C.R.E.A.M. And Fire

How Goodness Growth is Re-Focusing on Serving the Customer to Drive Value

Disclaimer: This is hardly an objective post. The Bengal Catalyst Fund maintains a position in Goodness Growth, and our fellow Bengal Capital partner, Josh Rosen is the interim CEO and CFO, as well as a current board member. We are highly involved in driving its strategy and vision. It’s worth noting, that although we let Josh read a draft of this post, we only allowed him to clarify a point or two prior to publishing.

This is part two of our piece on what we consider transparent and constructive management.  Part one (Radical Candor) addressed the relationship between management and investors. In this piece we will discuss the Goodness Growth internal strategy nicknamed “C.R.E.A.M. and Fire.” We recommend anyone interested listen to more about this strategy from the horse’s mouth as it was discussed on Goodness’ recent Q3 earnings call: Goodness Growth Q3 Earnings Call Link.

We also believe that Goodness Growth’s recent earnings disclosures (link) provide far more transparent a look into its business than many larger MSOs, and we continue to hope that more will follow suit in the future.

You play stupid games you win stupid prizes

-Taylor Swift

In the initial and heady days of cannabis legalization there was a sense that pervaded most businesses…one that screamed “you better do what everyone else is doing or else you’ll fall behind.”  An intense grip of FOMO was wrapped around every move. There was so much white space in the still developing landscape that the thought was “if I don’t capitalize on this opportunity - I’ll lose it forever.”  The resulting fallout was a land grab type mentality where money was thrown into opportunities just to “be there” instead of actually thinking about whether it truly made sense.  We recall talking to Josh at the time and he referenced how everyone was playing Monopoly and he thought they should be playing Risk, a topic industry veteran Kris Krane turned into two articles (2019 & 2023). 

The lack of financial discipline was due to the belief in the first mover advantage. You can justify lack of financial discipline when you think you are building a long lasting moat around your products. As we now know in retrospect - that simply didn’t happen.  Sure, in certain markets, we’ve seen outsized profitability, but we have yet to see it prove durable when competition intensifies. Just “being” on the shelves doesn’t last long as a business strategy and in particular, it isn’t nearly enough to resonate with consumers. The end result is frequently products, initiatives and infrastructure that end up highly unprofitable. Money and equity was used as a tool for reckless expansion for the sake of “scale” or “relevancy” that never materialized.

In light of these new facts, internal discipline on smarter decision making and immediately positive (or at least rigorously justifiable) ROI needed to take place, with an emphasis on sustainable cash flows. Hence the C.R.E.A.M. part of the strategy - “Cash Rules Everything Around Me” to those of you unversed in rap classics. “Adjusted EBITDA” that doesn’t make it to an actual bank account is largely counterproductive.  And not just one year of great cash flows either, but a line of sight on solid cash flows in the likely future. This sounds elementary, but in the days of expansion and market share chaos this was not at all the way things were done.

By highlighting and memorializing the need for cash and its preciousness, Goodness Growth and its team are trying to build a sustainable business for the future. It’s worth highlighting that only repeatable and predictable profits and profit growth are generally assigned meaningful multiples when valuing a business.  Simply earning cash during times of surplus EBITDA is not enough (we previously discussed our views on surplus EBITDA in part one Radical Candor). 

We're not competitor obsessed, we're customer obsessed. We start with what the customer needs and we work backwards.

-Jeff Bezos

This classic Bezos quotation seems and sounds obvious but in the world of cannabis this wasn’t always as clear as it should have been. For one, the legalization of the cannabis industry was at first a way to break free from the stigma and negative associations of the past. New companies emerged everywhere with a promise to usher in a “New Dawn of the Cannabis Industry.” In the rush and excitement to capitalize on this newfound moment in the sun - many new entrants into the industry didn’t listen to what the existing customers wanted.  Instead they focused on what they “thought” needed to be built. To make matters worse, in the early days many highly regulated medical markets had rules and procedures that significantly impaired the ability to target legacy customers and heavy users. So, even if a company wanted to put focus there, they simply couldn’t serve that segment of the customer base anyway. 

In the early days, this led many companies to create new age brands, looks and products that did everything they could to disassociate themselves with the legacy market and instead focus on the “new consumer” that would enter into the fray (the phrase “soccer mom” often got tossed around frequently in these discussions). As time has gone on we can now say with confidence that strategy was incorrect. The legacy market and its consumers are absolutely the cornerstone of the current cannabis industry.  By focusing on what the tastes and values of that segment are (the “Fire” products), Goodness is aiming to serve that north star of customer to the best of their ability.

Instead of turning their back on the legacy market, operators like Goodness who embrace the knowledge and learnings of those who came before them only increase their odds of serving their most loyal and important customers. 

Goodness Growth’s strategy is an exercise in addition by subtraction: taking away anything that doesn’t truly and directly serve customer value and focusing relentlessly on what remains. This common sense approach often challenges some of the vestigial “growth narratives” in this industry, but we believe it is truly the best path to building sustainable growth in company value moving forward.