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L-to-R: Vahan Ajamian, David Kretzmann, Daniel Yi
Run time – 23:56 (Transcript below)
Published 10/10/2018
Transcript
David Kretzmann: David Kretzmann here in the heart of Toronto’s business district. I’m actually at MedMen’s offices here in Toronto and I am joined by Vahan Ajamian and Daniel Yi at MedMen’s. So maybe Daniel, I’ll kick it off to you. You can introduce yourself and how you came to MedMen and your role at the company today.
Daniel Yi: Sure, so I head corporate communications and investor relations for MedMen. We’re based in Los Angeles. I joined the company about two years ago and it’s been quite a wild rollercoaster ride.
David Kretzmann: And Vahan, how about you?
Vahan Ajamian: Sure, so I’m Vahan Ajamian, managing director of analyst relations, I guess you can call me a reformed analyst now. I was in equity research for about 12 years, the last two or three of them covering cannabis. And back in May of this year I kind of switched jerseys and joined MedMen.
David Kretzmann: Awesome. And Vahan, we spoke at O’Cannabiz in June, a couple of months ago, and a lot has changed in the industry and I imagine with MedMen. But last we talked, MedMen had 12 dispensaries in three states in the U.S., what’s the situation looking like now?
Vahan Ajamian: So, currently we have 14 stores that are open. We are in three states operationally in terms of stores being open. But since we spoke, and shortly after we went public, we actually acquired a license in Florida. So the transaction should be closing in about 30 days or so from now and it gives us one of 14 licenses, there will be 18 coming in the state, allows us to open up 25 to 30 stores state wide. So we’re very bullish on the opportunity in Florida, it’s currently a very thriving and fast-growing medical market, obviously a great demographic given the senior population, and we’re optimistic that the state will go rec in a couple of years and we’ll be excellently positioned for that.
David Kretzmann: And what does the expansion process look like state to state? In other words, how do you decide which state looks attractive versus states you might want to avoid for now?
Vahan Ajamian: So we started off with the company obviously headquarters in California, that’s where the founders started the company. What we focused on was where are the most important markets? Where are brands? Where are pop culture built and made throughout the country? So the three sort of states and cities specifically focused on initially are Los Angeles, Las Vegas and New York. And soon will be in Florida, Miami, Orlando, Tampa, etc. So we focus primarily on the must-have states, the must-have cities, and then we’ll spread out to the rest of the country and internationally, obviously with the JV we have in Canada, and eventually globally.
David Kretzmann: And the company is also in the cultivation side of things if I’m not mistaken, so what does it look like with the product that’s actually sold in the stores? Are you only selling product that MedMen itself grows in its own facilities? Are you also selling other brands? How do you decide what’s sold in the stores?
Daniel Yi: It varies from state to state because obviously, you know, the regulations change from state to state. So in California, you have cultivation, manufacturing, retail licenses in broad terms, distribution licenses, and everybody can sell to everybody. So if you are a cultivator, you sell it to the distributor who then goes and sells it to the retailers.
In New York it’s a very co-integrated license, meaning you have to cultivate, manufacture, and sell within your own store. So every state’s a little different. This is a very fast moving space, as you know, you were talking about two months ago we joked that we live in dog years, right? Two months is like two years in cannabis time. The expectation is that the regulations will keep on evolving. But in terms of our strategy, to add a little bit to what Vaughn said, yes you want to own those very important high-profile markets, but it’s also about the regulatory landscape. After Colorado, Oregon, and Washington legalized adult use, you’ll notice that every state that has come afterwards, Massachusetts, Nevada, California, they’ve had a lot more restricted licensing. So to give an example, in Los Angeles, prior to Prop 64 coming into effect January 1st, 2018, the city of Los Angeles had a little over 1000 dispensaries, give or take. And most of them were non-compliant because L.A. didn’t actually issue licenses. They had ordinance-compliant dispensers and non-compliant dispensers. When they actually issued licenses, it turned out that about 155 of those dispensers actually qualified for a license, after Measure M in March of last year.
So part of our model is also to be in those supply constraint markets, because our sense of this is that at the end this is going to look a little more like alcohol. It’s going to be tightly-regulated. It’s not going to be like in Denver now where you have as many dispensary licenses as you have 7-Eleven’s, right? So it’s not going to be a pot shop on every corner, because generally speaking, communities don’t want that, right? I think Americans are becoming more and more okay with mariajuana being regulated and being legal, but they don’t want to see a pot shop on every corner. They don’t want to see a mariajuana store near their kids’ school, right? So our business strategy here is that it is going to be very restricted, so we want to own as many of those restricted licenses as possible which gives us the biggest market share.
David Kretzmann: Okay. And the company was started in the U.S., it’s based in the U.S., but we’re here in Toronto in the MedMen offices. So what’s the game plan for Toronto as far as building out the team, and presumably the business here, what should we be looking for?
Vahan Ajamian: So we’ll see how needs evolve going forward, from the public market side, from the investor relations side, and from the operations side. Alright, so we just had some wonderful news in Ontario earlier this week that the government is moving towards a private model. So the consultations I believe start next week with businesses, communities, law enforcement, et cetera. So the stores are supposed to be open on April 1st, so we have some time her to asses what is the application process going to be like, what are the number of licenses they’re going to give, and the competitive dynamic. And naturally we’d like to be in Toronto and other areas of Ontario that make sense, that fit our overall model of … fewer bigger better stores in nice areas of town with high foot traffic on those streets and a lot of tourism. So we’re optimistic that we’ll be able to have some in Ontario. So that’ll be part of the plan for Toronto specifically.
David Kretzmann: Got it. And if I’m not mistaken, you have a joint venture or a partnership with Cronos Group. You want to just expand on what that is and what that entails once October 17th comes around and recreational adult-use cannabis is fully legal in Canada?
Vahan Ajamian: Sure. There’s a few facets to the JV. So we get access to their cultivation facilities, the ones that they have now and will have in the future. And we’re going to be working together to co-brand specific products and brands of cannabis. And then the big part is the 50/50 stores. So we’ll be opening on a 50/50 JV basis, MedMen branded stores, in regulated provinces that allow it in Canada.
David Kretzmann: Got it. And what would you describe as the biggest differentiator for MedMen or the competitive advantage for MedMen? Because depending on the state or territory it can be a crowded retail market. So what is it that distinguishes MedMen from other players?
Daniel Yi: I think it’s the approach that we take to this space, right? We look at this as a consumer product, so it’s very natural at this stage in a nascent industry that it’s a little chaotic, and also the legacy and history of it makes sense, right? Because more than 20 years ago, California was the first state to legalize medical use of Marijuana. And so marijuana has been always under this medical use veil. And I’ll use that term very loosely. And in 20 years of medical marijuana in California, in many ways you had a de facto adult use, because let’s face it, it wasn’t that hard for you to go and get a doctor’s recommendation. And it’s not because people … people joke about it, but at the end of the day, if a doctor says, “Look, you have back pain? You have problems sleeping?” And people can laugh about it an say, “Oh, you told the doctor you have problems sleeping and now you can smoke pot.” Well actually, smoking pot does help you fall asleep, so what’s the difference?
I can go to a liquor store, buy my favorite single malt scotch, and I can come home after a stressed day and pour myself a couple fingers of my single malt scotch. I take a deep breath, I relax, right? I’m medicating myself, but I don’t need a doctor’s recommendation for that, right? So at the end of the day we approach this not as a medical product, we really approach this as a consumer product. So it’s a bit of wellness and nutraceutical and a bit of alcohol, right? And I think the rest of the industry, I’m not saying we’re the only ones, but I think because we started from that mindset, because we came into this space from that mindset, I think what differentiates us is that you could go to our store … and this is one of the things that I noticed because one day somebody said, “There’s something different about this store, it’s not just the beautiful furniture and the lighting and the walls, but there’s something different about it.”
And that’s when it clicked for me that even the nice dispensaries, for the most part in the U.S., the experience is very transactional, right. So you go into the store and then you go and check in with your ID and then there’s usually a velvet rope that takes you to the counter. And then you talk to the sales associate and I say, “I want an eighth of OG Kush, I’ve tried those edibles. And give me that vape pen.” You pay them money, get your thing, and leave. You come to MedMen’s store, and it’s like shopping at Whole Foods or shopping at Trader Joe’s, right? So you go for a carton of milk on your way out, it’s like, “Ooh, those chocolate pretzels look delicious, I should grab them.” There’s just … I always go into Trader Joe’s and I walk out with more than I came in for, right? And so we approach this as a consumer product, so our stores are not designed for that transactional experience, it’s really a shopping experience, it’s a real consumer experience.
And I think … actually this week we put out our earnings report, our early earnings report. Average spending in our Southern California stores is at around $77, close to $80. Some of the stores, this is an average, right, this is at six months into adult use in California. Some of our products are $100 a pop, like a doses pen is $100 and that’s one of our best-selling items. And I think it’s because we give that consumer experience. We allow people to come in and really learn about this space, all sales associates go through eight hours plus of training on products, right. And so I think that’s what differentiates us. We don’t come in and say, we don’t think of ourselves as a medical company, we’re not a pharmaceutical company, we’re a wellness lifestyle company.
David Kretzmann: Got it. And what about the eCommerce angle? Is it even possible in the U.S. to have an eCommerce cannabis operation? If not, is that something that’s potentially on the horizon? And if it is a possibility, would MedMen ever enter that online cannabis space?
Daniel Yi: Sure. I think … again to the point that this is a very fast-moving space and evolving space, I think you have to keep your mind open, right? I use the tech industry as an example often. In the early 1990’s nobody knew what an app would be, nobody had any idea that we would be so tied to our phones, and now it’s sort of, it’s just a fact of life and we feel like we can live with it, right? But it was unimaginable 15, 20 years ago. So it’s the same thing with cannabis. I think you have to keep your mind open. What we know is that today though, because of the regulatory landscape, you’re not going to … Amazon is not going to be selling pot products any day soon. So that’s not going to happen. Maybe 30 years down the road? It’s anybody’s guess, but you are starting to see how the beginnings of eCommerce. So in California for example, you can order online and pickup at the store. There will be delivery services, but the delivery services need to be tied to brick-and-mortar licensed retailers.
So yes, I mean the technology’s there, so it is part of it. But even with Amazon.com, if people are talking about how brick-and-mortar retail is dead, well brick-and-mortar is not dead, it’s evolving, it’s adapting, right? I still go … I mean I know that Amazon has a deal with Whole Foods, but I still go to the supermarket. Sometimes I just go on Amazon and I order a couple of things because it’s convenient, right? So it’s about giving consumers the option. At the end of the day, the customer’s king. The customer’s going to decide how this is all going play out and we want to be in tune as much as possible with the customer. Because I think again, that’s our approach, right? Because we treat this as a consumer product, and at the end of the day, what does the consumer want? And let’s stay two, three steps ahead of that.
David Kretzmann: This is a big week for the industry with Constellation Brands investing another $5 billion Canadian dollars into Canopy Growth. What was your reaction to that announcement? And maybe you could talk about the impact it has on the industry, and what implications it has for MedMen going forward.
Vahan Ajamian: Sure is. So we actually commended the big investment that Constellation made into Canopy. I think it’s really exciting time for the industry. Our vision is and our objective is mainstreaming marijuana, and now you have a very mainstream multi-billion dollar company making this massive investment in a cannabis company. So I think it’s a great data point, and there was a lot of discussion on the calls to eventually they will be able to enter the United States. So there’s a lot of positive momentum in the mainstreaming of marijuana by that investment. And similarly, we’ve been mainstreaming marijuana in the United States, in California now, working on this for over eight years. So I think it helps push our vision forward that this is a normal consumer product industry and it’s a very large one, and coming sooner than people think.
David Kretzmann: And maybe we could talk a little bit about what products are actually sold in the stores, and I imagine it varies by state, it’ll vary by country once you do open stores in Canada. So maybe you can give us an example of the products. Are you doing the edibles, ingestibles, oils, the dried flower, beverages, can you just walk us through what type of products are available in the stores?
Daniel Yi: So I think California’s … and potentially in terms of product options, Colorado, Washington, Oregon, the more mature markets in California is probably where you’re going to find the most variety of products. So in our stores in California, we have over 1,000 SKUs. So CB-infused water, medicated teas, medicated sodas, all the way to infused teas. Every time I go to a MedMen store to do an interview, there are like two or three new products. Like, “What is this? What is that?” A lot of pre-rolled joints. Because we are treating this as a consumer space.
Again, consumers want variety, right? It’s one thing if you’re 25 years old and single and you like the pre-rolled joints because you live in an apartment with your friends and you have roommates and you don’t have kids around, right? But like my kids, I have a 15-year-old daughter, and the last thing I want to do is have my apartment stinking of weed all day long, right? So I do appreciate a joint every now and then, but at home I’ll do edibles, I’ll use a vaporizing pen. And the numbers bear that out. If you look at the fastest-growing segments of this market, it’s the edibles, it’s the concentrates, it’s the sodas, it’s the … infused products. Bath bombs. We can’t keep enough bath bombs in our stores. I mean those things sell out every time they come to the stores.
So I think … earlier, to the point of Constellation Brands coming, I mean I think one of the things that I picked up from the calls is, I think Bruce Linton talked about Constellation’s experience with consumer brands. And I see this in California every day, partly because the laws now require packaging, so you can’t sell loose flower anymore. So even the guys who used to sell loose flower, now they have to put them in a package, and they’re realizing, “Oh, hold on a second. If I have to put this in a package that’s childproof and such, I also have an opportunity to brand it so that the consumer knows this is [Lowell’s 00:16:44] flower. This is Canndescent’s flower.” Right? So I mean we see this every day and I think this week, the fact that Constellation took a huge bet into this space just affirms all of this sort of that what we see down the horizon, it affirms all of that.
David Kretzmann: Yeah. Maybe we can talk briefly about capital allocation, what’s your process for determining ROI when you’re looking at a new state or territory, opening a new store. Do you disclose things like a payback period or essentially what you’re hoping for financially when you open a new store, and maybe what those capital allocation or expansion priorities look like the next one to three years?
Vahan Ajamian: Sure. So from our perspective there’s sort of two types of markets. There’s the markets that are live right now in terms of fully-recreational, like California, like Nevada. They’re obviously just starting, they’re only about seven or eight months into it, but you have revenues like the ones we just reported yesterday, where you can start working on traditional metrics for a high-growth industry. And then you have the really greenfield markets such as New York, such as Florida. So we announced in early June that we’re acquiring a license in Florida. So what we did there was we looked at the market and the market potential. “Where’s the medical at right now?” But specifically, “Where will we be likely in recreation a few years down the road?” And what we concluded was Florida’s likely to be a multi-billion dollar opportunity in terms of retail sales, probably in the three to four billion annually as you look at some of the different ways of calculating how large it could be.
So we had the opportunity to buy one of what will be eighteen licenses in that multi-billion-dollar market for $53 million dollars. So you get the net present value on that, and it’s an offer too good to pass up. And part of the benefits of being public is the fact that we could do it with half cash and half shares. Alright, so our capital allocation that allows the cash to go towards building the dispensaries rather than buying the licenses. And also from the seller’s perspective, they see the asset they have, and they see what MedMen is building, and they want to be part of that upside. Right, they see that we’re operating ourselves in Florida, “Now I can be part of something much larger, a nationwide leading, fully vertically-integrated cannabis company.” And you wouldn’t be able to do that if you were still private.
David Kretzmann: Got it. I’ve taken up a lot of your time already, so I’ll close with two final questions. First of all, at The Motley Fool, we’re a community of investors helping fellow investors, and we take a long-term business-focused approach, which is a bit contrarian compared to what you see out there in the cannabis space today, which is a bit more speculative and short-term in trading and things like that. But for us business-focused investors, what are the key metrics, trends, indicators we should be watching to best gauge the underlying health and progress of MedMen over the next five years?
Vahan Ajamian: So if you have a three to five year holding period, I’d say you have to look at where the industry’s going. To your point, Florida will probably be recreational three years from now, so you have to look at the evaluation today. But in terms of some of the KPIs, right now we are in the land-grab phase. Right, so it’s going to be about store openings, revenue per store, and essentially about the top line, right. And especially given our strategy of being in limited licenses, where we build a defensible moat around our businesses, because of the zoning restrictions where you can’t be 1,000 feet from another dispensary, a school, a park, a church. Every time we put a store in, depending on the state, you can help box out a region around you. So I think we’d be looking at, from an investor perspective, how is the market share of MedMen doing? How many stores are they opening? How many more customers do they have this quarter versus last quarter? How many more states are on the horizon that they’re unlocking? So that when we get to three to five years down the road eventually, we’ve seen estimates that the market will be $75 billion dollars. Who is going to be in that leading position to take advantage of that? Right now we are and we intend to stay number one and increase the daylight between us and the others.
Daniel Yi: It’s interesting you say three to five years, because that’s exactly what I tell my friends, right? They know I work at MedMen, and they know we went public, they’re all asking me, they say, “Hey Daniel, what’s your ticker symbol, I’m interested.” And I tell of them, I say, “Listen, if you’re going to buy MedMen shares, I don’t want to hear from you from three to five years. Don’t come and dog me about what the stock is doing today or next week and so on.” Because to Vahan’s point, because it is the land-grab phase. And people talk about KPIs, so for example, I think the thing you’re going to want to look at is number of licenses, right? So in New York for example, there are 10 licenses for a market that is expected to be worth three to four billion dollars, right? Similarly to Florida, and there are 14 licenses in Florida. The number of licenses will increase over time, but even those 10 licenses in New York, they started with five. So those five initial licenses had a two-year headstart on the next five New York licenses, right?
So I would look at that, who owns the license in the most important markets? And then secondarily, there are a lot of companies out there that are multi-state and multi-facility, just like MedMen. But having a store on Abbot Kinney, Los Angeles or Fifth Avenue, Manhattan is not the same as having three stores in Akron, Ohio. Right? So where are you going to get the eyeballs, where are you going to build a brand? Because again, if you believe in our thesis that this is going to be a consumer market, which we believe it is, this is not corn, this is cornflakes, right? This is Kellogg’s. So I think you have to look at the companies that are positioning themselves for that land-grab, for that market share, and we feel pretty confident that we are in the most important markets now, and now we’re focusing on those sort of supplemental markets.
So Ontario, for example. I was a conversation, Vahan and I were having this conversation yesterday with some analysts here on Bay Street, and they were asking us, “It’s going to be so hard for you to market in Ontario. This is Canada, there’s going to be a lot more government restrictions,” and so on. And I said, “Great. I mean at the end of the day, being a regulated, legal cannabis market,” like illegal means regulation and loss, right? Otherwise we might as well just go back to street dealing, right? So if you’re going to be regulated, then as a business we have to look at those regulations and say, “Well at the end of the day, Ontario might not be a great market for us because we can’t leverage what we do best.” But I’m not too worried because I have the most stores in California. I get more earned impressions in media by being a MedMen store on Abbot Kinney than I ever will anywhere else in the world. I get more eyeballs on my store in Manhattan than I will anywhere else in the world. Right, so I think that’s our strategy, is that land-grab. It’s the getting those licenses in those key markets and then five, ten years from now people are going to look back and say … when they think about cannabis brand, they’re going to think MedMen.
David Kretzmann: I think that’s a great place to wrap up. And certainly look forward to continuing the conversation in the months and quarters ahead, so Daniel Yi, Vahan Ajamian, thanks so much for taking some time to talk to The Motley Fool. We’ll talk again soon.
Vahan Ajamian: Thanks.
Daniel Yi: Thanks for having us. Thanks Dave.