This is the first article of a new series on TodayTrader where we’ll look at listed companies and try to come up with interesting investment opportunities through company and market analysis. Our opinion is based on our own analysis for educational purposes. As always, please do your research and form your own opinion before making investment decisions. We start with one of the fastest growing industries: The cannabis industry. The company we’re going to look at is Green Growth Brands, which has the goal to become a leader in the cannabis retail business.
Green Growth Brands
Green Growth Brands owns a portfolio of brands that focus on retailing cannabis and CBD products and related products. The company which is listed as Xanthic Biopharma Inc, but trades as Green Growth Brands, made its trading debut on the Canadian Securities Exchange (CSE) on November 13th, 2018. It trades under the ticker symbol GGB. GGB is led by a team of veterans from the retail industry who intend to use their experience to build customer focussed brands in the cannabis industry.
Besides cannabis related brands, the company owns cultivation, production and distribution facilities, as well as dispensaries, licences and research operations. Green Growth Brands presents a unique investment opportunity within the cannabis industry as it is focussed on high margin activities and has the right expertise to leverage in this area. With a market value of around USD 400 million it also has more space to grow than many other companies in the industry. Now let’s take a deeper look into Green Growth Brands:
- Company profile
- The Team behind Green Growth Brands
- Business model
- Brands owned by GGB
- Market analysis and growth opportunities
- Outlook, chances & risks
- Why invest in Green Growth Brands?
Green Growth Brands is based in Columbus Ohio. The company recently concluded a reverse takeover of Xanthic Biopharma, an already established developer and manufacturer of non-combustible cannabis and cannabis-infused products. Previous to this deal, Xanthic Biopharma acquired Nevada Organic Remedies, a vertically integrated marijuana company with cultivation, production and distribution facilities and two dispensaries. The dispensaries, which are branded The +Source, are located in Las Vegas. The company also owns four Nevada marijuana licenses.
GGB owns an additional operational brand and three soon to be launched brands. Each brand targets a specific market and product segment. Collectively, Green Growth Brands therefore has six brands, two dispensaries, a research lab as well as cultivation, production and distribution facilities. To date the company has raised CAD$ 141 million to execute its strategy. Part of this was raised by issuing convertible debentures which if exercised would result in the company raising an additional CAS$ 58 million.
The Team behind Green Growth Brands
The members of the leadership team of Green Growth Brands all have extensive experience in the retail, branding and consumer products industry:
- Peter Horvath, GGB’s CEO, has held leadership positions at American Eagle Outfitters, DSW, L Brands (the owner of Victoria’s Secret) and Mission Essential. He also led DSW when it went public.
- Ed Kistner, the CAO, has 33 years of experience running the operations of retail businesses including DSW and L brands. His experience includes finance, merchandise planning and operations.
- Scott Razek is GGB’s CMO. He is a strategic marketer and brand strategist and has led creative teams at L Brands, Bath & Boddy Works and American Eagle Outfitters.
- Kellie Wurtzman is the CSO at GGB and is responsible for retail operations. She has previously managed stores at Luxottica, Victoria’s Secret and Virgin Entertainment.
The fledgling marijuana industry is highly competitive! Choosing the right business model and niche will be key to the success of any company competing in the industry. GGB is focussed on the customer experience, rather than on the entire value chain. The company’s strategy is to use the retail and branding experience that the leadership team bring to the company to build brands within the cannabis industry.
This is a smart strategy. In time cannabis itself will become a commodity like other agricultural products, which have low margins. The profitable opportunities will in future be in the parts of the industry that can be differentiated i.e. brands and other forms of intellectual property. Besides brands, the company is also developing intellectual property in the form of a patent pending process to make THC and CBD water soluble.
The company will use two channels to distribute products. THC products will be sold at its own stores, while CBD products will be distributed through retailers and drug stores. For now, the company will focus on North America and specifically the United States.
Brands owned by GGB
Green Growth Brands currently has six brands either already operating or soon to be launched:
- The Source, which currently operates two dispensaries in Las Vegas, Nevada. These dispensaries sell medical and recreational marijuana, which can also be ordered online. GGB plans to have 35 dispensaries by the end of 2021. The Source already has annual trailing revenues of $17 million and enjoys an EBITDA margin of over 20%.
- Xanthic Biopharma currently produces THC and CBD infused drinks and energy drinks. The company is also developing other related THC and CBD products.
- CAMP is a lifestyle brand marketing premium product to the cannabis community. It appears this brand has yet to be launched.
- SEVEN7H SENSE is a soon to be launched range of CBD infused beauty products.
- Green Lily is a spa like dispensary focused on woman, selling cannabis and related products.
- Meri+Jayne is another lifestyle brand marketing CBD infused water and other consumable products.
Market analysis and growth opportunities
In the US medical marijuana is now legal in 33 states and recreational marijuana use is legal in 10 states. The list of states allowing marijuana is expected to grow over the next few election cycles. Marijuana is still illegal in all forms at the federal level. If or when this will change is uncertain. However, it’s widely expected that the stance will eventually soften. As of October 2018, both recreational and medical marijuana are legal in Canada.
As a result, it has been estimated that the revenue generated by the North American cannabis market will grow by $28 billion, from $12 billion in 2018 to $40 billion in 2023. The market for CBD which was worth $200 million in 2017 is expected to grow to over $3 billion by 2021. The marijuana industry is now a very competitive market with hundreds of companies competing for market share. In the future it’s inevitable that there will be consolidation amongst companies in the industry. Companies that are unprofitable will disappear or be acquired.
The companies that disappear will be those that are too focussed on low margin activities (like cultivation and some production processes) or are too small or regionally focussed to benefit from economies of scale. Those that survive and thrive will be those that are well capitalised, focus on high margin activities, and create intellectual property.
Outlook, chances & risks
Green Growth Brands is targeting parts of the value chain that have not been executed well to date. They also have a team of retail veterans with vast experience building brands and managing stores. So, does this make GGB a no brainer? No, there are still risks for the entire industry. The industry may disappoint investors in the medium term, which may impact the availability of capital. Green Growth Brands will probably need to raise more capital to execute its strategy, and it may be difficult to do so if investors become luke warm about marijuana stocks.
This brings us to the second risk. Canopy Growth Corp, one of the biggest players in Canada sold a stake to Constellation Brands and now has over $5 billion to spend on acquisitions. CGC has also made it clear that it also wants to build brands and a retailing presence around the world. So far it has not become very involved in the US market, choosing to focus on Canada until there is more clarity with regards to US legislation. However, at some point CGC may enter the US market with a lot of cash behind it.
The third risk is that at this point most of GGBs brands are concepts that still need to be rolled out and tested. There is always an unknown element to launching new brands. If these brands will become successful, there is huge growth potential. However, there is no guarantee of success, even with such an experienced team.
Why invest in Green Growth Brands?
GGB presents a unique opportunity by bringing retail veterans with vast experience in the consumer products space to a brand-new industry. This business combination could produce very exciting results. The company is still relatively small which means there is far more upside. The largest players in the industry Canopy Growth, Aurora Cannabis and Tilray are valued at 10 to 20 times more than Green Growth Brands. These established companies will possibly struggle to grow from here given their high valuations.
In addition, these companies and many others in the cannabis industry have a lot of capital tied up in low margin activities. This will impact their profitability when the industry becomes more competitive. GGB on the other hand is focussing on activities where it can add value and where it has expertise.
GGB may also hold an advantage when compared to other smaller companies in the industry. Many of these companies are geographically constrained to specific states, often with just one cannabis store and a cultivation facility. If the company can build strong brands it will be able to grow nationally and enjoy the benefits of economies of scale. Overall, while there are some risks, GGB still presents a unique opportunity within the cannabis space.
Conclusion: Green Growth Brands is a company to watch
Within the cannabis industry there are many types of companies for investors to choose from. It’s worth taking a step back and thinking about the long term. Ultimately, cannabis will be an agricultural commodity like any other. When we buy other agricultural commodities, our choice depends on the product brand or the store rather than the company or the farm it is grown on.
Investors should take this into account when investing in cannabis companies. In that respect Green Growth Brands will be a company to watch. What are your thoughts on the cannabis industry and especially GGB? Do you think this company will succeed? Please share your feedback and thoughts in the comments below.