It is hard developing brands when your time and money is being gobbled up by massive agricultural facilities. That is the idea, at least, behind High 12 Brands, one of a handful of Canadian companies focused on selling cannabis rather than growing it.
High 12’s business model revolves around white-label manufacturing. The company will develop and market brands, track consumer trends and manage a sales force. Third-party LPs will produce products for High 12′s brand lines and ship straight to wholesalers. High 12 will take a percentage of the wholesale revenue.
The company, backed by Igor Gimelshtein of Zola Global Investors Ltd. (former CFO of MedReleaf) and JW Asset Management, among others, raised $6.3-million in a Series A financing round that closed last week. It has developed four brands, which it hopes to bring to market later this year in Canada and California.
Cannabis Professional spoke with founder and director Michael Garbuz (formerly with Origin House) about High 12′s white-label approach. The conversation has been edited for clarity.
Cannabis Professional: High 12 is aiming to be “asset-light." What does that mean?
Michael Garbuz: When you’re an LP [licensed producer], 75 or 80 per cent of your resources and time is going into these huge assets you’ve put so much money into. Actually thinking about moving the product, merchandising it, trade marketing, digital marketing – it’s definitely a department within the company, but it’s not the entire company focus.
The idea is we're a consumer packaged goods company operating within the cannabis space. That means we're really good at sales and marketing, but we're not experts around manufacturing and cultivation.
If you’ve invested a certain amount in CapEx and ongoing OpEx, your business model is a bit weird, because you need to continue to move exactly that amount of product forever, not scale and not go down. Whereas our model is very scalable and dynamic. We’re not starting with the supply chain side, we’re starting with the customer side: understanding the data, understanding what’s selling, and then working with a variety of different suppliers to bring that product to market. If it’s selling, we can scale up and source from more suppliers. If it’s not scaling we can either switch supplier or switch the product.
CP: So with a white-label model, you never directly take possession of the cannabis?
MG: Correct. In every THC market today, not just in Canada, that is the case. For CBD, it is a bit different, because in the U.S. it’s regulated more like a food supplement.
CP: How does the revenue model work?
MG: We take a fee on the wholesale revenue. So if they’re selling a product to the OCS for say $20, we’re taking a percentage of that amount, and we get paid by the manufacturer.
It is really a volume game. As we’re coming into market, our licensing fees are at the low end of what they’ll be. Then as we get volume and shelf space, we can start to command pricing, because we’ll actually have the important thing, which is customers coming to the store asking for this product, because they saw it on social media, or they liked the video, or there’s trade marketing or there’s an event the budtender has been to. Stores are increasingly going to stock what’s selling.
CP: How much interest is there from LPs in this model?
MG: In Canada, the discussions around white labelling over the past five or six months have gone from, ‘maybe we’ll look at this,’ to ‘this is a front and centre initiative.’ So it really aligns well with our timing.
At first, we spoke with every single LP and we did a lot of outreach. Our view as we start moving more product is that that will change and we’ll get outreach from people. It actually has started to happen, where people are calling us saying, ‘we want to do X amount of kilograms of product, do you guys want to take it?’
We’re early movers, but we’re not first movers. There were some sort of one-off white-label deals; Lift & Co. early on actually had a strain of cannabis; Tokyo Smoke with Aphria had a strain of cannabis before they were a licensed producer through DOJA. More recently, we like the Ace Valley brand. Another group we really like is called TREC, which has two brands, one of which they’ve brought into market called Wink. That has a similar white-label, contract-manufacturing focus.
CP: What is the white-label situation like in the U.S?
A lot of companies in California and across the U.S. have become pretty segmented in terms of their approach. The top manufacturers mostly do white label, and then it’s really up to the brand, CPG element of the business to focus on selling, scaling the brand, getting the brand into different markets, and just building the awareness of the brand so you can get customer intake on the other end.
I'd encourage you to go see a company called Flower One in Nevada. It is one of the most impressive facilities I've ever seen, and 100 per cent of their business is around making products for other brands, which makes sense in a more mature market like Nevada, with all these different SKUs, a lot of flow through in dispensaries. Ultimately, you just can't be the best at everything, and they're really good at agriculture and facility operations. When you see a facility like Flower One, you're like, ‘holy shit, I never ever want to cultivate cannabis, because I'll never compete with those guys.’
CP: LPs have spent a lot of money developing brands in-house. How successful do you think they have been at this?
MG: There have been brands and licensed producers who have done a better job than others. To zoom out, the regulatory environment has been such a challenge for a lot of these licensed producers. For the products they wanted to bring out, it’s been a slower roll-out than they wanted, the distribution has been less smooth than it should have been, and the retail roll-out has been atrocious. And if you look at the marketing regulations, they’re very akin to Tobacco. I think a lot of the licensed producers have just felt like they’ve kind of been kind of put into a corner.
If you’re putting product on shelf in Canada right now, by and large – maybe a few SKUs are exceptions – it’s selling. But there comes a time when customers come into a store, and there are certain products they like and they buy, and there are certain products that they don’t. And the retailer is going to continue to stock things that are selling, and they’re going to stop stocking things that don’t.
CP: How does your model scale internationally?
MG: There’s no reason why we can’t be playing in more markets than any Canadian licensed producer globally in the next year. It’s a different type of cash expenditure required to get into a new market for us; we don’t need to get a new facility, and licenses, and hire a local team, and put in tens of millions of dollars of money and time.
I think for a CPG or alcohol or tobacco company that’s looking to invest into the space, our model will be more investable. We aren’t going to go out and spend $30-million and have a facility that is still burning money after it’s up and running. We’re going to spend on selling product and marketing product that’s already on shelves.