There is no sugarcoating it – California’s cannabis industry was a blood bath for operators in 2021.
The challenges were numerous and complicated. The tax and regulatory environment continue to burden licensed operators, who regularly face licensing delays and must pay steep state and local taxes, in addition to a rising excise tax.
Then, there is competition from illicit operators, who are not subject to the same rules, pay nothing in taxes, and therefore have an untouchable price advantage. A lack of enforcement by state authorities, despite the substantial revenue generated by high taxes, has provided no incentive for those flouting the law to stop.
Illicit operators are also contributing to California’s cannabis oversupply, which has resulted in crashing prices and growers being forced to accept pennies on the dollar for their products.
As if that is not enough, the cannabis industry is still operating in the grey area – legal on the local and state level in certain places, but illegal under federal law. Being in limbo means operators cannot access normal financial markets and banks. The lack of access has resulted in a wave of dispensary robberies and made it difficult for business owners to secure capital.
From mom-and-pop shops to publicly traded companies, few have been spared from the impact.
For example, TPCO Holding Corp. (OTCQX:GRAMF), the Jay-Z backed cannabis operator that is flush with resources, cash, and notoriety, missed its third quarter projected revenue mark by $14.72 million, including an adjusted EBITDA loss of $16.2 million. Harborside (OTCMKTS: HBORF), one of the first licensed dispensaries in the country, has seen a 68% drop in its share price this year.
With all the industries’ problems, California operators that are on a path of sustainable growth tend to stick out like sore thumbs.
“California is the Super Bowl of cannabis,” said Michael Lee, CEO of Empire, one of southern California’s premier cannabis operators. “As Frank Sinatra said, ‘if you can make it here, you can make it anywhere.'”
With a gross profit of 53%, a steadily increasing EBITDA margin, and a foundation built entirely on retained earnings, Empire is indeed “making it” in the wild west of cannabis.
Lee, 53, is no stranger to adversity and tough business climates. An immigrant from Taiwan and graduate of USC, Lee is a self-made entrepreneur who has been through the ups and downs that other cannabis operators are currently experiencing.
In the early 2000s, Lee built one of the fastest growing and largest golf equipment companies in America, Nickent. Then the 2008 recession hit, and the entire sector of durable goods that required discretional income was wiped out.
Despite the circumstances, Lee said he was determined to not give up. The search for a recession proof industry eventually led Lee to his second chapter of life in the cannabis space.
“Going through the recession and taking those hits prepared me for a storm like the one California’s cannabis industry is facing today,” said Lee. “That experience was invaluable, and I attribute Empire’s success directly to the lessons learned.”
One of those lessons was the importance of supply chain coordination, which is why Empire now controls a fully vertically integrated operation, including cultivation, manufacturing, distribution, and retail. That level of control has helped Empire mitigate many of the challenges others in the industry are experiencing.
Another factor Lee attributes to Empire’s success has been their ability to continuously expand operations through community engagement and license initiatives. Empire has placed a major emphasis on community outreach, including sponsoring donations to veterans, monthly food drives, annual toy drives, and COVID-19 relief for families.
With retail licenses, multiple brands, and a large distribution network, Empire now has presence in over 350 stores statewide. Collaborations with well-known brands in the market, such as Napalm, Grandi Flora, and Grizzly Peaks has rapidly boosted Empire’s reach, with many more profitable endeavors on the way in the near future.
“Vertical integration, along with a rockstar team, has allowed us to produce top quality SKU’s at a rapid rate, giving us an edge on the competition,” said Brittany Walker, Marketing manager and brand strategist for Empire’s in house brands. “Our goal is to offer the public products that are quality focused by controlling our supply and heavily investing in preroll technology.”
Those investments include the creation of a proprietary process to infuse the highest-quality concentrates into flower, to create what customers describe as one of the smoothest smokes on the market.
“The sky is the limit for Empire,” said Lee. “We have received numerous nine figure offers but have no intention of selling at this point – Empire’s potential and trajectory are far too great.”
As many in California’s cannabis industry struggle, Empire is a company worth keeping your eye on.
