What’s next for Harborside?

California retailer Harborside marked the end of an era this week when it ended formal ties with co-founder and chairman emeritus Steve DeAngelo, sometimes called the father of the legal cannabis industry. 

In a video posted on LinkedIn, DeAngelo said he would continue working to promote “cannabis knowledge and freedom” with a focus on “equity/sustainability/governance” (“ESG”) issues.

“A small band of fanatically devoted cannabis activists” founded Harborside almost 14 years ago, he said in the video, to build a “gold standard” dispensary. The dream became possible when Oakland awarded it one of the country’s first six dispensary licenses. 

Started as a non-profit, Harborside is now a publicly-traded for profit company which has continued to fight for the industry’s interests. It’s now engaged in a federal lawsuit challenging industry-hated tax rule 280E, with oral arguments scheduled to be heard before the U.S. Court of Appeals for the Ninth Circuit in February. 

Among the other achievements DeAngelo touted in the video, Harborside was the first dispensary to sell lab-tested cannabis and CBD rich products, and it has been a model for countless dispensaries seeking to create a more appealing shopping experience than the stereotypical head shop offers.

DeAngelo has also been involved in numerous other cannabis-related organizations including the Arcview investor network, which he co-founded and the Last Prisoner Project (LPP), a non-profit he started in 2019 to accelerate the release of cannabis prisoners. 

Days before DeAngelo announced the termination of his relationship with Harborside, LPP was the subject of a tough piece in Politico which featured criticisms of “an organization that is good at promoting itself, collecting celebrity endorsements and raising money from the multi-billion dollar marijuana industry, but less willing to put in the hard work required to help get people out of prison.” 

Harborside denies that the article had anything to do with the timing of DeAngelo’s departure. DeAngelo did not respond to an interview request. 

The timing of DeAngelo’s departure comes at an inflection point for the industry. Only a few years ago, Harborside’s flagship Oakland store was routinely described as the world’s largest dispensary. Now it is dwarfed by mega-stores in Las Vegas and elsewhere. 

More significantly, Harborside is no longer a dominant player. While it has come a long way to improve its financial situation, it is now dwarfed by multi-state operators (MSOs) leveraging their far higher revenues to boost their market share. And these companies are beginning to arrive in California. 

• In Q3 2020, Harborside reported revenue of $19.6M up from $11.7M in Q4 2019. Over the same period it saw significant gains in gross profit and adjusted EBITDA as well. But numerous MSOs now report quarters with more than $100M in revenue and observers expect the recent wave of M&A to accelerate leading to larger and more powerful companies able to throw money at whatever advantages Harborside may have.
• I asked Harborside’s general counsel and chief compliance officer Jack Nichols about how he saw Harborside competing in the future and he pointed to several assets: attractive store locations in the Bay Area and Desert Hot Springs as well as its reputation for wellness and product safety. The Desert Hot Springs location also has a drive-thru — a rare thing in California — right off the highway, which locals and tourists find convenient. He said it would also help sales once the Coachella festival returns. 

For a different perspective on how smaller companies with activist roots can thrive in the MSO era, I spoke to DeAngelo protégé Kris Krane, who’s now President of 4Front, a publicly-traded MSO with operations in Washington, California, Massachusetts and other states:

• Krane said the company has made some tough decisions, including cuts to its advocacy work. However, he said — and earnings reports show — that it is in a much stronger position than a year ago thanks to its focus on what it does best: efficient manufacturing.
• In 2019, 4Front merged with Cannex, a Washington state company that was a bit off radar because it’s location outside the top tier market. But 4Front liked Cannex’s manufacturing capabilities. It’s thesis was that customers haven’t yet developed strong brand loyalties and so “you can take down market leaders with a better less-expensive product.”
• “A gummy’s a gummy, a gummy” Krane said, and by making and selling them less expensively, the company has seven of the top 10 edibles brands in Washington. The market, he said, is beginning to value efficient manufacturing more than it has in the past.  4Front reported Q3 revenue of $22.3M and adjusted EBITDA of $3.7M.
• Harborside’s edge over the big MSOs, could be the “great retail experience” it offers, Krane said.
• Krane suggested that each of the largest MSOs each have their own strengths — such as capital markets expertise, “gigantic megastore retail” or “doing everything fairly well” — but that there’s still room for smaller operators.
• Whether 4Front’s manufacturing expertise, or Harborside’s retail concept, is enough for them to chart independent futures as consolidation accelerates remains to be seen. As a profitable company, Krane said 4Front doesn’t have to make the decision about a merger right now. “The smartest thing for any company is to be in a position choose its own path.”