6 Tips to Control Costs in a Market Downturn

As high taxes, oversupply, price compression and a still-thriving illicit market continue to plague legal cannabis operators, business owners must adapt or risk shuttering their operations.

Phil Niles, executive vice president of GreenSeal Cannabis Co., a licensed cannabis producer based in Stratford, Ontario, says the company is faring better than many of its competitors through strategic moves to control costs.

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“Obviously, it’s not a single lever that you pull,” he says. “This is why most people haven’t figured it out because if it was just one thing, you just do that one thing and you’re done. It’s a lot more than that. I would definitely say that cost control is the name of the game.”

Rather than view cannabis as a wildly different industry that has to play by its own set of rules, Niles sees the industry as just another group of businesses providing a specific product and experience for consumers.

“It is different, but … the end goals are the same,” he says. “You want to put a really quality product in front of your customers at a fair price. That is no different than any other industry on the planet.”

While there is no one cheat sheet or blueprint to follow for success—especially during this market downturn in many state-legal U.S. markets and Canada—Niles says businesses should have a willingness to adapt and find ways to pivot and work with what they have during this period of high interest rates, rising inflation and low capital availability.

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“You can find opportunities that [will save the company] five cents a gram, eight cents a gram, 10 cents a gram,” he says. “These opportunities exist, but they require a willingness to change [and] also a willingness to look very honestly at your own business. Don’t just do something because GreenSeal did it or because that company down the road did it. Do it because it makes sense and adds value to your business.”

Because every aspect of a cannabis operation is tightly integrated, Niles says each step toward controlling costs typically leads to another.

“We’re very open to R&D and looking into new ways [of doing things]," he says of GreenSeal. “That would be my point of encouragement to everyone else. There is no bit of your business that should be off-limits to analysis and change, and it’s just a question of figuring out which changes make the most sense for your business.”

Here are six ways that GreenSeal has adapted to survive the market downturn.

1. Automate the processes that don’t add value.

While there are many areas of the business that can be automated, Niles and the GreenSeal team have taken the stance that they will automate time-consuming, laborious tasks that don’t necessarily add value—but they will push back against automating processes that do add value to the business.

“Where we’ve chosen to automate is quite selective,” Niles says. “We haven’t automated everything we could automate for within reason, but the things we did automate were non-mission-critical things that needed to be done but didn’t add value.”

For example, GreenSeal has automated labeling for its preroll tubes, an operationally required process that has no bearing on product quality or customer experience.

However, even though there is equipment available to automate the process of bagging dried flower, the GreenSeal team has opted to leave that task to its staff.

“It comes down to product quality,” Niles says. “A human being putting three and a half grams in a bag, that is one more opportunity for a human being with product knowledge to check product before it goes to a customer. And that’s actually the very last opportunity that you have to check the flower before it goes in the bag and it’s off to the customers. So, we sat there and said, well, that is a final quality control checkpoint. If we automate, we are potentially removing that quality control checkpoint. From our side, we want to make sure that the only stuff that goes in the bag is the best stuff to go in the bag.”

2. Embrace vertical cultivation.

GreenSeal has employed vertical cultivation, which Niles says increases efficiency and helps control costs in several ways.

Cleaning is of course a large part of any cultivation operation, and Niles says cleaning a 2,000-square-foot room with six tiers of plants is quicker and easier than cleaning a 12,000-square-foot room with one level, for example.

From a security perspective, less cameras are required for the 2,000-square-foot room with the six tiers of plants.

And in a market like southern Ontario where land can be expensive, Niles says vertical cultivation has allowed GreenSeal to locate its facility on a smaller plot of land, which decreases the overall up-front cost for the real estate as well as the property taxes and construction and maintenance costs.

That being said, Niles acknowledges that vertical cultivation often requires more of an up-front investment.

“The buildout for vertical is going to be a lot more expensive than just a single level or hanging some lights,”’ he says. “GreenSeal made the up-front investments a long time ago. …. And I appreciate fully in this industry that it’s hard to make those same investments now that we have in the past. Needless to say, building infrastructure is a huge expense, but it has huge payoffs on a cost-per-gram perspective long term.”

3. Evaluate utility costs.

The electrical distribution within GreenSeal’s vertical grow facility uses digital electricity, or a direct current rather than an alternating current. This allows the energy source for the lights to be located outside the room.

“Because there’s no heat source in the room, you don’t have to pay to get rid of excess heat,” Niles says. “We probably save 5 percent to 10 percent on our energy bill just by removing the heat source from the room.”

GreenSeal has also invested in energy-efficient equipment, such as its HVAC system, which then lowers the company’s total energy costs over time.

“I think HVAC is one of the more under-appreciated areas of investment in the cannabis space,” Niles says. “Paying for top-quality equipment there can actually save you a lot of money and a lot of headaches down the road. We made pretty big up-front investments there, but it’s been a big cost savings for us on an ongoing basis.”

4. Borrow technology from other industries to save time.

The cannabis industry is new and also distressed, meaning that there is not a lot of economic incentive to create new technology for the space.

“We’re in a quiet period now where future tech needs to be created for this industry to do well, but it’s not being created,” Niles says. “Internally at GreenSeal, we do a lot of R&D and we’ve built a lot of our own stuff. We’re fortunate to have very talented folks on staff, but … you don’t have to necessarily reinvent the wheel.”

Because GreenSeal uses so many pots, it used to take a team of five or six people a full workday to wash pots once a week.

“That’s the definition of a non-value-added activity,” Niles says, adding that he could not find a suitable machine available to specifically wash pots for the cannabis industry.

The GreenSeal team took matters into its own hands and ended up purchasing a dishwasher meant for a commercial kitchen to wash the pots on a weekly basis.

“Commercial kitchen dishwashers, they have to clean a lot of plates, a lot of cutlery, a lot of silverware, a lot of cups all day, every day, really efficiently,” Niles says. “We ended up buying one, we made a few retrofits to it, and now, instead of five or six people taking all day [to wash pots], it’s one person for an hour or two. It’s a huge efficiency gain, and those aren’t expensive pieces of technology, but it was something we were able to deploy from what might look like an unrelated industry. We were able to take that tech, bring it internally and leverage it.”

Another example of GreenSeal’s borrowed technology relates to the soilless mix that the company uses as a growing medium. The product comes in large bales that the team had to break up by hand and moisten before using it for planting.

“We had a very clever guy that pointed out that bale breaking machines already exist in the agricultural industry for hay bales, so we got one of those, and I think it was $7,000 or $8,000,” Niles says. “We got this bale breaker, and then we macgyvered ourselves a water source to connect to it. So, you just throw in the bales, it breaks up the bales, it pre-moistens the soil as it’s coming out, and it drops it right into a bucket. [It’s] a super-efficient labor saver, and it saves your back, too.”

5. Rethink genetics.

Niles says one of the biggest keys to GreenSeal’s cost-control success has been the company’s approach to genetics.

GreenSeal runs a full in-house breeding and genetics selection program, and holds a nursery license that allows the company to operate a separate, dedicated space used solely for working with new genetics.

“We’re either doing rounds of genetic selection and phenohunting, or we are breeding our own,” Niles says. “And this is a huge, huge driver of savings for you on your gross-margin side.”

The genetics program allows GreenSeal to constantly evaluate and optimize its genetics to ensure that it is only putting plants into production that are guaranteed to yield favorable results.

For example, if the team discovers that one cultivar yields 30 grams per plant and another yields 60 grams per plant, it can cut its cost per gram in half by simply growing the higher-yielding cultivar.

“Now, it’s obviously not as easy as that because you still need to have strains that are in demand in the market,” Niles says. “You need ones that people are still going to want to buy. You can have the world’s highest-yielding strain, but if it kicks off 12 percent THC, that’s just not going to be useful at all. Maybe it’s useful for future breeding, but it’s not useful as a production strain.”

And while Niles acknowledges that there is cost associated with phenohunting, he says the investment is worthwhile.

“The cost of a phenohunt is peanuts compared to what you’re going to save when you find that winner,” he says. “When you find even just one winner, the phenohunt will pay for itself many, many times over, over the batches that you grow. … I think it’s appreciated from the perspective of differentiation or quality, but I don’t think it’s appreciated fully from a cost-per-gram and gross-margin perspective.”

6. Budget for taxes—and reduce the tax burden where possible.

While all businesses owe taxes to some extent, Niles says the tax regime placed on Canada’s cannabis industry is “egregious.” He notes that the current tax structure trims roughly a third off of GreenSeal’s revenue.

“We build that into our numbers at the outset,” Niles says. “We just know out of the gate, we’re going to lose a third of our revenue, and then we adjust the rest of the business to fit that.”

There is some opportunity to reduce the tax burden, he says, when it comes to product offerings. For example, in Canada, infused products are taxed at a higher rate per gram for excise taxes than traditional prerolls or flower.

“We do have infused prerolls in the market, but what we’re finding is that the potency of those products isn’t all that different from our flower and preroll products,” Niles says. “We’re sort of pulling back a little bit on our infused products and devoting more resources to our flower and prerolls because in a market run by THC, it’s all about maximizing the THC in your flower and preroll products.”

Otherwise, budgeting for taxes and knowing how much will come off the top to pay the tax bill is a company’s best bet, Niles says.

“Budget accordingly, build it into your pricing from the outset and of course lobby as an industry to make changes, but the best thing you can do is just accept it,” he says. “It’s there and it’s probably not going away."