Recently, Motley Fool contributor Eric Volkman had a chance to interview Ayr Wellness (AYRW.F 13.55%) CEO Jonathan Sandelman. In his pre-cannabis career, Sandelman was a top finance industry manager, rising to the position of president of Bank of America Securities and founding asset management firm Sandelman Partners.
His expertise is certainly being put to the test in the marijuana industry, which is beset by a number of challenges that can make it difficult to succeed. In this discussion, he addresses how his company is attempting to set itself apart and earn a profit despite the sector's many pitfalls.
Image source: Getty Images.
Eric Volkman: In terms of retail and wholesale cannabis, one thing that makes your company distinctive is its concentration on high-potency product. By your estimate, what kind of market share do you hold in this category, and how has it developed over time?
Jonathan Sandelman: We would really categorize our product offering as high-quality as opposed to high-potency. It's true that THC content is important to our consumers, but we also care a lot about terpene profiles, which offers the taste, flavor, and overall effects of our offerings.
We are market share leaders in Massachusetts in the flower category because of our high-quality product, of which THC content is only one factor. It's also about consistency of the product, terpene profile, flavor, availability, reliability, etc.
Volkman: How do you plan to fend off the competition in the high-potency category as consumers look for more "whole plant" offerings?
Sandelman: Our competitive edge is developing innovative, consistent, and high-quality products, alongside convenient delivery methods that make the category more accessible. We listen to customers -- e.g., introducing the Florida market to Origyn. We offer a high-quality, consistent product at a competitive price -- that is the Ayr way.
Volkman: Your dispensaries are currently located in five states (Arizona, Florida, Massachusetts, Nevada, and Pennsylvania), and there will be more coming on stream if all goes well (New Jersey and Ohio). I'm not seeing the commonality between all of these markets; what exactly is your strategy for nationwide dispensary build-out? Are you simply going on an opportunity-by-opportunity basis?
Sandelman: These states actually have a lot in common in the fact that they meet the criteria for what we find attractive in a cannabis market.
We like highly populated, sizable, addressable markets, limited licensing, the legal status or likelihood of adult use, the geographical positioning of existing retail locations, and the existing assets and talent the company is bringing to the table. If we have all of these boxes checked, we feel we are positioned for success.
We also love the idea of setting up in neighboring states, when possible. While cannabis itself cannot cross state lines, there are still efficiencies that can be captured throughout the supply chain, and in addition to marketing and branding.
Volkman: You have quite a large presence in Florida, but that state is dominated by Trulieve Cannabis ... which is about to get much larger thanks to the Harvest Health & Recreation acquisition. What is your share of the Florida market, and is there a way to take some from your now more powerful competitor?
Sandelman: Florida is an important market and one that we are quite bullish on. We identified quite early what a pivotal market it can be and looked to get into the market with the right asset at the right time and right price, which we did with the Liberty Health Sciences acquisition in February.
When we acquired Liberty, we knew that we were acquiring a company with a lot of retail stores but less than half of the statewide average sales per store.
We recognized during the acquisition process that the issue, which was an underperforming cultivation, is something we felt we could fix, because cultivation is a key strength of ours, and get Liberty performing to its full potential. And since closing the acquisition in late February, that's exactly what we've done.
We understand that Florida will be one of the best markets in the country and are going all-in on increasing our presence in the state. While Florida is currently an attractive medical market with a fast-growing program, we feel that once the state goes rec, it has the potential to rival California.
This leaves enormous runway for our own growth in the state, regardless of what our competitors do, as long as we can control what we can control.
Volkman: At the end of your most recently reported quarter, you had nearly $196 million in cash -– a comparatively large war chest. Do you sometimes fear that potential acquisition targets are well aware of this, and could that make acquisitions pricier than they otherwise would be?
Sandelman: Our acquisitions are usually based on relationships that we've developed over the span of years. We see ourselves as acquirers of talent in addition to acquirers of assets, so any time we undergo a transaction, we want to make sure the relationship is strong, and we have a good idea of the talent we're bringing into the organization.
That relationship aspect can also have a direct impact on the compensation for the acquisition. You referenced our cash position in your question, but that's really only one aspect of the consideration that goes into a deal. Stock is an extremely important part of any deal, providing the sellers with skin in the game and the opportunity to see the fruits of their labor continue to grow.
This stock component is the most important, and it is also where the relationship aspect is most crucial. People know my background as an investor, and they understand that when they take our stock, we're effectively managing their family's money. So that trust and relationship factor is incredibly important when they are deciding whose stock to take.
The trust and relationships we develop mean that we often don't have to pay the highest dollar amount for a particular acquisition. People trust us to be stewards of their capital and grow their investment over time.
Volkman: In your most recent set of quarterly results, you speak of "putting important resources into elevating and evolving the Ayr Wellness brand." Could you elaborate a bit on your plans for this, and give us a ballpark figure for costs?
Sandelman: We expect sales and marketing to run at about 2% to 3% of revenue over the long term -- this might be a bit higher in the next few quarters as we launch and invest in our new brands, like the recent introduction of Revel branded flower in our Pennsylvania stores.
We will be narrowing our portfolio to a few "national power brands" that will carry into all of our markets, while developing our Ayr Wellness dispensary banner in key markets, with the goal of streamlining and branding dispensaries in all markets under the Ayr Wellness name.
Volkman: In recent weeks, we've seen legalization moves in both New York and in Alabama (for medical product, at any rate). Do you think the "legalization wave" will continue, and if so, how will this affect your current business and your future strategy?
Sandelman: Legalization, in our opinion, is only going in one direction -- toward more liberalization and access in states across the U.S. That includes states implementing cannabis legalization for the first time or transitioning from a medical-only market to adult-use.
Public sentiment is clearly on the side of cannabis legalization, and state and local governments will continue to follow, even if the federal government takes a while to figure out how to approach federal cannabis legalization.
