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Generation GrowGen: CEO Darren Lampert Is Building a Business for the Long Term

Denver, Colorado-based GrowGeneration Corp. (NASDAQ: GRWG), or GrowGen, is a rapidly expanding chain of national retail outlets, or specialty hydroponic…

By hempcbdtimes , in ancillary Ancillary Businesses cultivation GrowGeneration grows Indoor retail Supply Chain Uncategorized , at June 23, 2021

Denver, Colorado-based GrowGeneration Corp. (NASDAQ: GRWG), or GrowGen, is a rapidly expanding chain of national retail outlets, or specialty hydroponic and organic garden centers, that caters to the increasingly sophisticated needs of cannabis cultivators at all levels of growing. Servicing everything from home grows to massive indoor facilities utilizing the latest technologies, GrowGen’s model is as timeless as business itself: meet every ancillary need of your customer and you own them for life.

The world is rife with hydro stores, of course. A quick Google search turned up more than a dozen such shops within a 15-minute drive of my San Fernando Valley home, a mix of indies and chain outlets but no GrowGen, the closest of which is south of me and a bit of a drive. The hydro landscape is as competitive as any in cannabis, however, and if GrowGen’s noteworthy expansion during its relatively short life, and especially of late, is any guide to its future, it could become the leading ancillary company servicing the cannabis grower segment for generations. A heady thought, to be sure, but it turns out that Nasdaq-traded GrowGen was created precisely to become the best picks and shovel company in the business, according to CEO Darren Lampert.

“GrowGen was started in 2014 with a very specific business plan,” he said during a recent phone call. “To become the largest retailer in the hydroponic garden arena, pretty much servicing the cannabis area, but also verticals and urban grows. The landscape when I first started was pretty much when the evolution of the cannabis space began. You started to see adult use legalization and an industry on the other side of it that was akin to the hardware stores of years ago, before Home Depot, Lowe’s, and Ace came around, and you saw the building boom in the 1980s and ‘90s, and the hardware stores couldn’t handle it.

“It’s pretty similar to what you’re seeing in the cannabis space right now with legalization on a state-by-state basis, and an industry that is evolving from the grow side,” he continued. “And anything that evolves from one side also has to evolve from the other side, and we’re the picks and shovels part of it. Regarding the evolution of the grow facility, it’s now called controlled environment agriculture. You’re no longer dealing with plants in the ground, and people running around watering and feeding plants. It’s all done through technology, and it’s very specialized, and what GrowGen has built is a team that understands the specialty nature of growing indoors.”

GrowGen refers to 2020 as transformative for the company, and the numbers bear that out. The company reported 143 percent revenue growth, 262 percent EBITDA growth, 63 percent same-store sales growth, 132 percent gross profit margin increase, and a 24 percent decrease in operating costs. The same year saw 14 new locations added across 12 states, including all of the West Coast states, for a total of 52 throughout the nation, with plans to have 60 in operation by the end of 2021, creating “the nation’s biggest chain of hydroponic garden centers and the largest sales team of hydroponic product specialists to service both commercial and craft growers,” per a company infographic.

Keeping pace with those performance indicators is GrowGen’s literal footprint as measured in square feet and SKUs. As grows have gotten larger, so have the stores. “We started with four 2000 square foot stores in Pueblo, Colorado,” said Lampert. “Now our average store is 15,000 square feet and expanding from there, and our stores are averaging over $450 a square foot, and that’s growing, too. Those numbers are increasing on a yearly basis, and when you start looking at retail metrics, our metrics right now in the cannabis space on the retail side of it are certainly in line with some of the biggest companies out there.”

Asked to explain the metric in more detail, he said, “We have 900,000 square feet of space, and our sales right now are about $450 million to $470 million, so you look at sales per square foot. It’s a metric used in typical retail, and we are not typical retail, but like anything else, there are certain metrics that Wall Street uses that we are also forced to use.”

In terms of SKU’s, GrowGen’s inventory appears to be not only comprehensive, but targeted to the needs of a growing sector. “I have about 10,000 SKUs, but like every industry, 100 SKUs make up 70 percent of what we sell,” said Lampert, adding that the company is organized to meet any conceivable circumstance. “We usually divide [products] into consumables and non-consumables,” he said. “Consumable products are products that people need on a weekly or monthly basis, and non-consumable products are what people need every three to five years to build facilities; lighting, benching, control systems, air control, dehumidification. These are products that you would replace every five years, best in breed technology.

“What we’ve seen this year on the technology side,” he added, “is a change in lighting that’s going from double-ended lighting, which are very energy inefficient, to LED lighting, where there are certain states have tax benefits for switching to LED, even in the cannabis space. It’s products that focus on energy efficiency, water efficiency, crop control systems. Everything is now done through control systems at these facilities. Plants are no longer on the ground, but on rolling benches, so every square foot of the facility is used.

“The two biggest inputs in a facility are the cost of employees, which is going down per square foot, and energy and water usage, which is also going down,” he added. “You’re seeing the move to sustainability and conservation, and it’s the same thing on the nutrient side, where you’re looking for more uptake out of the nutrient, for your nutrients to make your plants bigger and better, and certainly the yield to be bigger and better. Like anything else, yield is important, how many pounds you get per light is always an important metric to people, especially when coupled with quality. That’s how you make money.”

Sales associates, or grow pros as the company calls them, number over 500 and are the secret ingredient to the success of the company. “The mantra for GrowGen is that we acquire stores in mature states that have been around for many years, that we understand the cash flow balance sheet income statement, and more importantly, understand the customers at those stores and understand the employees,” said Lampert. “The most important part of this industry right now is certainly the employees, the knowledge base, and there are not that many individuals in the United States that really understand how to grow cannabis right now, and especially the specialty nature of the plant. So, for GrowGen, every single individual that works within our stores knows how to grow a plant, knows the science around the nutrients, the soils, the rockwool, and can also evaluate any individual that walks in off the street and wants to know how to grow a plant.”

How can a business afford to carry so many products that are relatively slow movers, or is there a lot of product turnover? “I think the simple process is the better run companies don’t keep the products that don’t sell,” said Lampert. “We are in the midst of finishing SKU rationalization at GrowGen, and if you don’t make the cut, it goes to the warehouse. If someone needs it, we ship it. And getting shelf space at GrowGen is getting predominantly harder. We won’t carry products that don’t sell, that don’t make it through SKU rationalization. For our larger customers, we’ll keep products, not on the shelves but in the back if they use them on a weekly or monthly basis. If not, we won’t be carrying them in our stores.

So, as big as some of their stores are, shelf space is still limited, and you have to make choices about who gets on there? “One hundred percent,” said Lampert. “And by the way, advertising in this industry is challenging in a lot of ways. For manufacturers to get new products to market, they need someone like a GrowGen, because you can’t knock on doors, you can’t cold call, and the publications are tough. So, you need a marketing company, and GrowGen opens that door in many ways.”

I ask Lampert what sort of customer is walking through the door? “The interesting thing is right now we have over 100,000 individuals shopping our stores every month,” he said. “We did over 17,000 transactions online last year. So, our retail segment is anywhere from a craft grower to a caregiver to a small single state operator to an individual growing fruit, vegetables, or cannabis in states where there are plant counts for individuals with medical cards, or plant counts for people that live there because of the adult use laws. We run the whole gamut, but the one thing we’ve seen is that our foot traffic has almost doubled this year.”

GrowGen is currently building out huge outlets in the greater Los Angeles area. “We purchased 55 Hydro about two months ago and are in the middle of moving to a much bigger location on the 55 in Santa Ana,” said Lampert. “We’ve also recently signed a 70,000 square foot lease in Long Beach, and another 52,000 square feet in the middle of Los Angeles. We’re building both locations as we speak.”

Noting that these locations seem to be appreciably larger than your average local hydro shop, I ask what consideration go into going big or small. “It depends on the area they’re in, but we do use our superstores for distribution, commercial, and online fulfillment, and also for customers,” said Lampert. “If there is a large concentration of growers in an area and [the location is] near the ports or in a good distribution hub lane, we have no issues opening larger stores. They’re storage for our proprietary and private label brands, and again, distribution and fulfillment to our smaller stores.”

All this growth implies people entering the industry. I ask Lampert what the new grower looks like. “I believe the new grower is going to look like a craft grower from the wine industry,” he said. “New growers that are coming in on the craft side of it, on the caregiver side of it, care tremendously about the quality of their product, they care tremendously about yield right now, and really helping their patients in a lot of ways. There’s a lot of passion in this industry.

“We’re seeing growers of all types,” he added. “We represent over 2500 commercial growers right now, and I think the one crazy part of this industry right now is that everyone is so fixated on the MSOs around the country. There are ten of them! There’s not that many MSOs, so once you get away from that group of 10 – and it may not even be 10, what you really hear is usually a group of six and take the Canadian group out because they don’t grow down here – it’s a very small group.

“Like anything else,” he continued, “they’re the ones that make the news every day, but I ask the same question to most people when they interview me. When you walk into a liquor store and you’re looking for a bottle of wine, are you buying a craft bottle of wine or are you buying one of the large manufacturers that has three different brands? Most people buy craft. So, there are a lot of interesting dynamics, and one of the beliefs we have at GrowGen is that we believe in much more open licensing. We believe people should be able to grow plants, and licensing should not be as regulated as it is on a state-by-state basis. When I look at the laws coming out of California and Michigan, and even what you’re seeing right now hopefully coming out of New York back on the East Coast, I see much more open licensing than you were seeing in the past when you take a look at Florida, when you take a look at Pennsylvania, New Jersey, Connecticut, and Minnesota. There is such restrictive licensing in those states. We believe that with education, that when the government does budge one way or the other, that a lot of these closed states will start opening and there will be many more craft growers in these states. People want to be able to grow.”

Restricting grows would obviously be problematic for any cultivation support provider, but are there other restrictions that could hurt, like limiting THC levels? “If they would eliminate THC levels,” replied Lampert, “you’d probably see more growing, different types of growing, with different quality. I think when you look at the maturity of a market, if you look way back at the 1970s and ‘80s, people were drinking grain alcohol, which is kind of akin to smoking or taking very high THC. It doesn’t mean that it’s any better, but in the early onset of any industry, people still don’t know.

“When you walk into a liquor store,” he continued, “the difference in pricing of wine can range from $3 to $3,000. When you walk into a dispensary, everything is the same price, or maybe a five or 10 percent difference, maybe 20 percent. But that’s just because we’re at such an early stage. What you’ve seen in the industry is the amount of money that’s gone into marketing and using big names to brand products. It hasn’t worked. It’s really been a big failure, people relying on other people’s names on brands as opposed to people relying upon the quality of their brands. And I think you’ll see that changing in the future. You’ll start seeing the spread between high grade and low grade, and quality. People are going to start looking for quality. When you walk into a liquor store, you don’t ask them what kind of tequila or wine you want, but I’d say 90 percent of the people who walk into the dispensary are still asking the budtender what kind of cannabis they should be smoking, because they don’t know the answer.

“But if you walked into a bar, and you walked up and said, ‘Excuse me, I’d like a drink,’ they say, ‘What would you like?’ And if someone handed you a drink, you’d say, ‘What is this?’ In the old days, when someone handed you cannabis, you didn’t ask what it was, you smoked it. So, what you’re seeing right now is the infancy of an industry, and that’s why we are so excited about the future at GrowGen, because we believe you will see 100 years of growth in this industry, as it was in the wine and spirits industry at the end of Prohibition. We’re almost still in prohibition in the cannabis industry, and right now, on the other side of it, you’re talking compounded annual growth rates in the high teens to 20 percent over this decade, and cannabis going from a $20 billion business to a $100 billion business industry. You’ll see that on our side of the business, there’s a lot of differing metrics, but people are saying it’s an $8 to $10 billion industry that’s going to double over the next five years.”

Is this level of growth necessary for a business with traditionally tight margins? “I think relatively speaking within the retail space, our margins are tight,” said Lampert, “but with that, our rents are much lower than industry standards, and most of our locations are warehouse-style locations near cannabis growers. We put our stores where the cannabis growers are, so our rents are a much smaller part of overall expense lines than with most retailers. Even with that, like anything else, it’s a balancing act. Our EBIDTA levels are coming in a little bit over 12, so they’re going higher, not lower right now, as are our margins with our new private label initiatives at GrowGen.”

That was the perfect segue into my question about the extent to which GrowGen carries its own products. “We do both,” said Lampert. “We bought a few products in the last six months, niche products that we sell into the industry and to some of our competition. We’ve left the names the same of the products that we have bought. One is an additive, one is a cocoa product, both out of India, and very successful products on the market. And we also have private label products that we believe are products that the market wants to buy from GrowGen, products that are coming in from China, high margin products that our customers are more agnostic about; they’re not asking for brand names. But with that, we also bought a large set of trademarks from a company back in 2018, and we’re reviving a lot of these trademarks.”

On the all-important issue of sourcing and the threat of interruptions to the pipeline, Lampert insisted GrowGen is as well situation as possible. “I think the simple part is, the plants do not sleep. When they need to be fed, when plants need products, they can’t do without them. And I think what certainly differentiates GrowGen from our peers is our selection, which is the best in the industry. No one is even close. We have over $80 million of product paid for right now on our balance sheet, and we’re better served than any company in the country to get products to the growers on time, whether it’s from the store closest to them, or we have to ship it to them from somewhere else.

“One of the biggest issues you’re seeing now is with lead times,” he added. “Lead time disruption certainly is online, mostly with the smaller customers of GrowGen, and we do have a lot of products that are shipped directly from manufacturers and distributors when you purchase online. There have been shipping delays, shipping inflation, and port congestion with private label products, but our same store sales have grown since COVID, up 37 percent in 2019, 63 percent last year, 51 percent in the first quarter of 2021, and we were able to get product to our customers on time, as opposed to our competitors.”

I noted that in a recent earnings call, Lampert said that GrowGen has built the foundation for tremendous growth for the next several decades to come. I asked him to expand upon that remark. “First, as you probably know, we’ve gone from $30 million in 2018 to $450 plus this year, so you’re talking 15x in revenue in three years,” he replied. “Do I expect 15x in revenue over the next three years? No, but certainly the excitement comes from a lot of different places. One of the things that excites me every day is that we’re in 12 states right now, we still have 38 states and growth, and we still believe that Europe will be a tremendously vibrant market in the future. We believe we’re in the early innings.

“The other part that excites GrowGen and certainly excites me, is the urban garden markets,” he continued. “I believe with climate change and what’s going on in the world we live in, that there is a tremendous move for indoor gardening, urban vertical gardening. I do believe in certain states – even Mississippi, where there’s some issues with legalization right now – if you took tax dollars coming out of cannabis, and the government was to give tax credits to build urban gardening facilities within states, you’d see such a tremendous boom on so many different levels. For whatever reason, getting these bills passed is so challenging and difficult, which they shouldn’t be. The world has grown cannabis for generations and done it successfully. Right now, the government is taking the lion’s share of the profits coming out of the industry, especially on the grow side from their taxes, which should start being reinvested back into the communities grow. GrowGen is working right now with Whole City Foundations, building a greenhouse in Newark, New Jersey to teach the kids how to grow fruits and vegetables.”

We are nearing the end of our talk and had not addressed the equity markets at all. It was a subject Lampert seemed almost resigned to discussing. “The only challenge to being the CEO of a public company,” he said, “is finding the hours in a week that you need in order to work with Wall Street and tell your story and do interviews, which takes away from time doing work and it also increases your hours by many every week.

“New industries have challenges and there’s a lot of young investors out there in the country we live in right now, especially during COVID, with Reddit and Robinhood and everything else, and cannabis stocks have gotten the rap on Wall Street about being very volatile,” he continued, speaking to the messaging Wall Street and investors need to understand. “GrowGen is a specialty retailer with a cannabis and controlled environment, agricultural flair to it, but people still want to trade it as a cannabis company, and cannabis companies are volatile trades. There’s a lot of different laws coming out, and there’s a lot of news on the cannabis space on a given day. Four years ago, when they put out the Cole memorandum, everyone thought every cannabis company would go out of business. It didn’t happen, but a lot of trades are done on speculation. That said, we believe that in a few years GrowGen will be trading at a multiple that’s the same as most retailers, and we believe we should have a higher multiple than them. The way that GrowGen is growing right now, we’re expecting $54 to $58 million in adjusted EBITDA this year, which is almost $1 a share. If you looked at us two years ago, we earned $6 million, and suddenly people thought we were trading at these insane numbers. But we are growing into the numbers as we speak, and the company’s getting stronger by the day.

“We’re going to earn $54 to $58 million this year, almost $1 a share,” he repeated, when asked about GrowGen’s profitability. “It wasn’t growth at any cost when we built GrowGen, but we built GrowGen to make money. We’re not a not-for-profit company, we expect to make money, and we’re very process driven, whether its margins where we’re spending, or how we’re building this company for the long run. We have no debt on our balance sheet, we have about $130 million in cash on the balance sheet right now, and about $80 million of inventory paid for without any debt. We’ve built a company that we believe will be in every state in the country in this decade, and there’s tremendous growth ahead for GrowGen.”

As far as the competition goes, Lampert stated simply, “We’ve bought most of them. When you look at our acquisition pipeline, and the acquisitions that GrowGen has done over the last four years, we’re buying our competitors in mature states. On the other side of that, when you look at what GrowGen has done in Oklahoma, we’ve greenfielded four stores and we’re in the midst of greenfielding our fifth store. So, in new states, you’ll see us building, bringing our team in and really starting new states where there is no competition. In California right now, there are over 100 hydroponic stores. We’re building out Southern California, where we’re very strong. We’re building out Northern California right now. We’re buying stores in these mature states, and we’re buying stores at three to five times EBITDA. So, it’s a wonderful spread between the two, and we’re making these stories better, doubling sales within two years of life. The model is working. We’re giving customers more optionality, and customers want optionality both in the learning side of it and from the how they want to shop. Cannabis growers are fickle sometimes, and it’s a new industry; they want optionality from products, from the technology side of it, and also from the way they want to buy. We give credit to customers while most shops will not because we have a big balance sheet. We’ll do whatever our customers want.”

Lampert’s unbridled confidence extends to the prospect of big box stores stepping in after federal legalization. “First, they can’t find employees, and we own the customer, so why would a customer leave me,” he said. “If we represent all the customers, why is someone going to go to a big box store where they don’t want to shop, they don’t feel wanted, that doesn’t deliver, and they don’t have the phone number of an individual they can call at three o’clock in the morning when their plants are sick? It’s almost like switching doctors. Our top employees are doctors to a plant, and they are value-add to these facilities. So, we don’t really see our customers leaving, we’ve had very little turnover on the customer side, and you can see that from our same store sell.”

“We’ve built something that didn’t exist in this industry,” he added. “When we started, there was no clear leader in the industry, there was no national company, there was no multi-channel sales company that offered online in-store distribution, and direct shipment to farm or warehouse of private label products with a commercial team. If you look at some of the other rollups going on in the country right now, they have taken a nascent industry and have brought professionalism to it and have really done it to better serve the customers. That’s what you’re seeing right now. The days of an individual building a 100,000 square foot grow facility to walk into a 2000 square foot shop that has no product in it just doesn’t work. People are growing to make money now. Some are growing for medicine because they can’t afford to buy it, so they’re growing it themselves, and they need to know how to do it, they need the best products, and that’s why they come to GrowGen.”

Asked if he wanted to add anything, Lampert spoke to the intrinsic qualities that distinguish his company from the pack. “The interesting thing about GrowGen is that the passion comes from up top and goes throughout this company,” he said. “I think what most people in this industry certainly understand is that it is the merging of two cultures: the merging of the business world C-level executives with the cannabis world, where most of our employees come from. And I can tell you that most of our employees can read a balance sheet, understand income statements, and understand the stock market. I’ve taught most of them, so it’s something that has been very special and important to GrowGen that we integrate our staff. We have productive meetings to see what our customers want, and what our employees want, because if you don’t understand the industry, you’ll never make money in it. Our executives spend a long time with our employees, and I travel the country. I’ve been to dinner with most of the employees that work for us right now, and I think it’s been a wonderful learning experience for both sides. I learn from them, and they learn from me, and we look at our senior staff the same way. Our senior staff teaches but they also learn, and I think we’ve done a tremendous job merging cultures at GrowGen. And I think that’s really where our success is bred, and why we continue to grow this business in an effective way, and I believe we’re going to continue to do so.”

The post Generation GrowGen: CEO Darren Lampert Is Building a Business for the Long Term appeared first on Cannabis Business Executive – Cannabis and Marijuana industry news.

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