A High Tide of Discount Club Cannabis is Headed to the U.S. from Canada
February 15, 2022

By Tom Hymes @ Cannabis Business Executive

Forget the bridge-blocking Canadian truckers! A discount membership club for cannabis is on its way to the United States from Canada, and it looks to be on steroids, courtesy of Raj Grover and High Tide Inc. (NASDAQ: HITI) (TSXV: HITI) (FSE: 2LYA), a rapidly growing retail-focused company that currently operates 109 cannabis dispensaries in Ontario, Alberta, Manitoba, and Saskatchewan, all by way of a select group of subsidiary services and brands – including Valiant DistributionCanna Cabana, and Famous Brandz, to name a few – that are the backbone of High Tide’s integrated value chain. Grover, who founded the business in 2009 as one shop and two employees, spoke last week with CBE about the company’s fast growth of late and its ambitious plans for the future, which include an all-out assault on the U.S. with only the best of intentions.

I was interested to know if Grover, who has been in the cannabis business for many years, had altered his original vision or stayed consistent with it. “I’ve been very focused right from the inception of High Tide to be diversified enough to tap into multiple revenue streams and not get tied into one bucket, and we’ve clearly executed on that front since our inception in 2009, when we launched our smoke shop called Smoker’s Corner,” he said. “It was just one store with a total investment of $48,000 and two employees, and we turned that into 19 smoke shops before taking the company public and turning them into dispensaries. I also started a distribution company and banded all of that into one umbrella and took it public in December 2018, and that company is called High Tide today. But the goal, and the projection, was always to have multiple revenue streams in the cannabis industry, and we are doing exactly that.

“If you want to talk about growth, how seriously we have grown, just shrinking this down to a four-year timeline, all of 2018 revenue was just $8.7 million,” he continued. “In 2019, we did $32 million. In 2020, we did $83 million, and we just exited 2021 at $181 million. And we are now forecasting that we will do over $280 million at least in fiscal 2022. So, you can see the exponential revenue growth, and it’s all come together because of our diversified strategy, which we’ve been able to execute on since inception basically, and it continues to grow.”

Because no one could have known in 2009 how the regulatory landscape was going to play out, was High Tide’s strategy devised from the beginning to be regulatory proof? “Yes, absolutely,” replied Grover. “Of course, there was no talk of cannabis legalization when we started in 2009 with a smoke shop, but like I said, I was always looking for diversified revenue streams. When I started the smoke shop, it was just one little store and the goal was to build that into a chain of stores, and at the same time start manufacturing our own accessories to not only service our own ecosystem of smoke shops, but to also then wholesale to thousands of other stores in Canada to begin with, and then to move on into the United States. We’ve played within the regulatory landscape of cannabis right from the beginning. At that point, it was just consumption accessories, and obviously, when Justin Trudeau came into power and delighted us all by saying that we are going to legalize cannabis in Canada, we quickly started devising plans on how to convert these smoke shops into cannabis dispensaries, and how to distribute our products on a global scale, and that is how High Tide was born. We’ve been diversified since inception, but we’ve always kept our eyes on the ball, towards where the cannabis puck is going versus where it is today.”

It would seem the United States is about to experience a power play. I asked Grover to dig down a little into High Tide’s appreciable revenue growth of late and where it is coming from. “Sure, I can put some light on it,” he said. “Approximately 70 percent of our revenue is derived from brick-and-mortar retail, which is our 109 stores in Canada and counting. We are projecting that we will hit 150 stores by the end of this year, calendar 2022, and calendar 2023, we should be at 200 stores. So, brick-and-mortar is driving most of our revenue growth here in Canada, and then last year, in 2021, we made six ecommerce acquisitions outside of Canada. We bought three consumption accessories ecommerce platforms and three CBD ecommerce platforms. These are all pure direct-to-consumer businesses, and we were able to increase our revenue from $11 million at the start of fiscal 2021 to $80 million today. You can see that exponential growth there; again, diversified strategy, extract as much as we can from the brick-and-mortar front, and then we supplemented that with getting into these ecommerce businesses, which have now opened up even more pathways for us to increase revenue from.”

Leveraging ecommerce Commerce

Building out an ecommerce ecosystem on top of a brick-and-mortar network of stores appears to be an essential component of High Tide’s plan, along with which come conversations about data, IP, and those crucial components. “I think moving to ecommerce was absolutely a bull’s eye move,” said Grover. “The ecommerce businesses we acquired; on average, we’re looking at 50 percent gross margins in these businesses, but that’s just on average. On the higher side, some of them do 70-75 percent gross margins. You can see the opportunity there, because when you look at our brick-and-mortar business, it’s generating somewhere around 20-25 percent gross margins, or historically around those levels, and those margins are under pressure here in Canada because of how competitive it is. But simply by making this move into the ecommerce side of things and going global, starting with the United States and then moving internationally, we’ve been able to increase our gross margins and increase our consolidated gross margins because of the help we got through our ecommerce businesses.

“And you’re absolutely right about data,” he added. “We’ve grown our data business quite substantially. High Tide has one of the most unique and diversified ecosystems in cannabis, period, no matter which company you look at, If you look at Canada, if you look at the United States, there is not one other company that is doing what High Tide is doing, which is a leader in cannabis retail, a global manufacturer and distributor of consumption accessories, a dominant player in the ecommerce space related to consumption accessories and hemp-derived CBD products.

“We’ve got a lot going on for us,” Grover emphasized. “And what we can do because of these multiple business lines is we are able to package all this information and sell our data to multiple industry stakeholders. This goes beyond the licensed producers who absolutely need the data to guide their manufacturing and growing priorities; if they don’t get their growing priorities right, that can account for major losses. But we also have investment banks that are interested in our data, we have multiple industry stakeholders that are interested in our data, and we’ve increased our data business quite substantially. Actually, in just the beginning of fiscal 2021, in 2020, our data revenue was only $2 to $3 million annualized, and we are roughly around $16-$17 million annualized now, so we’ve grown our data business quite tremendously. And the data business is also a very high margin business, because the output is only the report that we present to our customers.

“And then if you talk about IP, it’s a good point,” he continued. “Because of some of the acquisitions we’ve made, especially on the ecommerce side – like Smoke Cartel, which we acquired in March of 2021 – they had this proprietary drop ship technology they had built, and now we are able to use this technology on all of our ecommerce platforms. What this technology does is basically it’s a plug-and-play API that connects our Smoke Cartel platform with multiple vendors in the cannabis industry, and with it we can make millions and millions of dollars in sales without having to stock any physical inventory.”

High Tide also has acquired a retail technology and smart locker called Fastendr through its recent acquisition of Bud Room, a retail cannabis store located in Ottawa, Ontario. “Fastendr is also a very unique technology, said Grover. “Because of how competitive it’s gotten in Canada in terms of gross margins, you have these retail kiosks with advanced smart locker technology. We’re able to drop our overhead costs, drop our labor costs, and further monetize data through these kiosks that we have in our stores and eventually to third parties. So, High Tide continues to make moves above and beyond what traditional retail looks like and think outside the box.”

I asked Grover if, if addition to aiding with gross margins, the focus on ecommerce was also intended to grow High Tide’s market share by gaining new customers. “Absolutely, it’s doing all of that for us,” he responded. ‘It’s giving us extended market share. What I’m really proud of is that at the start of fiscal 2021, we were sitting at roughly 650,000 international customers in our database that had purchased cannabis accessories from us. Today, we have over 3 million international customers in our database, and 80 percent of that count, which is roughly two and a half million customers, reside in the United States. These customers have purchased clients’ bongs, vaporizers, rolling papers, or CBD products, so these are our future potential THC customers. They’re buying all of this paraphernalia, obviously to consume cannabis. We already have them in our database, and we talk to them every day.

“So, I feel that High Tide has more than one competitive advantage,” he added. “But if you look at the way we’ve scaled up our revenue – our international revenue went up from $11 million at the startup in 2021 to $80 million today – we’ve got a ton of good stuff going for us, and this would not have happened if we had not focused on that market share grab that we did through these ecommerce acquisitions. And you can count on it, we are going to do a whole bunch of these this year as well, because we want to be ahead of the curve when it comes time for federal legalization, and guess what, we have these customers just waiting for us to sell them cannabis products.”

The Costco of Cannabis

With such a good start constructing High Tide’s foundation, I wondered what international markets appeal to Grover. “The United States remains the number one focus market for High Tide, and it will remain that way for quite some time for obvious reasons,” he said. “It’s one of the most lucrative cannabis markets in the world, and the consumer is quite advanced in the U.S. when it comes to cannabis. That’s why we are able to sell them these technologically advanced accessories, and they’re also into CBD products. The United States was first out of the gate on that. So, our focus remains on the US in the near term, but if you look at Europe, we just entered Europe with the acquisition of Blessed CBD, and prior to that, we had purchased Grasscity.com, which is the world’s oldest online smoke shop based out of Amsterdam, Netherlands. So, you know, UK, Germany, Netherlands, France, these are very important markets for us. I think our focus on Europe is going to be on Germany, especially because Germany has come out and said that they are going to legalize cannabis recreationally. Well, we are one of the largest recreational cannabis player in North America, so we want to mimic our success in Europe starting with the German market. The UK, Netherlands, and France will be equally important, but starting with Germany.”

When Grover uses the word ‘mimic,’ does that mean building a vertical infrastructure in the target countries, like Germany, or does it mean buying companies in order to set up a footprint?

“So, the German market is absolutely one of the most lucrative markets for High Tide, and we’re going to apply the same playbook in Germany and in Europe that we did in Canada, which is growth by acquisition,” he said. “You’ve seen us grow through multiple acquisitions, but also organic growth. If you look at Canna Cabana stores, we added 48 stores organically in 2021, which is a large amount of brick-and-mortar cannabis stores. It’s not easy to do, especially during COVID. But by building organically and acquiring multiple companies that were strategic and a creative fit into our ecosystem, our numbers speak for themselves. We have exceeded revenues, we have adjusted EBITDA positive for seven consecutive quarters, and I feel that we can replicate this playbook starting with Germany and then moving beyond in Europe, which will be a blend of both organic growth and growth through acquisition.”

I asked Grover if this is the so-called Costco playbook in action? Is High Tide in fact a full-sized, yet scaled-down version of Costco? “We absolutely are, and we are being called that for the right reasons,” he replied. “You’re hearing more and more buzz about the Canna Cabana stores. We’ve been deemed the Costco of cannabis, and I am very proud of the fact because the concept that we have created is completely geared towards our members in Canada. We have the largest loyalty of any competitor in the country, sitting at approximately 400,000 members. We manufacture our own consumption accessories, so we have 5000 SKUs of consumption accessories that we sell.

“We also design, manufacture, import, wholesale and retail 75 percent of all of these SKUs, which is completely like the Kirkland Signature brand,” he added. “We have our own brands, and we’re able to design and manufacture these brands and sell them exclusively to our club members in Canada, and this is why we have given up on wholesale in Canada. We’re not interested in that. We’re retail focused, and we are providing our members with special benefits by buying CBD companies abroad. Canada has not seen the sort of cannabinoid science formulations that are available in the United States, and now we have the ability to bring these formulations into Canada to our membership program. So, we are being called the Costco of cannabis for the right reasons, and we are only just getting started. Our loyalty is absolutely exploding, and we are the first ones in North America to launch the innovative discount club models that we did. And I am very bullish on the fact that when we are able to play in the United States – when our exchanges where we trade, on the NASDAQ and the Toronto Stock Exchange venture – when they are good with us touching the plant in the United States, I think our concept will catch fire in the U.S. and that it will immediately take off, because we’re already seeing that success.”

I asked Grover why the discount club membership model sometimes works and sometimes it doesn’t. I assume that scale is essential to getting discounts in place on a regular basis, but I’m sure it’s been tried before, unsuccessfully. My other question had to do with who loses in a discount model, because when prices are discounted 25 percent, someone’s getting the short end of the stick.

“You’re totally right, the first thing you need is scale to even think about launching a discount model,” he replied. “So, let’s talk about this. How many companies in Canada have that scale? Not many. We are the leader in Canada with 109 locations. Second, and I would put this above everything, is execution. Whether you’re executing on a discount model or you’re executing on a non-discount model, you still need to execute. So, the proof is in the pudding. We’ve continued to execute since our inception, and we continue to make large strides in the cannabis industry, and it’s working well. The most important element for us launching this discount model is we are a very unique cannabis ecosystem. This is not everyone’s cup of tea. For example, we have been designing and manufacturing consumption accessories since 2009. That’s going back 12-13 years, and there is no one that I know of that competes with us today in cannabis retail that has this expertise. And we didn’t just come and compete on price. We didn’t say that the discount model is all about price. Absolutely not. Price is a big element, but we are providing exclusive products to our club members that are unavailable elsewhere, and this is why we fit in that Kirkland brand category, because we have our own brands and products.

“To compete with High Tide or to start matching what High Tide is doing as a discount club retailer, you’ve got to have an ecosystem that High Tide has, which I don’t believe any of the North American competitors that I’m currently looking at has the ability to do,” he added. “And like I said, we’re not just competing on price; we’re banking on our diversified ecosystem coupled with the best price for our club members, and our club loyalty is absolutely exploding because they can’t see this value in any other region.”

As powerful as this plan sounds, it also sounds long term, and I wondered how High Tide plans to replicate its fast growth in a shorter period of time in new markets. “My focus is on the United States, “All of our products are already available in the United States, where we have a distribution center, and our CBD brands are U.S. companies that we purchased,” replied Grover. “They do processing, formulations, distribution, all in the United States, so the U.S. market is set up even better than the Canadian market, in my opinion, and it’s ten times the size of Canada. So, if we are tasting such success in Canada, I think our success will be manifold in the U.S., and you couple that with the 3 million existing international customers that we have, out of which 80 percent reside in the US and 20 percent outside the United States and Canada, and we have a perfect ecosystem ready to launch in the U.S. market and then in the European markets. I think our infrastructure is totally ready for when the time is right.”

High Tide is even ready for 50 states with 50 different regulatory schemes. “We already know what the U.S. market is,” said Grover. “Yes, regulations differ state by state, but they’re already a lot more favorable for cannabis retailers. For example, in Canada, we have to live with these tiny gross margins on the brick-and-mortar front, which is probably 15 to 30 percent. In the United States, these numbers look like 45 to 70 percent. These are unheard of in Canada, so when we go to the U.S. market, it’s going to be a lot easier because of the experience we’ve gained in the last four or five years in Canada, because of our scale, and because of interprovincial differences that we’re already used to. We’re ready for all the challenges, but I’m looking forward to the U.S. challenge.”

The plan, he added, is to acquire brick-and-mortar shops in the U.S. “In fact,” said Grover, “we are in a few conversations right now to execute on an option agreement which will allow us to put that option into place today with a particular retailer, or more, and execute on that option when federal legalization happens. Which is, we tie the business up at a set multiple of EBITDA that they’re performing at today, and we’re able to take them over as soon as federal legalization takes place. We already have a few brick-and-mortar shops in the U.S., so we are working on that strategy, and as federal legalization takes place, or we are allowed by the exchanges that we trade on, we are going to start building a lot of stores organically in the U.S. But it will be a blend of both, just like we’ve done in Canada, where we acquired our second largest competitor at the time in November of 2020. This is called meta growth. We doubled our store count from 33 to 66, and we intend to do exactly that in the United States when federal legalization takes place.”

With time for one last question, I asked Grover what he has learned about the average cannabis consumer over the years but add that I’m not sure most cannabis consumers like to think of themselves as average.

“I agree with you that no one likes to be called average,” he said, “but let’s talk about the word average, because it’s really about the average. The one thing I will tell you is that the average cannabis user – which is over 70 to 75 percent – cares directly about variety and price. Let me elaborate. Variety means, when you and I go to a liquor store, you may have your favorite, which might be Grey Goose, I might have my favorite, which might be Glenlivet. So, every time we go to a liquor store, I know I want my single malt and I want this particular brand, and you want this particular brand of vodka. It’s very different with cannabis, where the average user wants a crazy amount of variety. They want something new all the time, and that is what makes the grower’s life really difficult, because they always need to stay ahead of the curve and come up with something new and exciting. That is only going to continue, and that was a big learning curve for me, too, because, again, this is a new industry. And I know personally, as a consumer, I also want variety. I don’t want to use the same strain over and over again. At some point, I want to change it, and then maybe go back to it eventually.

“The second thing is price,” added Grover. “What we find from multiple data sources, multiple surveys, and our own data, is that 70 percent of Canadian cannabis consumers care strictly about price. They want it cheap, and they want variety, and this is starting to show in our results. We’ve launched the discount club concept and we are experiencing fantastic success, and we’re not just providing our customers with value-focused cannabis brands only. We are showing them the entire premium selection at value prices. That’s why we call ourselves better than value. But these are the two big differences that I would like to point out, that variety and price are most important to the average cannabis consumer today.”