Rocks Are Thrown at Glass House

The Scarcity Mindset in Cannabis

Imagine a company that treats its employees with dignity, pays well and has an obviously positive company culture evidenced by it being considered one of the top companies to work for in its industry. Also imagine this company is an environmental dream in terms of using the sun for energy, recycling water, and recycling CO2 in an industry that creates a tremendous amount of CO2 and uses an extreme amount of energy. Then imagine, that this company is current on its taxes and pays its bills in an industry that is struggling and behind on its taxes and is behind on many of its expenses. On top of this, it is active on the social justice front fighting for positive social change. And in addition to these obviously positive accolades, it is growing fast and about to be free cash flow positive in an industry that is suffering with many companies losing lots of money.

You would imagine that such a company would be celebrated by investors and its industry.

But welcome to the upside-down world of cannabis, where scarce capital and struggling business models make for sharp elbows and spitballs from the back of the classroom from the failing students of the industry.

What makes all the industry criticism so confusing is that Glass House, from my due diligence seems like a wonderful company (albeit not a perfect company).

Glass House appears to have a fantastic corporate culture and treats its employees well. MG Retailer has rated Glass House as a top cannabis company to work for. I can tell you from personal experience having taken several tours there how positive their culture is, from people greeting you and looking you in the eyes, many employees wearing “La Familia” Glass House branded shirts and a general good vibe where people seem to be happy being at work. Again, from experience, I can tell you that is it not like that at many other cannabis companies.

One large private California competitor even told me they believed that Glass House treats its employees too well and they needed to fire some of them!

The company is at the top of its class when it comes to the environment. It harnesses the power of the California sun and near perfect weather to produce something like 95% less carbon emissions than typical indoor cannabis. They recycle water and CO2 and are about as sustainable of a cultivator as you can possible be.

As the Southern part of the US melts this week, think about how absurd it is to be growing cannabis indoors in places like South Florida, or think about how dumb it is for Massachusetts to be using 10% of its electricity grid for cannabis cultivation. Even if you don’t believe in climate change, it isn’t cheap and doesn’t make economic sense. Only in a world with interstate commerce restrictions would the current setup exist.

Then there are the customers. Twice in the past few days, people in Santa Barbara have stopped me to compliment me on my Glass House trucker hat. One was my Uber driver after my car needed service and the other was a waiter at a restaurant. They love the company and its products. And this small sample also points to a huge customer base that appreciates and loves moderately priced, quality cannabis.

Then there is the social justice work of CEO Kyle Kazan, who has been fighting for social justice for nonviolent cannabis prisoners, actively supporting the work Weldon Angelos does and lobbying in court and in DC on prisoners’ behalf.

What an evil company, I should root against such a company, right?

But in the bizarro world of cannabis where the scarcity mindset rules the roost, one company’s fortune is seen as being taken at another’s expense. The limited availability of capital and the limited number of investors means that often investors and companies feel like they are competing against each other, and we see this often when one company is seen as “winning” versus others losing.

I guess I might be throwing rocks at Glass House too if my business model was struggling, cannabis prices were falling, and regulators were starting to change the rules so that I didn’t benefit from regulatory capture. The last thing limited license companies and their investors may want is a scaled, thriving California company which can produce cannabis at a fraction of their cost with quality that at least matches or exceeds the quality they produce. Interstate commerce destroys limited license markets’ artificial profits and must be quite the risk to worry about on the horizon.

But it isn’t just investors and executives in limited license markets that are worried. As Glass House has emerged from the wreckage of the California cannabis landscape and has turned the corner when others are struggling, the knives have come out from failing California companies.

Farming is one of the toughest businesses in the world to be in, that is why it is the most subsidized in the world. The idea that small farmers would thrive in a business that has always depended on scale, capital and lots of technology is wrong. A lot of these inefficient small farms need a scapegoat. And many of them have romantic dreams of a bygone world of legacy growers. They simply cannot understand that farming has always been about scale, technology, and precision farming in a perfect environment. So, of course they will think that something more nefarious must be going on.

It has been interesting to watch the various criticisms that have been thrown at Glass House over the past twelve months. First, I was told what happened in Canada would happen to Glass House. Then I was told no one would buy their product because it was low quality. Then, I was told there was no way margins would jump. Then I was told that prices would collapse when Croptober came. Then I was told the company would go bankrupt. Then I was told that interstate commerce would never work.

Now, critics accuse the company of being the largest illicit seller of cannabis. I think this is my favorite because some of the critics leveling this charge have vociferously argued that interstate commerce does not work and will not work. But now, they are arguing it does work, but only illicitly.

The most ironic thing about the latest critique is that the bears and critics don’t even realize they are making the uber bull case for Glass House that there is massive untapped national demand for low-cost, high-quality California cannabis.

Regardless, I’m sure there will be more critiques to come as people contort themselves into pretzels trying to stop a company that has a durable cost advantage over the industry.

Here is my advice to Glass House. Keep treating your employees well and keep up the “La Familia” spirit. Keep fighting for the environment. Keep trying to drive down costs, so that medical patients and consumers can enjoy the lowest cannabis pricing possible. Keep up the fight for descheduling cannabis and the release of non-violent cannabis prisoners. And keep expanding.

I think Glass House and other scaled West Coast growers have the potential to be a huge positive for our society and the cannabis industry. And it also has the chance to be an enormous economic payoff for investors. Glass House is showing what is possible in a struggling industry and I’m looking forward to their second quarter earnings to show a taste of the future.