Your Margin is Glass House’s Opportunity

Scale and Size Should Allow Glass House to Dominate California

These two massive buildings look awfully similar in size and scale. One is obviously an Amazon fulfillment center and the other is the new state-of-the-art greenhouse that Glass House Group (Canada: GLAS, OTC: GLASF) just acquired.

Amazon is making substantial investments in their infrastructure to gain a permanent size and scale advantage over competitors so that the company can provide consumers with great products and service at a cost that no company can match.

Jeff Bezos has famously said, “Your Margin is My Opportunity.” Once you have a cost advantage, you can set the pricing and deliver a value proposition that creates a long term economic moat that can be quite valuable.

And this is exactly the opportunity that Glass House currently has in cannabis, now that it owns the world’s largest greenhouse that can be approved for cannabis cultivation.

The cannabis supply chain is very immature and most of the market is driven by inefficient outdoor farms or expensive indoor facilities and a mix of mom-and-pop production and companies trying to scale in an industry that is capital constrained due to conflicts between state and Federal legality of cannabis.

Glass House has an opportunity to focus purely on scaling its premium cannabis at a cost that no one anywhere can match. And by controlling its full supply chain, it can then start creating branded products to dominate California, the largest cannabis market on the planet.

As many investors know, an oversupply of cannabis emerged this summer in California pressuring prices, especially outdoor pricing (lowest quality). Most cannabis farms are small and sub-scale. Their cost structure simply doesn’t work in the current climate. Many investors have fretted what this means for Glass House, not realizing how positive this is for the company in the long run.

First, this will lead to a shakeout as many farms are simply no longer economic in the current environment. Second, Glass House should lean into this weakness and go full blast producing even more supply. They have a cost advantage and should use it to drive market share gains just like Amazon does.

What investor in their right mind is going to fund competing grow operations when they know that 5.5 million square feet of cultivation at the lowest cost imaginable is coming online over the next three to five years?

By scaling now, Glass House can gain a permanent cost advantage that will be the envy of the cannabis world.

Finally, Glass House has an opportunity with this new state-of-the-art greenhouse to produce cannabis that is almost 95% of the quality of the most expensive indoor cannabis. And premium indoor cannabis has not seen the kind of price declines that outdoor and greenhouse has seen. Glass House should go right at those consumers. Indoor margins are Glass House’s real opportunity.

And we already have evidence that their strategy is working. When Glass House announced their SPAC transaction, they were the #2 flower brand in California. As of July, they are now the #1 flower brand. Consumers are already responding to their great quality at a great price offering. And this is before they turn on their new greenhouse facility.

As an investor, I want them to focus on driving costs as low as possible without sacrificing quality. And right now, I want them to grow market share, not profits. Even as the #1 market share leader, Glass House only controls 3% of the California market. I want them to get to double digit market share while regularly communicating with investors their progress on cost of goods sold and how quickly they can scale their production.

When legalization and eventually interstate commerce happens, institutional investors, Big Tobacco, Big Alcohol, the big Consumer Packaged Goods (CPG) companies and even Amazon will be looking for companies with the infrastructure and experience to drive national branded products at a price and quality that can’t be matched. Glass House has a clear opportunity to be the prized belle of the ball when that happens. The longer it takes for full legalization to happen, the better for Glass House to cement their cost and scale advantages.

Due to the current bear market in the publicly trade cannabis stocks, the capital markets for all practical purposes are closed. But not for public companies that can access the debt markets. With no debt, substantial real estate ownership and $30-$40 million in cash before they even tap the debt markets, Glass House can and should step on the gas. I’m hoping that we will soon hear of a debt facility that Glass House can tap into, so they can accelerate their strategy.

In my humble opinion, investors are being short sighted by not seeing the massive long-term opportunity that lays in front of Glass House. Every investor should be pushing and cheering on Glass House to scale now while no one can follow. And the current environment simply could not be better for the company to flex its advantages and create real long-term value in California.

And when the national market opens, even if it takes five or ten years, no one will be even close to what Glass House should be able to offer. Cannabis pricing and margins in states like Massachusetts and Illinois can be five times California’s competitive market. And in the long run, those margins will be Glass House’s true opportunity.