Five lessons cannabis retailers learned the hard way

Mike Khemmoro, the chief operating officer of Mango Cannabis, a small multistate operator with retail permits in four states, was looking forward to a smooth opening at the company’s New Buffalo location in Michigan.

But then the state imposed a new 24% wholesale tax to take effect on New Year’s Day.

In a market with established big players and well-known price compression, Mango couldn’t afford opening a new store understocked – and couldn’t afford falling behind on pricing or margin.

So he had to figure out an inventory solution.

“We adjusted by essentially tripling what we would normally have purchased for initial inventory,” Khemmoro told MJBizDaily. “Without planning for that, we would have opened even more behind the eight ball than anticipated.”

Supply headaches are just one example of the snafus that can delay retailers’ opening days and inflate costs before revenue streams begin. Shifting taxes and zoning restrictions can put pressure on retailers in an otherwise clean supply chain – but so can compliance-driven buildout upgrades and staffing challenges.

That’s knowledge some cannabis retailers found out the hard way. Here are five lessons retail operators wish they’d learned before starting their businesses.

Know your location — and the zoning – before you make any deals

Fadi Boumitri, CEO of Ohio’s Ascension Biomedical, had the ideal site in mind to open Roam Dispensary last year.

He might have, if it weren’t for local zoning. State law requires a 500-foot buffer between cannabis retailers and specific “sensitive uses.” These include schools, libraries, parks – and churches.

And what constitutes a church isn’t always denoted by a steeple.

“We went through the process of talking to brokers, making offers, etc., and then found out there is a 45,000-square-foot office space next door, and a church has 2,000 square feet in that building that they use for Sunday service once a week,” he said.

“We had to put the pencils down and find a totally different site.”

After mastering state law, operators must also ensure they’re current on local law. Municipalities and counties are often able to set their own standards, including limiting the number of licensees.

Cannabis retailers must plan for common security cost overruns

Security requirements, such as compliant camera systems, steel mesh inventory rooms, safes, and reinforced entry points often translate into extra construction costs that blow through budgets.

In New York, the state Office of Cannabis Management requires cameras be positioned at entry and exit points, as well as each point of sale. And all locations need to capture “clear and certain identification” of people entering and exiting or at a register.

“These systems can add significant cost,” said Billy Qirollari, owner of Sweetlife, a cannabis store in the Upper East Side of Manhattan.

High resolution camera systems covering all the necessary areas can run from $15,000 to $50,000, according to Catalyst BC, a global cannabis consulting firm. Overall, total startup costs can range from $300,000 to $1.5 million, Catalyst BC estimates.

What accounts for such a wide range? In some cases, it’s individual interpretation. Some inspectors whose sign-off is needed to open “may interpret requirements differently,” Qirollari added.

Final numbers depend on the size of the store, branding, labor costs and security – but cost overruns are common.

Prepare for a lengthy approval process

Some operators might believe the approval process is a one-stop shop. In reality, it’s a multi-tiered journey with several different levels. And that can stretch out timelines.

“Community board reviews and local approvals can delay opening timelines, all while rent and holding costs continue to accrue before a single sale is made,” Qirollari said.

If approvals or community board decisions are delayed, carrying costs can push total investment far beyond what was originally anticipated.

Applicants looking to put together a store in New York City need to notify a community board 30 days before applying to the Office of Cannabis Management.

Miss a deadline, and the next opportunity is in 30 days. Applicants need to make sure they know the full site-specific process – and not miss any steps.

When planning cannabis inventory, think beyond stocking shelves

Cost of goods sold (COGS) is a key metric for any retailer. But for cannabis shops, there are many external factors that can affect the cost of inventory at launch.

“Coordinating inventory deliveries, intake procedures, and POS setup can also conflict with construction and inspection schedules,” Qirollari said.

To cut down on uncertainty – and to avoid stocking up on hard-to-find or expensive products that customers don’t want – he suggests starting with a smaller, diversified inventory.

“That can help new stores avoid being overexposed to products that may not match local demand,” he said.

Timing is everything, for training and staffing

Retail employees must know the state’s rules, such as purchase limits and ID verification requirements. Failure to ensure staffing compliance – or putting out a call for job applications too late – can lead to opening delays, retail operators say.

Operators may want to cut down on payroll by not retaining retail employees for a store that’s not yet open. But hiring too late can result in workers who aren’t fully trained on customer flow, POS systems, compliance, and standard operating procedures, Mango’s Khemmoro said.

On the reverse, hiring people before you’re fully up and running can make for payroll burn.

“What I would do differently if starting again is build the talent on the team even more than what we did, earlier in the process, to accommodate expansion in a more manageable way,” Khenmmoro said.

“It is easier to fly the plane if you are not trying to build it at the same time.”

Operators should build in more budget and time buffers from the first day and plan staff training earlier, Sweetlife’s Qirollari said.

A soft opening before a grand launch is one useful compromise that Qirollari wishes he’d considered.

He said: “This would give us time to work through operational issues in a lower-pressure environment and create a smoother customer experience once fully open.”