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We have long suggested that retailers will be able to create value in Canada given the circumstances of the industry structure, and this story is playing out as evidenced by the growth in revenue being reported by the publicly traded companies, all of which are profitable or nearly profitable. In contrast to the Canadian LP index, which is down 37.7% year-to-date, the three leading retailers we track have performed much better:
Tough packaging and advertising restrictions and substantial inventories are challenges for the LPs but opportunities for the retailers, which also benefit from the role they play, especially with new 2.0 products including edibles, extracts and vape pens, in educating consumers who may be new to the market. We note that only a few LPs have made substantial investments into retail operations, as they are highly restricted by the provinces in terms of how involved they can be.
We expect that there will be successful cannabis companies in America focused on different parts of the supply chain, including cultivators, processors and distributors as well as retailers, our focus today. Like their Canadian counterparts, American cannabis retailers are helping to open the cannabis market to both new and traditional users, especially now that we are seeing delivery and order-ahead options in many markets as well as the proliferation of electronic payment options.
In the U.S., each state operates differently with respect to the level of vertical integration mandated. At one extreme is Florida, where there is no wholesale market and operators must grow, process and sell each gram directly to patients. In other markets, there can be limits on how many retail stores one can operate. So, each state offers different opportunities to companies that want to focus on retail.
Very few cannabis operators are proclaiming that they want to be focused primarily on retail, perhaps after the epic failure of MedMen to capitalize on this thesis. In that case, we think its poor execution and capital markets strategy doomed it, but the company was actually on the right track conceptually. Looking ahead, we think many of the new markets that are benefiting from tight supply that makes all operators look good will change as new supply comes on over time. As the products become more of a commodity, manufacturers with lower costs or better brands will win, and we think that most investors appreciate this dynamic. What may be less understood is how much more important retail will become at this time.
For now, establishing retail-focused operations is a bit of a challenge. With supply constraints in newer markets, we are seeing some companies move to make sure they have at least some production. This is more tactical than strategic, a move to assure that the retail operations aren’t entirely captive to the suppliers.
Building a good retail brand isn’t easy, but we think it’s a lot easier than building cannabis operations in general. Capital costs are substantially lower for stores than cultivation facilities, and there is no need to invest heavily in each state of operations, something cultivators or processors must do in each state due to the lack of interstate commerce. We are at a point of industry development where we think it makes sense to pay attention to cannabis operators that are proving themselves to be good retailers as part of their core focus.
Jushi Holdings is a relatively new multi-state cannabis and hemp operator emphasizing its retail operations, which operate under the BEYOND / HELLO banner. The company operates a diverse portfolio of branded assets in limited license states built upon acquisitions, distressed deals and competitive applications, with a primary focus on three key markets: Illinois, Pennsylvania and Virginia and operations in California, Nevada and Ohio as well. Jushi, which will be hosting a virtual Investor Day in October, has provided financial guidance for 2021 revenue of $200-250 million and adjusted EBITDA of $40-50 million.
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Alan & Joel