Niche growers supply high-end marijuana market in Arizona

Inside a nondescript block building near Sky Harbor International Airport in Phoenix, workers pack hundreds of vacuum-sealed glass jars with high-end marijuana. They will sell for a steep premium at medical dispensaries across the state.

Nearby, thousands of marijuana plants are meticulously hand-watered, hand-trimmed, and nurtured in a series of growing rooms.

The Grow Sciences cultivation business, like a few others in Arizona, has found a niche producing high-end marijuana that sells for about double the price of other products on the market, the Arizona Republic reported.

The company doesn’t have a dispensary license from the state. Instead, it “rents” one from another company that does. Leasing licenses to grow marijuana allows entrepreneurs to break into the cannabis industry without also having to run a retail dispensary.

The operators of some of these farms say the arrangement allows them to focus on growing high-end marijuana that is in heavy demand. Customers pay top dollar and clear the shelves as soon as the products are in stock at dispensaries.

Grow Sciences launched in 2017 when CEO Mike Cuthriell and COO Matthew Blum decided to move into the Arizona market, taking experience they had in other states to what they describe as an open frontier in Arizona.

“I didn’t think patients were getting clean cannabis here,” Blum said, adding that many Arizona marijuana dispensaries focused on growing large quantities of marijuana, rather than quality. “There was a race to the bottom.”

And Arizona offered a good opportunity unlike other states, such as Colorado, where thousands of operators flooded the market.

“Arizona insulated themselves from that,” Blum said.

Because marijuana is illegal federally, all of the plant that is sold in a legalised state must be grown there and not transported across state lines.

For now, Arizona has issued just 130 licenses for dispensaries.

The licensing system for medical marijuana, and soon-to-be recreational marijuana, is extra lucrative for those who get them. That’s because in Arizona they can vertically integrate, meaning they are licensed to grow marijuana, sell it wholesale to other dispensaries and retail it themselves.

Still, some license holders have found it profitable to lease the growing rights from their license to specialty farmers for tens of thousands of dollars a month. The specialty farms sell it wholesale to dispensaries that retail it for US$5,000 to US$8,000 a pound.

That’s a significant premium, considering many marijuana growers spend just US$500 or so to grow a pound of marijuana. While high-end growers can spend more than US$1,000 per pound on cultivation, others report expenses as low as US$100 a pound.

Grow Sciences has no retail store of its own. It leases its growing license from one of the three Territory Dispensary retailers in the state. With three dispensaries, Territory has the rights to develop three farms separate from their stores.

Arizona doesn’t restrict the size of cultivation facilities, so companies that control more than one license often find they can supply themselves with one large farm and lease some of their cultivation rights to others.

Leasing the growing rights was a much less expensive way to break into the Arizona market than buying a license from another operator, considering the asking price for those is now about US$15 million, Blum said.

That hefty price tag doesn’t take into account the expenses of running the business, either.

And leasing the cultivation rights frees specialty growers from having to manage a retail store, with all the attendant issues of inventory, labour and licensing. That gives specialty growers the freedom to focus on farming.

Still, Grow Sciences spent close to US$10 million getting the business off the ground, he said.

They sold their first product in early 2018, and the company had positive earnings within 13 months, he said. They paid off the personal loans they took out to launch the business and set sights on expansion. The company also has equity investors.

Grow Sciences produces about 400 pounds of marijuana a month, and it has about 100 different strains in production. The company has about 21,000 square feet of space now and is preparing to expand to 65,000 square feet.

When Arizona dispensaries have Grow Sciences marijuana in stock, they advertise it for US$50 for one-eighth of an ounce. By comparison, lower-end marijuana sells for US$22 for that amount.

The premium-branded company’s pricing comes out to US$400 an ounce, or US$6,400 a pound at retail prices, although consumers can’t purchase that much at once.

Medical-marijuana consumers are allowed to buy up to 2.5 ounces every two weeks. Those without a medical card can legally possess one ounce following the recent passage of Proposition 207.

Adults age 21 and older will be allowed to purchase marijuana at dispensaries sometime in the late spring or early summer of 2021.

Other business use the same model, including Abundant Organics, another high-end grower that has no dispensary of its own. Abundant Organics sells wholesale to dispensaries from a farm in Camp Verde.

The company prides itself on being 100 per cent organic, with no chemical pesticides or herbicides.

And like other high-end cultivators, Abundant Organics’ products sell out quickly when they hit shelves, even though they are some of the highest-priced products in the market.

“I’m embarrassed. I have family members who ask, and I can’t tell them where to get it,” co-founder Jake Young said.

Young and his good friend Jud Burke launched the business in 2016, first running the cultivation for a Tucson dispensary, then moving to Camp Verde, where they operate under one of Curaleaf’s licenses.

Wakefield, Massachusetts-based Curaleaf is one of the largest marijuana companies in the nation, with dispensaries in multiple states, including eight in Arizona.

“They are not going to invest in eight different grows,” Young said.

Leasing a license might be easier than buying a license outright, but it’s still difficult to break into the industry, he said.

“I get asked all the time, how do I get into the market?” Young said. “There are a lot of other growers who are good at what they do who didn’t get their chance. We got very lucky to get a chance to get a foot in the door. We feel blessed to have the opportunity.”

The company operates from a 15,000-square-foot building with about 27 workers and is preparing to hire as many as 50 new employees and add about 55,000 square feet of space in an adjacent building, he said.

That should help the company meet more of the demand.

“Unfortunately a lot of dispensaries we have to turn down,” he said. “With the new building we are hoping to reach throughout the state and feed that demand.”

He said the business partners have discussed getting a dispensary license, but they aren’t really interested in expanding that way.

“We have a lot invested in being the wholesale side of things,” he said. “Everything derives from the garden. It’s nice to be in the background doing our thing.”

– AP/Arizona Republic