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High Tide: Catching Up With The Costco of Cannabis

A lot has happened in the seven long dog years since Cannabis Business Executive last profiled Calgary, Alberta-based High Tide Inc., Canada’s cannabis retail juggernaut whose expanse of stores spans provinces and time zones and is only getting larger. In a recent call with founder and CEO Raj Grover, the intrepid entrepreneur described the highlights of the last year, and painted a picture of a company that is always in motion, even during a strategic pause.

“I agree that cannabis years are like dog years,” said Grover of the toll a single year takes. “One big thing that happened within the last 12 months is we’ve added another 45 stores to our portfolio since January of 2020, so we now have 151 locations Canada-wide, operating across five Canadian provinces: Ontario, Manitoba, Saskatchewan, Alberta, and now British Columbia. We have also claimed the title of the largest revenue-generating cannabis company in Canada, in the whole country, and that includes all growers, extractors, and retailers.

“Our revenue is fast approaching half a billion dollars,” he continued. “In 2018, when we took the company public, our revenue was just $8.7 million for the entire year, and we have now reached $180 million in just 90 days, as per our last reported quarter. We are extremely excited about our continued revenue trajectory, which is one-of-a-kind in the country, and then we’ve also just reporting our twelfth straight quarter of positive adjusted EBITDA, $5.5 million in adjusted EBITDA, which was our highest ever, and our second consecutive quarter generating these records. So, I couldn’t be more pleased with the trajectory of the business.”

The latest earnings report for Q1 included an 80 percent increase in revenue year-over-year and 10 percent sequentially. Was that because of additional stores or was there more to it?

“There is absolutely more to it,” said Grover. “Our retail model is the bright and shining star in our ecosystem, and it is the most differentiated retail concept in Canada or the U.S., which is obviously our discount club model. This is why everyone calls us the Costco of cannabis, and it is really helping us increase our same-store sales quite rapidly. In the last reporting quarter, same-store sales increased by 52 percent year-over-year and 4 percent sequentially, and this was our sixth consecutive quarter of sequential gains in terms of same-store sales increasing, so our discount club is leading the way.”

But that explanation only partially explains what High Tide is able to do in Canada and internationally. “In 2021,” continued Grover, “we acquired six ecommerce platforms, three were consumption accessories, three were related to and driving CBD products, with five in the U.S., one in the UK, expanding our international reach.

“In 2022,” he added, “we applied for brick-and-mortar stores. We built 23 locations organically, and acquired 22 through M&A, and we acquired locations with extremely attractive multiples of approximately three-and-a-half to four times EBITDA for most of them, which is unheard of, but we have been really good acquirers from day one. M&A is a huge part of our strategy, and we remain true to that strategy, but we also know how to be nimble. Now, given the dynamics of the macro markets and everything else that’s going on, including the further deterioration in cannabis capital markets, we are clearly proving to the cannabis universe that not only can we grow our revenues at the fastest pace when compared to the rest of the cannabis industry, but we also know how to take apart and focus on free cash flow generation, which is exactly our focus for 2023.”

In light of the deteriorating capital markets, was High Tide able to pick up distressed assets? What is the situation in Canada? “Canada remains an extremely hyper-competitive cannabis retail market, and on the manufacturing and production side, it is also highly competitive,” said Grover. “From that perspective, the good news for us is there’s so much competition here that we don’t have to look at just distressed assets. We can pick up some of the top performing stores because we have become the consolidators of choice in the Canadian cannabis retail landscape.

“And there are not many companies that are selling even at a size and scale to be able to compete with us,” he added, “so we’re actually cherry-picking cream-of-the-crop cannabis retail stores and not chasing distressed assets or turn-around stores. We want to turn them around with our discount club model, and we are getting to cherry-pick some of the best locations in Canada. Even on the organic side, we have been welcomed by many large landlords in the country that continue to offer us some of the best real estate in Canada, so we don’t have to compromise on our strategy or get into inferior real estate, either through organic deals or through M&A. We have some really attractive sites in front of us. We are just taking a pause on M&A on purpose, strategically, to focus on that free cash flow.”

Is the pause also a result of the expenses involved in building-out new or upgraded locations? “We have been acquiring most of the stores,” noted Grover in response. “Through the equity of our company, we have been very wise in terms of how we want to use cash when we organically build our sites. It costs us roughly $300,000 to $400,000 per location, including working capital, but that is a cash outlay.

“Historically, how we’ve been acquiring is usually through the use of our stock,” he added, “but in general – and keeping in mind where the markets are today – we’re taking a pause on M&A and we’re steadily building our organic portfolio. Instead of rushing into another 30, 40, or 50 locations this year, we are building it in a more stable manner from the free cash flow reserves that we are generating.”

In March, the company reported a 64 percent improvement in free cash flow year-over-year, an achievement Grover fully intends to build upon. “While we have executed and delivered on our hyper-growth strategy in recent years establishing our brands and becoming a household name in Canadian cannabis retail, considering the market realities today, I am announcing a shift in that strategy,” he said at the time. “While we would never overlook a compelling M&A opportunity, we are now adding to our strategic mission the goal of becoming one of the first cannabis companies in Canada to generate free cash flow from operations by the end of this calendar year.”

Canada is NOT the United States

I asked Grover if there was a similar dynamic in Canada with companies that perhaps got out over their skis having to retrench or even leave certain areas to focus on other less competitive markets. “No, it’s definitely not the same in Canada, “he responded. “In the United States, most of the states allow vertical integration. It’s the opposite in Canada, with the exception, I believe, of Alberta, Saskatchewan, and Manitoba. For example, in Ontario, which is the largest market in Canada, licensed producers or growers can own a maximum of 20 or 25 percent of a cannabis retailer, which blocks them from participating fully in the retail landscape in Canada’s largest market. And I believe that is not the case in the United States, where it’s a bit of a mix as well., but it leans more towards that you can be vertically integrated in most states in the US. That involves some heavy capex, and you need a lot of cash for that kind of growth, and if you get it wrong, that does become a big issue as we are seeing a lot of these MSOs exit certain states. Canada has its own unique challenges and some big challenges, but not these particular ones.”

What sort of unique and big challenges? “The first one would be over-saturation,” said Grover. “You have a ton of competition here in Canada. In our own province of Alberta, we have 4.3 million people, and there are over 800 cannabis retail outlets for that population. In Ontario, which is the largest market in the country, there are over 2000 cannabis stores in that province. So, as you can see, these are a large amount of retail stores and in some provinces like Ontario, the rules are very different about where you can locate cannabis retail stores next to or apart from each other, and that just means business is extremely difficult in general.

“The number two challenge is the strength of the illicit market, which remains quite strong in Canada,” he added. “It has come down quite a bit over the last year or so, but not at the pace at which legal retailers would like it to come down. This is due to many factors, one being a bit of a lack of enforcement, which we have to deal with. So those are two of the biggest challenges that we face.”

Overproduction is also an issue. “What I’m reading in the news is that licensed producers’ vaults in Canada hold upwards of 1.5 billion grams of cannabis, which is three to four years of supply to meet Canada’s needs,” said Grover. “This is why a lot of producers have to sell their cannabis at negative gross margin, so you can understand the severity of that situation.

“In terms of the bestselling products in Canada,” he added, “what we’re seeing in retail stores is definitely dry flower is the number one category, prerolls being the biggest of the dry flower category. Overall, I believe dry flower is sitting at around 65 to 67 percent of total sales in our stores, and prerolls are about 20 to 29 percent of sales. Despite advancements in cannabis 2.0 and other product categories, dry flower has remained strong in our stores.”

What effect does the huge amount of stored flower have on prices and margins? “That is more of an issue on the production side of things than a worry for retailers,” said Grover. “It actually has an opposite effect on retailers. When cannabis is getting cheaper on the wholesale level, on the retail level retailers are still able to mark-up the products consistently as they have been. It helps us fight the illicit market much better when there’s so much competition on the production side that the wholesale price of flower continues to come down. As retailers, we are still able to mark-up that flower at the gross margins that we use consistently in our stores, so it’s not a problem.”

The Growth of the Discount Club Model

Another achievement for High Tide is the expansion of Cabana Club membership at its 151 brick-and-mortar locations in Canada, something Grover mentioned with obvious pride. “When we launched the discount club model approximately 16 months ago, we were sitting at 245,000 members,” he said. “A year ago, when you and I last spoke, we were sitting at around 400,000 members, and we have just reached over 975,000 members of our cabana crowd fast approaching that million milestone, which is roughly 14 percent of Canadian marijuana smoking population outside of Quebec.

“It is the largest brick-and-mortar loyalty program in the country, and thanks to our international business lines, our overall customer database, including the Cabana Club membership, has now surpassed over 4.5 million customers,” he added. “That is why we believe that we are sitting with a pot of gold in our hands with that dramatic club membership, and it shows no signs of stopping, but continues to grow.”

I noted that retailers in the U.S. have complained to me about the practice of deep discounting as a race to the bottom, but Grover said it is comparing apples and oranges. “I can only speak to you about what we are doing, which is a retail model that is highly differentiated from anything else you will see in the U.S. and Canada,” he explained. “I would agree that if you were only competing on price, it would be a race to the bottom, but our ecosystem is the opposite of that. Yes, prices are a big factor, and discounting is a really big factor, but we are leveraging the strengths of our full ecosystem.

“For example, when we launched our discount club model, there were not many retailers in the country that even had a membership model,” he continued. “When we launched the program, we already had a quarter of a million members, and we offered the largest selection of consumption accessories in our stores. This is why we sell three to four times more consumption accessories than any competitor. We are also leveraging our international CBD brands, which we are bringing into our continental stores here in Canada, like the introduction of our NuLeaf Naturals products in Saskatchewan, Manitoba, and Ontario.”

It is, he added, a well-thought-out strategy. “We planned this launch of the discount club model leveraging the strengths of our full ecosystem, and then evolving it into ideas such as Elite, which is very similar to the Costco executive membership,” he said. “Over the last reporting quarter, we already had 9500 paid members, so we have a highly differentiated cannabis retail model that is not just a daily offer.”

High Tide is Canada’s largest non-franchised cannabis retailer and claims 9 percent of retail market share. Does that mean there is plenty of room to grow? “9 percent is massive,” countered Grover. “If you look at our store count of 151 locations, and you look at the total Canadian store count, which is sitting at approximately 3200 stores, it’s roughly 5 percent of the brick-and-mortar portfolio in the country, and yet we generate over 9 percent of total Canadian retail sales. That is a huge number, so we are winning on both fronts, because our stores are producing more output than a regular cannabis store. For example, our stores in Alberta are double the provincial average, and are triple the average in the province of Ontario. We’re getting a lot from one location when you compare it nationally, and our 151 stores could be similar to 365 or 375 normal Canadian cannabis retail locations. So, we’re definitely winning on all fronts.”

In terms of the health of the consumer in general, Grover said he is seeing resiliency in tough times, and a strong response to the discount club model. “Thankfully, the cannabis business is recession proof, or at least that’s how it seems to us,” he said. “We know people will prioritize their essentials over discretionary products, but we have not seen that in terms of our cannabis sales, and discount models tend to do even better in recessionary times. And we are seeing continued growth in our club memberships, which means new customers continue to find us and shop with us, preferring us over our other competition or the competitors, and our same-store sales continue to increase since we launched the discount club model.

“As I mentioned, we are now at almost over 100 percent growth in same-store sales growth in just 16 months,” he added, “so I believe we are doing even better in recessionary times. Given that people will still consume cannabis when they’re stressed or when times are not great, cannabis sales remain stable. However, the advantage that we have is that our revolutionary discount club model continues to attract more and more people, especially during these times.”

The High Tide Edge

Last year’s CBE article was titled, “A High Tide of Discount Club Cannabis is Headed to the U.S. from Canada.” Considering the economic environment and stagnation at the federal level in the U.S., is it still coming? “Absolutely, it’s coming, and I live for the day when we can compete and build a strong business in the US,” stated Grover with conviction. “I can’t wait for that day. But we’ve got a lot of work ahead of ourselves. We could still add about 100 stores in Canada alone, and the only reason we have not initiated plant-touching businesses in the U.S. is because we trade on the NASDAQ Stock Exchange and the Toronto Stock Exchange venture, which currently does not allow us to participate in plant touching businesses in the U.S.

“But we know that this will change, and we know that both parties in Congress are aligned to do a major cannabis reform,” he added. “It’s not happened to-date, but down the road this is going to be a reality – maybe two years, maybe three years from now – and we remain very hopeful for when that happens. Our discount club model is extremely well-received in Canada, we continue to polish and refine it, and when we can enter the United States with it, I think we will be a top five retailer in the country.”

Is there anything that prevents someone from trying to replicate the model down here in order to head High Tide off at the pass? It’s not that competitors have not tried here, but you can clearly see who the leader is in the country,” said Grover of Canada. “Like I said, this is not purely about price. This is about having a very unique and diversified cannabis ecosystem, which we continue to leverage fully in our brick-and-mortar cannabis stores in Canada. So, our competition can try, absolutely, but the proof is in the pudding.

“We have one million members in what is by far the largest brick-and-mortar loyalty plan in the country,” he added. “To build this kind of momentum quickly is not easy, and you also need experience and expertise in cannabis. We’ve been cannabis operators since 2009, when we were in the consumption accessories category, which is exactly the same customer that purchases cannabis, so we’ve been catering to this customer for 14 years now. Competitors can try, but they will find themselves in a difficult position to establish a well-rounded model that we have in order to be something very similar to what we talked about.”

It sounds formidable indeed, but I did wonder what exactly it looks like for High Tide to bring all of that south. “We’ve been keeping our eyes on where the cannabis puck is going in the US, and we’ve been building this momentum,” responded Grover. “Of the four-and-a-half million customers in our database, 3.2 million reside in the United States. It is a massive number, and I cannot say any of our federal competitors in the US, the multistate operators, have access to this kind of large customer database. These are the customers that have purchased ancillary cannabis vaporizer CBD products, and we already have them as our customers, and we communicate with them on a weekly basis. ‘’

“When federal legalization takes place,” he added, “we will already have this massive customer base that is part of our ecosystem, we can turn the taps on and off, and we can start offering cannabis products overnight in certain states that will allow online cannabis sales. There are many provinces in Canada that allow that, so we are looking forward to that opportunity. In the meantime, we will continue to build our customer base in the U.S. at a rapid pace, so we have a head start. This is what I meant about leveraging the strengths of our completely diversified ecosystem.

“On top of that,” he continued, “we have the opportunity to initiate options agreements where we can lock in a portfolio of stores in the US, do deals with different chains of different sizes, and be ready with a store footprint for when federal legalization takes place. We have proven that we are very good at M&A, that we know how to buy companies and how to buy stores, so I do not feel that we will lack that head start or will be too far behind our U.S. competitors when that opportunity arises.”

Would those sorts of deals also apply to producers and cultivators down here? “I was referring more to our brick-and-mortar,” said Grover. “Of the 151 stores that we have, roughly half were built, and half were acquired, and we are talking about using the same playbook. Before we even build in the US, we could enter the country with a whole bunch of acquisitions that we have an option to close on once it’s federally legal to do so. We will position ourselves through options-style agreements in the U.S. when the opportunity arises, or when we feel we’re getting closer to the time of federal legalization. It doesn’t make sense to do it today given the monetary benefit of doing these deals, and we’ve been very savvy in terms of how we want to map out our trajectory for the U.S. and not rush into situations like some of the other producers in Canada have done. You can look at their financials; they have to manage a lot, but are they able to manage it efficiently? I don’t think so.”

Does High Tide plan on being vertically integrated in the U.S., or will the focus remain on retail? “We are definitely retailers at heart,” said Grover, “but we have a lot of our own brands and consumption accessories. We make roughly 5000 SKUs of consumption accessories, and out of that, 80 percent are manufactured by us. We are also semi-vertically integrated in the CBD business, and have a cGMP-certified facility in Denver, Colorado where we make our CBD products. So, given the opportunity in the US, we are definitely open to vertical integration in certain states, but there are a lot of states in the US where you don’t have to be vertically integrated. Our strength right now is being that pure-play retailer, so we’re going to start in states where we are getting into business within more of our comfort zone, and then expand our horizon from that, and eventually we definitely want to integrate those opportunities.”

Are there states they like and others they want to avoid like the plague? “Our attention is focused on Canada, but we’ve got a very good sense of what’s really happening in the U.S., he said. “If you look at Oregon, Washington, Colorado, and California, they are highly differentiated from Nevada, Arizona, New Jersey, and New York – extremely lucrative versus highly competitive states where businesses are finding it difficult to get ahead. But where we are in Canada, 4.3 million people have 800 cannabis retail outlets, so competition is fierce. If we can compete and win here, we can compete in Oregon, we can compete in Washington, Colorado, or California, which are not such lucrative states in comparison to some of the other states in the U.S. We want to be a 50-state player given the opportunity, and when the time arises, and we feel we will be a few steps ahead from even our American counterparts because we’ve learned to fight the battle so hard here.”

The View From Canada

High Tide has always had international aspirations that extend far beyond its neighbor to the south. “In 2021, we purchased Blessed CBD out of the UK, which is part of our ancillary cannabis business portfolio,” noted Grover. “And prior to that, in 2018, we had purchased Grasscity out of Netherlands, so we have exposure in the UK and Netherlands. We have also entered Germany organically through our Blessed business. Our government relations team is monitoring the situation very closely, and we are cautiously optimistic that retail sales could commence in the last quarter of 2024 in Germany. This is why we signed a non-binding LOI with Sanity Group in Germany, which is a producer and distributor, and we’re retailers, so it’s a complementary marriage and a great partnership to establish ahead of time.

“We are really looking forward to the German market opening up,” he added, “and it could potentially open up even ahead of the United States. I don’t have a crystal ball, but it would be my inclination that Germany could open up sooner, and we want to be among the first few players in Germany, taking our discount club model there. We know if it’s a big hit in Canada, it will be a big hit in Germany as well.”

Would that entail branded stores? “We would keep the same name, so it would be the growth of our Canna Cabana brand,” said Grover. “We want to make Canna Cabana into a global cannabis retail brand. You only have Costco. If it’s a Costco, it’s a Costco, and it’s going to be the same thing for Canna Cabana. So, we’re going to launch all of these stores with the same polished concept that we established here over 16 months ago, and we have been perfecting. We’re going to launch a discount club model in Germany through private retail shops as we have here, and eventually we hope to get to a similar scale that we have here.”

I noted that all of that sounds plausible because of High Tide’s strategic discipline, something that other well-situated companies seem to share. “In my opinion, genuine operators will always shine through even in a very difficult business environment, and execution is critical in any business, not just the cannabis business,” replied Groover. “There are some operators, even some of the single-state operators and smaller MSOs, that are doing a great job and have learned how to say no.

“I would point to High Tide, which acquired six companies in 2021 to increase our margins,” he added. “We did that very successfully, launched the discount club model, and then we acquired nothing at an enterprise level, either in the U.S. or internationally, while we continued to do accretive brick-and-mortar M&A at three-and-a-half or four times EBITDA multiples. So, you have to be very focused on your business, you have to understand your business really well, and execution is critical in everything you’re doing. We have been doing exactly that.”

It is a far-reaching strategy that includes the launch of new products in new places. “We recently launched seed sales in the U.S., and we launched our white label brand in the provinces of Saskatchewan, Manitoba, and Ontario,” noted Grover. “These are both high-margin initiatives. Seeds yield us north of 50 percent gross margins, and Cabana Cannabis core products and our other white label products yield an additional five to seven percent gross margins. On the SKUs we are introducing, we have 10 white labels in the market since June of 2022, and we continue to expand our portfolio. Going forward, we’ll get some help with these newly launched initiatives, including the rollout of Elite, the first of its kind paid membership program in Canada, which increased by 58 percent just since the launch.”

Indeed, Elite makes High Tide truly the Costco of cannabis. “It is the first of its kind cannabis paid loyalty program in Canada, and we believe that Elite is also the first of its kind in the United States,” said Grover. “We currently have 9500 members in the program, which offers customers additional benefits such as Elite flash sales, exclusive accessories and delivery discounts, and limited-edition products and advanced discounts on products.

“It is a well-rounded program that leverages the strength of our full cannabis ecosystem, and this is also why Elite is totally differentiated,” he added. “It brings totally differentiated products to cannabis consumers in Canada than what you would see in other stores. Elite is also helping us launch our own white label initiatives and other products, and it’s helping us increase margins not only through the membership fees, which are $30 a year for the first year – the regular price is $60 a year, which yields over 70 percent goes margins – but as we introduce newer products to Elite, we are also able to bring in some exclusive accessories that provide higher margins.”

Before we rang-off, I asked Grover if he had anything to add. “Yes, I would love to mention that we are the top cannabis retailer in all of America as reported by the Financial Times just last week, which is a massive accomplishment,” he said. “We also ranked 31 out of 500 in companies in all of the categories, which is also a huge accomplishment for a Canadian cannabis retailer that is not a U.S. company. I would add that we are very focused on what we are doing, and we are very excited about our discount club model. So, you’re going to see continued growth of our model, and you’re going to see us continue to ramp up our locations. Our long-term plan to get to 250 locations in Canada alone, so you can imagine what that number will look like when we get to the United States.”

And what lessons right or wrong does the United States have to learn from Canada’s experiment with legalization of cannabis at the federal level? “Many lessons can be learned from Canada, which led as the first G7 country to legalize cannabis,” he replied. “We know the cannabis wave is coming across the planet, and starting with North America, it’s now spreading to Europe. So, Canada definitely led the way and gave us this cannabis opportunity federally. As far as wrongs, there have been many opportunities where we could have done better. One of the bigger ones being enforcement of the illicit market, which is really strong in Canada and definitely a big hurdle for legal businesses. Also, the excise taxes that the growers are dealing with are quite high, and then some of the other regulations that we have in place right now, like our edibles can only have 10 milligrams of THC per unit per package. That’s a bit of an issue because you’re discouraging people from consuming cannabis edibles versus buying a smoking product, which you can buy at any THC strength.

“So, there are a lot of things that we can work on as a country, but I’m very proud of Canada for being the first G7 country to legalize cannabis federally and providing an example to countries like the United States that it can be done,” he added. “This is where the world is headed, and the U.S. can definitely learn from the examples I mentioned, especially the enforcement of illicit markets, which is critical. Setting up retailers and growers for success is critical. There will be a time for excise tax collection, but the time is not when you’re setting up a new industry. You have to support the industry, so I certainly hope the United States takes a few cues from how legalization has gone in Canada.”

I also had to ask about cannabis stocks, which have taken a drubbing over the last year. Was that anticipated by Grover, and does he believe they will rebound anytime soon? “For High Tide’s sake and everybody else’s sake, I definitely hope they rebound soon enough,” he replied. “And no, I did not picture cannabis stocks tanking to the degree that they have. But we have learned how critical it is to move on reforms quickly, and I hope that the regulators are listening and watching, and act upon this phenomenon fast, because we need the support of our government partners to steer the industry forward, and we know what kind of damage it can do when we don’t have that support.”

Tom Hymes

Tom Hymes

Tom Hymes, CBE Contributing Writer, is a Connecticut-based writer and editor with over 20 years’ experience covering highly regulated industries. He was born and raised in New York City. He can be reached at [email protected].

This Post Has One Comment
  1. That was an excellent conversation with Raj, thanks for sharing. I like the questions Raj was asked and his detailed candid responses he gave. Future certainly looks bright for this undervalued high growth company.

    Cannabis reform in both Germany and the U.S. will eventually happen allowing High Tide international expansion. Bullish HITI long term.

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