Dispatch # 6: The ‘pick and shovel’ play

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Jason Villalon tries not to check his company’s stock price too often. 

In over-the-counter trading Friday afternoon, GrowGeneration Corp. was off a few cents. But since the start of the year, shares in this supplier of cannabis cultivation equipment have slumped 17 percent.

The day I met him this week, Villalon did sneak a peek at the price on this phone. But he’s going to take the long view on share values, given that he’s just 29, goes to work in a T-shirt and earns stock options.

From where he stands -- inside a retail outlet on West Fourth Street in downtown Pueblo, Colo. --  nothing seems to be stopping the cannabis industry.  

“Our economy has really thrived,” Villalon told me, when asked how legalization has affected the region. “There are people buying thousands of acres of land to grow.”

He added, “It has created business in other sectors, like tourism.”

Yes, you can grow almost anything better indoors with the company’s soils, ground oyster shells earthworm castings and lights. 

But vegetable gardeners are not driving a fast-paced expansion for GrowGeneration, here and in other states. 

For ventures like this, it’s all about supply-side economics.

Some stock-pickers who follow this side of the cannabis business call it a “pick and shovel play.” It’s a reference to what happened out west nearly two centuries ago. Not all the miners in the California gold rush hit it big. But wily entrepreneurs selling them implements did. 

That’s what moved two eastern investors to take the four-store Pueblo Hydroponics chain and expand it to more than a dozen locations, most recently in San Bernardino, Calif. Company executives say they are chasing expansion to all states that have legalized weed.

Stock markets are still leery of marijuana stocks. The substance is illegal in most places. But here in southeastern Colorado, people who want to get into cultivation, on any scale, are finding their way to places like GrowGeneration.

Numbers seem to be in the company’s favor. 

New Frontier Data, a company that watches the cannabis industry, calculated this year that the legal cannabis market was worth $7.2 billion in 2016. By 2020, sales in the medical and recreational sides will hit $24.5 billion, the firm predicts, and that’s not counting additional states ending prohibition. 

Pueblo is one of the hottest areas for cultivators, figuratively and literally. The digital display the dash of my rental car reported a temperature of 119 degrees at midday this week. A few blocks away, the Arkansas River boiled along beside this city’s sprawling rail yards.  

All-comers

Villalon’s shop attracts big players as well as little guys. While commercial and amateurs tend to find different suppliers in most of the trades, they both hit shops like this out here. 

“It is kind of an interesting thing,” he said of the mix of shoppers. “The commercial sales are a large part of the market.”

Villalon said he may sell a few dozen bags of “supersoil,” or truckloads of it. 

Nearly a half-dozen other grow stores have opened in the Pueblo area in just the last year. Villalon’s company competes mainly with the bigger players, Grow Warehouse and Way to Grow

“It’s been a big industry so far. A lot of growth has happened here,” he said. 

The newest GrowGeneration outlets are bigger than ever. Even the West Fourth Street shop, penned in a bit in downtown Pueblo, managed to more than double its size by taking over the neighboring storefront, edging closer to a yoga studio.

Villalon, a home-grower himself, had been working two jobs but is now devoting all his time to GrowGeneration, as this shop’s manager. By the way, he bought his house at 23, paying less for it ($38,000) than he has for a truck. 

Just a few years later, those kinds of house deals are harder to find in Pueblo.

Like a lot of Coloradans, Villalon is friendly and approachable, even when he realizes you’re not there to shop.

Getting to know customers is a key, he believes, to remaining competitive. “It always takes time to create the relationships that will make your business grow and prosper.”

Villalon’s customers hold him to it. They bring in distressed leaves from cannabis plants and ask him to diagnose what’s wrong. Generally, sick plants are getting the wrong food -- or something’s amiss with the growing environment. “We try to deduce it from there.”

When customers ask him what it takes to be a successful grower, this is his answer: “Time, desire and space.” Set a simple, straightforward approach to cultivation and stick with it, he said. The cost of entry for small growers runs around $500. 

Lots of those asking are retired folks. 

A case of jitters?

The cannabis boom may be chasing early entrants out. I looked up “business opportunities” in this sector and found plenty of listings for sales of dispensaries, stores and growing facilities, both in Colorado and in California, Oregon and Washington. 

Yes, it’s a big country, but only a few states allow cannabis cultivation and retail sales. Nearly half support medical dispensaries. 

A gold-rush mentality runs through a lot of the sales pitches. 

Here’s a sample:

-- “Entrepreneurs who didn't invest in a marijuana dispensary when it was for sale will be green with envy.” (Disclosure: I fixed a typo in that to say what they meant.)

-- “The NET cash flow of each of these locations is mind boggling.”

-- “Rarely does a cannabis business come along which can launch YOU into wealth!”

-- “The city has issued limited licenses in this area which will make this company continue to rise in pricing, so get it while the getting is good!”

Of course, if it’s so great, why leave the business?

The wholesale price of flower is coming down fast. That’s going to help retailers, but punish growers. 

Villalon says he’s seen lots of cultivators set up and secure licenses, then flip the business to someone else, taking their profit. 

“The licenses are very valuable,” Villalon told me.

That’s the other version of the “pick and shovel” play. Find the next prospector before anyone realizes the gold’s about to run out. 

If it ever does. The analysts at New Frontier Data think that’s a long way off. 

Have a question about what’s up with the cannabis business in Colorado? Email Larry Parnass at lparnass@berkshireeagle.com. And watch this space for regular reports from the road.


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