One of the niceties about retail is that it’s all mostly the same.
Salt of the earth people working long hours and not making much money.
The only companies making the amount of money worth talking about in retail are either payment processors or technology companies that lever the consumer against the merchant.
Generally.
The exception to the rule has been Amazon, and while its ecommerce business isn’t massively profitable (by intention), it is a huge, huge business, commanding $700B in revenue, growing 22% a year.
Because retail is so similar it makes trends relatively easy to spot.
For example, what Amazon did to retail became a popular thesis in the restaurant industry around 2018.
What is that thesis?
Amazon noticed that if it were a large enough market maker it could collect transaction data from its buyers and sellers to make its own goods. By watching what items in what sizes and shapes sell at what price, Amazon could private label these items, undercutting competition. This could take many forms, such as better-predicting item trends and price, and even preferentially listing their own goods above the competition in search results.
In 2018 the same thesis propagated the food landscape as the third party delivery companies realized that they, like Amazon, were sitting on a mountain of transaction data.
With a bit of infrastructure, why not just verticalize food production: make their own food in faceless kitchens with no formal restaurant front of house (i.e. there’s no way for a customer to just walk in and sit down to eat) and list their products at the top of their own search results?
Instead of capturing 20-30% of every customer dollar through the platform, they’d earn nearly 100% of the revenue.
Well, turns out that restaurants are a bit more complicated than hocking non-perishable ecommerce goods.
People dine out for the experience a lot of times, and this has buoyed mom and pop operators that would otherwise collapse when competing against the better systematized (and capitalized) chain operators (we use “systematized” loosely, as even the chain operators run around like it’s still the year 1500 and some medieval wench is brewing ale in the barn).
We’re still pretty bullish on ghost kitchens – what the aforementioned business model is called – as the economics are that much more compelling if you can consistently produce the food.
We suspect in another decade 10% of restaurant food will be made this way once the third party delivery companies figure out the necessary levers to get it to work (like literally Chipotle could be a ghost kitchen company tomorrow and nobody would notice: the product is perfectly suited for that format of consumption).
In our recent foray into cannabis, we couldn’t help but notice that, while young, the cannabis industry is already evolving much faster than its retail predecessors.
We suspect that’s because there’s more dry investor powder than ever, and those dollars are salivating for returns.
In our view cannabis is much more likely to follow in the footsteps of an Amazon than of the restaurant industry.
Why?
Consistent, stable products.
Nobody in cannabis is manufacturing unique SKUs at the counter. Instead, products are coming from manufacturers in reliable form factors. Sure, there’s a burgeoning number of brands, but their products are very similar, and more importantly behave like traditional retail.
This means there’s a very material amount of risk for verticalization. And by risk, we mean risk for today’s cannabis retailers.
Let’s think about grocery retail for a minute.
Do you know how the grocery market share breaks out? How consolidated the industry is? Here’s your graphic from Statista.
This happened because consumers, over time, wanted consistent, lower priced goods. As the mom and pops consolidated, the mass merchandisers got larger. They used their data and purchasing power against the smaller operators until they owned the market.
Walmart, for instance, has been fingered for intentionally lowering prices when entering new markets to push the incumbents out of business.
We’re not at all saying that this shouldn’t happen, by the way: it ends up creating more choice and lower prices for the end consumer.
Sure, the mom and pops are put out of business, but hundreds of millions of consumers are voting with their wallets and have decided that this is the way the market should work.
We ain’t going to fight that.
But the way we see the cannabis market is a ticking time bomb, and with the amount of investor cash available, the clock may be counting down faster than anyone realizes.
We’ll turn to an industry example.
Eaze built an ecommere platform for cannabis merchants to list and sell their cannabis products.
In 2020, they decided it was a more prudent move to verticalize. They ultimately bought a retail and processing license from Green Dragon after raising $35M in investor capital to execute against this new verticalized vision.
Here’s Eaze’s own investor deck spelling it out.
But Eaze has bigger competition.
Yes, they’ve raised $200M, but Dutchie has raised 3x that amount.
Several people have noted that Dutchie has pretty broad terms of services for their dispensary customers.
Company owns all right, title and interest in and to (a) the Services and Software, and all improvements, enhancements or modifications thereto, (b) any software, applications, inventions or other technology developed in connection with the Services or support, (c) all feedback provided by Brand relating to the Services, and (d) all intellectual property rights related to any of the foregoing.
Notwithstanding anything to the contrary, Company shall have the right to collect and analyze data and other information relating to the provision, use and performance of various aspects of the Services and related systems and technologies (including, without limitation, information concerning Brand Data and data derived therefrom), and Company will be free (during and after the term hereof) to (i) use such information and data to improve and enhance the Services and for other development, diagnostic and corrective purposes in connection with the Services and other Company offerings, and (ii) disclose such data solely in aggregate or other de-identified and anonymized form in connection with its business for marketing purposes. No rights or licenses are granted except as expressly set forth herein.
There are multiple ways to read this, but if you fall in the camp that Dutchie is trying to verticalize, then this language is something to be concerned about.
We know, we know: put on a tinfoil hat and admit that Dutchie verticalizing is a conspiracy theory.
But is it?
A former Dutchie employee with familiarity of Dutchie’s payments efforts gave us some intel that gives us pause.
Dutchie wasn’t making any money so we were really focused on taking revenues from the payments stream. For a lot of us it was mixed signals: here was Ross, the then-CEO, talking about helping dispensaries, but then at the same time saying that payments was our path to profitability.
Former Dutchie employee
As those of you who read this periodical know, our belief is that payments offer no value, are entirely commoditized, and for the poor SMB merchant are the number one way for some vendor to extract their pound of flesh under the cloak of darkness.
And this is where it gets super interesting.
“There were numerous, secret projects at Dutchie, all with code names. It seemed like nobody but the c-suites knew what these projects were exactly.”
This makes the following comments mere speculation on behalf of the former employee, but they’re definitely reasonable and logical speculation.
“The secret project that garnered the most interest were talks of using third party delivery platforms, like Doordash, to sell through our customers’ products.”
This would, in essence, convert Dutchie dispensaries into commoditized fulfillment centers, much as we’ve seen take place in the restaurant landscape.
As I understood it, payments for cannabis products on a third party delivery platform would be processed through Dutchie, giving us the payments revenue we were after. When I learned more about these efforts I felt the company was a big lie: we weren’t helping dispensaries at all.
Let’s stop here because I think what this person said is wildly interesting.
We’ll open with an analogy.
Prostitution is illegal in virtually every US state.
But making pornography is not.
So what if, instead of hiring a prostitute, a company allows a consumer to pay to receive instructions on how to be a porn star? You’d have sex, and the company would film a single copy of the event, handed to you, as proof of the services rendered.
You’re not paying for a hooker: you’re paying for “instruction”.
Cut to US cannabis.
Buying cannabis is impermissible on Visa or Mastercard rails domestically.
But delivery services are totally copacetic.
What if consumers could just pay for a delivery service using their credit card and the underlying cannabis product (being delivered) was actuarially free?
In the background the delivery service would transfer money to the cannabis provider, via Dutchie, over a cannabis-approved bank-to-bank ACH rail.
In essence, Dutchie would be verticalizing cannabis by commoditizing their dispensary customers.
We know that Doordash is conceding payments to SMB POS companies since they’ve recognized that SMB POS companies are looking to make all their money on payments and they don’t want that competition (at least today), so this logically pencils.
We also know that Dutchie has ACH payments infrastructure, so this would leverage Dutchie’s existing efforts.
And the math could make sense where Dutchie wouldn’t need to directly bone the merchant on high payment rates because they can effectively do so by negotiating a percent of order volume from Doordash. For example, Doordash charges the dispensary 30%, of which 5% goes to Dutchie.
(And don’t be shocked if Dutchie foists a separate payment fee of 3%, even if the ACH rail is literal pennies to use.)
We get it: businesses have to make money.
Yet you don’t have to sex-traffic children to get paid.
Life’s too short to be a piece of shit.
But when you go out and promote the team that led the company that effectively invented SMB sex trafficking at Toast, it’s clear that some people don’t subscribe to that belief.
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