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There are a few sectors that have collapsed as dramatically as cannabis. Once projected to generate billions of dollars in new business, radical social reform, job creation, and rapid growth, the industry has devolved into a commoditized race to the bottom. But just because the big corporations are losing money doesn't mean everyone else is. While they're all hemorrhaging cash, the local self-funded dispensaries are quietly surviving. For them, profit isn't a future goal, it's a mandate. California is the world's largest and most competitive cannabis market. In 2023, $5.1 billion of legal cannabis was sold in the Golden State with another $8 billion moving through the black market.
Los Angeles County alone reigns as the highest grossing market with five to 10 times as many sales as any other county in the state. There are more dispensaries and black market dealers in LA County than in most states combined. But if you can make it here, you can make it anywhere. While many weed businesses have folded, a few independents are still making money. These owners are the ones with real business acumen in this industry. Resilient, savvy, and shrewd, they turn a profit year after year, outlasting the VC back giants, regulatory hurdles, commoditization, and the black market.
In this modern MBA original, we go from the macro to micro to understand how to survive in this crumbling business. From the global corporations all the way to three independents in the world's most competitive market. Happy 420. There you go. We ignore phone calls, don't reply to texts, and leave emails unread. Spam hasn't slowed down. It's evolved and multiplied in the digital age. Modern tech didn't kill it. It supercharged it. AI, social media, and scrapers are now harvesting every scrap of your digital life, all in the name of profit. And behind the scenes, there's a whole industry making it happen. Data brokers.
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selling our personal information. They don't own our data, yet they're making bank off it. That's robbery. With one click, Aura took care of the hardest part and removed our information from these websites. And most importantly, they're continuing to monitor to make sure our information stays off for good. Aura is an all-in-one digital security that goes far beyond any tool you may already have. Don't take a peacemail approach to digital security. Not having Aura is like locking the front door, but leaving your back door open. With Aura, you get immediate alerts whenever your info is found on the dark web. real-time fraud alerts for the one thing every hacker and scammer in the world wants,
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where your data is being exposed and sold. We're not leaving ourselves vulnerable at Modern MBA, and you shouldn't either. Every industry has its gold rush. For cannabis, the green rush started in 2012 when Colorado and Washington became the first US states to legalize recreational marijuana. The federal government's hands-off approach signaled a seismic shift. Presidents from both parties began pardoning marijuana offenses, backing decriminalization, and focusing enforcement on harder drugs. By 2023, cannabis was legal for medical use in 39 states and recreational use in 24. but
it remains federally illegal, classified as a schedule one drug, and banned from research. This legal limbo blocks cannabis companies from banking, tax deductions, and interstate commerce, essentials for any modern business. Still, legalization was expected to drive explosive growth. Investors and operators rushed in, betting that weed could replace beer and cigarettes as the next billion dollar vice. The black market had long dominated, but legalization reset the field, opening the door for someone to build the next Marro, Bud Light, or CVS for cannabis. As more states and countries joined in after 2012, every link in the value chain, from farming to retail was up for grabs. Startups burned through millions
in venture capital and private equity, building fast and talking big. When Canada legalized marijuana in 2018, it gave these same companies the means to pump and dump. No company symbolized the hype more than Tillray, the first cannabis company to ever go public on a US stock exchange. By 2019, Tillray was the exclusive supplier of medicinal marijuana to Noardis, the lead partner with Annheiser Bush on THC drinks and the CBD distributor for authentic brands. But it was founded by VCs who boasted repeatedly that federal legalization was coming soon and that legal weed would disrupt big pharma, big tobacco, and big alcohol. Tillray stock soared from $30 to $180 in two months,
hitting a $17 billion valuation, 600 times revenue. Insiders quickly cashed out, but the international medicinal business was all hype and no substance. Overseas customers were only accessible through tightly regulated channels with strict dosages and state controlled pricing. The real money was in the US, but as a NASDAQ listed company, Tillray couldn't sell there. That left Canada as the only option. Tillray tried to buy their way to dominance, acquiring smaller brands to enter higher margin edibles, vapes, and hemp alongsidearmacies and dispensaries. They merged with Afria, Canada's second largest cultivator to create the world's largest, lowest cost cannabis producer. The plan was to unify
in exchange for majority market share in Canada and to wait out US legalization. Yet, gross margins fell, showing that even the best funded first mover couldn't avoid commoditization. 5 years later after the merger, Tillray is still unprofitable and holds just 13% market share in Canada. Even with its economies of scale, the company today earns more selling beer than selling cannabis. MedMen rose to fame as the Apple store of weed, opening flashy dispensaries in upscale areas across every legal state. But the company burned millions, falsely believing traditional retail economics didn't apply to cannabis.
Even as stimulus checks boosted sales for every retailer from Target to Louis Vuitton during the pandemic, Medman sales declined. Fancy storefronts weren't enough to build loyalty. In six years, Menman fell from a $3 billion unicorn to bankruptcy. Even later entrance who tried to learn from these mistakes have struggled. Backed with $2.4 billion from big tobacco, Kronos tried to carve out a high-end niche. They spent $und00 million over eight years on R&D for stainless steel vapes, CBD skincare, gourmet edibles, and luxury infused body products under the belief that brand power and product innovation could be a moat. Despite owning Canada's top selling brand in
flour and edibles, Kronos loses hundreds of millions of dollars annually. Curelief, with 150 US dispensaries, is the world's largest cannabis company by revenue. But their scale and vertical integration was all built on debt. Debt fuels growth but magnifies losses when revenue stalls. With profits swallowed by interest, Curelie also loses money to the tune of tens of millions of dollars. Trulie chased emerging states flooding Florida with hundreds of stores and a thousand different SKs of flour, drinks, and edibles. But because cannabis companies can't move inventory across state lines, all that product can only
be sold through their own dispensaries or wholesale to competitors who are already promoting their own. Even though Canada and the US are the top markets, the gap is huge. True Leaf grosses four times more selling medicinal marijuana in Florida alone than Tillray does in all of Canada. But they hold just 35% market share in Florida, and sales have dropped yearly. Even Green Thumb, the only profitable public cannabis retailer and manufacturer, has seen their growth slow and margins dwindle under commoditization.
Since no one knows if or when federal legalization will ever materialize, the big corporations can only focus on form factor as their only avenue for growth. Rather than persuading consumers to smoke or eat cannabis, the focus has shifted to getting them to drink it. Whoever can make that canned hit brand they all say will unlock billions more in sales. But this feels like wishful thinking as branding has not proven to be a profitable mo for anyone. There's a pattern. These corporations peaked during the 2010s when they were the only game in town. Now with competition everywhere, profits have collapsed and
no one has been able to figure out how to compete at scale on anything besides price. From one angle, this was just a case of too much supply for too little demand. From another angle, commoditization was always inevitable, but market correction shouldn't mean collapse. Alcohol and tobacco are like cannabis. They're also commodities with comparable regulations. If Anheiser Bush, Altria, and Philip Morris can all carve out multi-billion dollar positions and massive premium margins in alcohol and tobacco, why hasn't the same happened in cannabis? It's clear that there's more dynamics at play than what we can ascertain from big company financials. The green rush is over.
What's left is just business. Regulated, fragmented, ruthless, and perfectly competitive, where only the smartest survive. Out in central LA is Noel, owner of Mecca Mid City. Mecca has been around since 2012, 6 years before California legalized recreational marijuana and the competition flooded in. Today she and her team are prepping the store for 420, the biggest sales day of the year. Steve, the hay, what do you think if we angle it on the right side for the photo booth? So, if we have the guy on the left and the hay on the right. So, it's like people can sit down and do that.
Kind of adds the carnival feel as well. Yeah, I like that. Okay. Noel's been in cannabis since the 2000s. She was a real estate broker who broke bad, growing weed in her garage and slinging it on the streets. After a few close calls, Noel walked away from the black market and went legit. I was pretty green and pretty naive when I first started doing this. You know, picture me, blonde, blue-eyed girl, walking around with my Ralph Lauren bag. I had everything nicely organized into ounces, and I was going into the worst neighborhoods you could imagine, thinking everything's fine. I was able to get an investor and get a large grow, an 8,000 foot grow and that place got
robbed. I quickly learned I had to pivot. A lot of the stores I noticed were just really uninviting, unwelcoming, scary for a female to walk in. And it was mostly guy customers. The security guards were gruff. They were rude. Everything had black bars on the windows. You walk in, it's dirty, it stinks. I just wanted to make a place more inviting, good music, good service, and that the people working there had good customer service, but more importantly, they knew what they're talking about and they could help you. How did that work? This one here? Mhm. So, you purchase a battery and then this is the top piece that has the oil inside and you twist it on and then that's reusable.
Yes. So after you finish that one, you just remove that, toss that away, and you just come back and buy your refill. Noel's lived through it all before legalization, through the green rush, and now the downturn. The promise of easy riches during the green rush meant California got saturated with too many cultivators, processors, manufacturers, and dispensaries. Wholesale prices have plummeted 70% in the past 4 years. Retail prices by extension have declined. An eighth of an ounce or 3.5 gram is the most common quantity in which cannabis is sold. It's the industry equivalent of a medium-siz soda. The average retail cost of an eighth has dropped 42% with comparable
drops across edibles, vapes, and pre-rolls in the state. Legal sales have fallen for the second year in a row. Tax revenue from cannabis has dropped to its lowest since the legalization of recreational marijuana in 2018. This freef fall is also happening in Colorado, Oklahoma, Oregon, and Washington state. The market has been a roller coaster. We were doing a ton of business. Everybody was. And then LA started issuing a lot of licenses. And then the state shifted the excise tax from the distributor to the retailer, which is essentially the customer. And then the economy tanked. There's all these different elements that happened at the same time.
It just crushed the industry. There's only really three types of people left in the Los Angeles market. I feel like you have the social equity people, you have the people like me that have been around forever, and then you have the corporate cannabis. They make the most beautiful stores and things like that, but they seem to really be struggling right now. Most of the multi-state operators, they've left California. They can't cut it in California. Noel isn't losing sleep over the corporations or dispensaries down the street. It's not that people are losing their taste for cannabis. It's that they're turning to the black market, whose prices she can't match. Weed on the black market today is at least 35%
cheaper without taxes. In LA, the state excise tax is 15%, sales tax is 9.75% and the city tax is 10% for a total of 35%. Customers pay this tax whenever they buy weed from Mecca or any other legal dispensary in LA. And instead of applying these taxes as one combined line item to the purchase price, these taxes actually compound, each one taxed on top of the last. The average retail price today for an ETH is $23. for an edible is $13. Pre-roll is $18 and a vape cartridge $25. When purchased legally, that's $8 more on the ETH, $5 more on the edible, $6 more on the
pre-roll, and $9 more for the vape. But when customers buy on the black market, they avoid these taxes entirely. To offset the tax revenue that's been lost to the black market, the state government has opted to raise the tax rate even further, which ironically will only drive even more customers underground. The total tax on legal cannabis will increase to 39% in July of 2025. Business is really frustrating at the moment because we are competing with so many licences who are dropping their lowest price. You can buy cannabis at a smoke shop under the guise of it being hemp, which it's not. We all know it's
not. And then you just have your straight dealers that aren't paying any taxes. I wish that people in government were a little more business-minded. But if they just lower the taxes, then we wouldn't have to compete like that and they would end up making more money. There's merit to the argument that the way cannabis is taxed in California is unprecedented. In the world of alcohol and tobacco, taxes are shared by multiple entities through the supply chain. Excise tax on beer and wine is paid by manufacturers as a fixed fee per gallon. Excise tax on cigarettes is paid by wholesalers as a fixed fee per stick. But in cannabis, the excise tax is a percentage that's placed exclusively on
the retailers rather than the manufacturers or wholesalers. But there's a counterargument that it doesn't matter where the excise tax gets imposed in the supply chain. Cigarettes are the most expensive in the states of New York, Rhode Island, and Connecticut. And the same is true for spirits in Washington, Utah, and Oregon. The higher excise taxes in those states are imposed on wholesalers and distributors. Yet, it all gets thrown onto the customer. The only other legal drug where retailers are responsible for excise tax is the ecigarettes, but that rate is only 12.5% compared to cannabis's 19%. Ecigarettes are also taxed as a percentage of the lower wholesale or manufacturer price.
Weed is not only broadly taxed at a higher rate, but also at the highest amount at the retail list price. California, Washington, Montana, and Virginia have the heaviest egg size taxes in the industry with 19 to 37% on retail sales. California takes it a step further than its peers. The 19% egg excise tax is applied on gross retail sales rather than net sales. This means that retail operators like Noel get taxed on the total transaction amount per order before accounting for discounts or returns. This is why most dispensaries operate on a final sale basis. no refunds, returns, or exchanges. If they accept a return, they get hit twice.
Once with the total loss on the product, and two with having to dig out of pocket to pay the 19% tax from the initial purchase. But beyond high taxation and illicit undercutting, the challenges for retailers nowadays is product. What's out there is what you get, and the days where you could just put any weed on a shelf and expect it to sell are long gone. Noel has survived by building her own supply chain. So while Mecca is the storefront, she also runs Signal, a cultivator, manufacturer, and distributor. Vertical integration enables Noel to produce exactly what she sees customers looking for in store. The reason behind Mecca's longevity in her book is treating the product and space with the service and attention of a
neighborhood specialty rather than a lowest bidder commodity that the industry has become. In a time where trust is low and everyone is in survival mode, she's become even more cautious about what's going on shelves. I don't let the brands run this store. They're trying to sell their product. But we would lose our integrity if we just put a bunch of things on the shelf without us even knowing if it's good or not. I don't let brands pay bud tenders, but they do. They offer them rewards, taking them out to dinner, gifts, all of those kinds of things. If something breaks, if a branded flower happens to be dry or something, they blame Mecca. They don't think about the
separation between the brand and the store. So, we have to implement our own quality controls. 18th century botnist classified weed into two categories, sativas and indicas, based on their differences in plant appearance and psychological effects. Sativas stimulate mood and energy, making them well suited for daytime and social use, while indacas offer seditive effects that are ideal for sleep and pain. Over the centuries, growers started cross-breeding sativas and indicas to create new hybrid strains. These hybrids combined traits from both categories to deliver more precise effects and were genetically optimized for larger yields and faster growth. These days, hybrids dominate and customers care less about if their weed
is a pure sativa or pure indica and they focus far more on how it makes them feel. Today, there are over 700 different strains of cannabis, most of which are hybrids. Every strain of cannabis gets branded with a crazy name like donkey butter, cheetah piss, and apple fritter. Breeders do it to differentiate their seeds to growers. Growers maintain these names as a way to differentiate their harvests to distributors and retailers. And finally, the dispensaries keep these names as a way to spark customer interest and to set their inventory apart from the competition. That way, when customers find a strain that they like, they'll ask for it by name. In 2022, Gelato and Wedding Cake were the two bestselling
flower strains in the state. A year later, consumers had shifted to Blue Dream and Biscati. If you stock only the best sellers, you jump head first into a price war, pedalling the same handful as everyone else. You stock too many exotics and you lose mass market appeal. Choosing strains is one thing. Ensuring quality is another. Alex, are you ready for me? How is it? Good. How are you? Good, good, good. I like this one. This is a cheetah. The cheetah? Yeah. Has a good smell, too.
No, I don't like this one. No, no, that one. How many of the Shake Shack? Yeah, that one we have close to a,000. What's the price? 325. Let me get some samples. Of course. For Noel, it's less about names and more about the quality of harvest. Growing conditions in soil, humidity, and season impact quality. These days, the few farms left are focused on pushing volume to survive, and even the harvest quality of one strain can vary wildly across farms. Some growers will even proactively rebrand old strains with flashier new names just to stand out more to buyers and retailers like Noel. Noel's perspective is that without this
hands-on QA and direct cultivation experience, corporations like Medmen, who try to make money by just opening as many dispensaries as possible, will always lose. If you don't know what you're looking at, you'll get fooled by distributors or growers who are just looking to squeeze newbies with subpar batches, falsely labeled strains, and overpriced products. Cultivators are in this difficult situation where they have to choose between what yields the most and what will sell. Sativas take 12 to 14 weeks to grow plus cure time. OG can be difficult to grow and it doesn't yield as much. So yeah, of course they're
growing hybrids. Of course they're growing gelades. Cannabis has such a varied nuance to the effects and back in the day I could look at a pound. I could smell it and just having my experience and knowing what strains look a certain way, smell a certain way, I knew what it is. Now with so many hybrids, I don't want to take that chance. What is this? Oh, birthday cake. Obviously, we have everything lab tested, but I have my indicica tester, my hybrid, my sativa tester just to make sure that the actual effect is what I want people to feel. You have indicas that give you the couch lock, make you want to go to sleep instantly. But you also have indacas that make you giggly but also relax.
It's it's a fine line. Even sativas, you have energetic, social sativas, and then you have some that will make you a little anxious. I go the extra mile because it's my name on it. How do you feel? I feel good. It was a It gave me a lot more body pie than I expected because it had like a sativa hybrid smell to it kind of. Um, but I'm getting a much more hybrid indica lean. I know it's I can tell by the butt in the taste it's not, but I'm getting a very a lot more body height than I typically get. Do you feel it in your chest? Yeah, I'm getting a lot like shoulders behind my eyes a little bit. And it's You don't look that high though.
Well, I smoke a lot of weed. You're smoking every day right now? Yeah, for sure. How did it taste? what it tastes like. The taste were was probably um be honest. Yeah, that was my biggest let down for it. Um I was actually curious if you had any more cuz I was like maybe let me try it in a pipe instead of a paper. See if it tastes any different. But it was pretty earthy and um grassy, you know. What do you feel like doing right now?
Yeah, I'm feeling very relaxed. It's definitely a I think it's a good daytime high for sure. You going to label it sativa? No. hybrid for sure. I was going to say cuz it is I can tell it's sativa genetics, but it's a very hybrid. Mhm. Smoking and hot for sure. Noel inspects shipments weekly, stamping the Mecca brand on flower that meets her standards. Oh, that looks really good. So pretty, right? That looks really nice. And it has like big mugs out. Well, you know, sometimes you cleaned this.
Mhm. She sources from her own growers and longtime local farms. In a market overwhelmed by outrageous strain names and fleeting quality, Noel's strategy is to make Mecca a mark of trust, a constant that other dispensary owners can rely on regardless of changes in strain or supply. But in today's market, it's all about value. Despite all the ambiance and curation, Noel isn't blind. The black market is about to be 40% cheaper, and no retailer has ever survived exclusively selling high-end weed. And since she can't get weed any cheaper from the growers and wholesalers, she's opted to grow it herself. The Mecca brand is designed to
compete on quality for price rather than quality absolute. The average retail price of an ETH is 20% cheaper than that of the bigname brands, and it's a bargain that few, if any, can match in this new race to the bottom. The brand has really saved us. Uh the Mecca brand is about 40% of our sales and that's huge. There was a summer there was a huge drought and a lot of retailers didn't have a lot of product but we were okay because we had our own. When I first opened, I had all this beautiful expensive indoor and I was so proud of the menu. But then it didn't really sell. And so I quickly had to come up with a marketing plan and we came up with the BOGO, the buy one get
one to clear it out. And so the BOGO was born. And I've just I've learned what sells and what people want. Welcome guys. Welcome. Happy 420. 420 is the biggest day in the industry and the main event of the year for Noel. Every year at Mecca, it's a different theme and no costume or prop is ever reused. This year's theme is Weedle Juice, her own spin on the Tim Burton classic. For past 420s, it was Kill Bill, Super Mario, Alice in Wonderland, and Great Gatsby. It's this local spirit that has allowed Mecca to take root in the neighborhood well before corporate stores moved in. The event is as much a
celebration for the loyal regulars as it is a defensive shield against any other dispensary looking to challenge their market share in this area. A lot of other stores have the same product. So every 420 we try to think of something. What is the big wow that will bring people in the door and with the economy being down I was thinking what is going to get them to drive all the way across town past 10 other stores to come to Mecca. And I thought, you know, people need hope. 420 is one day on the calendar, but Noel runs her event for two consecutive days. On a normal day, Mecca grosses on average $22,000 in sales. On this 420,
sales clocked in at $74,000 per day, over triple the regular volume. Given the time and money invested, there's no reason to rush a tearown. And running the event a day longer captures customers that missed out on the day before. Mecca grossed $12 million during the pandemic, but annual sales are down to 8 million with Signal averaging another $1.1 million a year. Both businesses run at a 25% operating margin. Noel's success is rooted in hyper local knowledge, and she's pivoting to wholesale to make up for lost retail income. Her next store is in Bell Gardens in a rare green zone where surrounding cities have banned cannabis, which would make Mecca one of the first legal dispensaries. I feel like this is just a downturn. It's still not
federally legal. There's still so much opportunity. There's still people doing well. I mean, I'm doing fine, but I know that once we can go to other states, it can be done and I feel like I can do it. So, I'm not so down on myself about the current state because I know it will change. You take care. Every day, rain or shine, 71-year-old Jay drives to Urba's four stores to make sure everything's running smoothly. How you doing?
All right. How are you? Good. No complaints. Good to hear. After you. There you go. But he knows that once the 420 rush is over, the industry will slip back into the slump it's been in for the last 3 years. It was very lucrative during the green rush. Today it's tight. It's a very dysfunctional industry. You're seeing cultivators turn their licenses back in. 4 years ago it was $3,500 a pound, you know, for good quality weed. Today it's $500 a pound. It cost them more to grow than it's worth. Growers have certainly been hit the hardest. Over 7,500 have gone out of business in the past 5 years, leaving just 4,000 licensed cultivators in the state. In percentages, that means that
over six out of every 10 growers have gone out of business. What happens upstream flows downstream. One out of every two distributors and nearly four out of every 10 dispensaries have shut down. These numbers only capture the companies that tried to play by the rules. And it's plausible that some of these exits are not true insolvencies, but a return back to doing business in the black market. In the green rush days, people would come in and they would spend $70, $80 for an eight. Today, they come in and they have two questions. What do you have with the highest THC? What do you have with the highest THC and the cheapest price? So, it's dumbed all the way down. You have to be able to pivot. A retail license
used to be $4 to5 million. Today you can pick up a retail license for a quarter of a million. It's dirt cheap. Why? These guys want to get out of the business. It's not fun anymore and it's not lucrative. And frankly, it's overregulated by people who don't know what the hell they're regulating. And that causes a bigger problem. It's kind of like a car mechanic wanting to do brain surgery. That's what we have with the people who are making the laws for cannabis. All right, looking good. Why do I go to every store? Why do I meet with every manager? Why do I talk to all the vendors? It's Darwinism.
How you doing, man? How's it going? I'm Cristiano Jay. Nice to meet you. One of the owners. How you doing? Every single aspect of our business, we have to stay on top of only the strong will survive. As a Brooklyn native, Jay's a straight shooter. To him, cannabis is just like every other business. And the industry is suffering from both the practitioners and policy makers who fail to treat it like one. What's happening today is as much the result of self-sabotage as it is poor governance. For Jay, the most important qualifications are common sense, discipline, and old school elbow grease. Basic elements that the cannabis corporations and their VCs lacked. These intangibles are what he believes has
kept on top and would keep any business in any sector alive through a downturn. I have never been in an industry in my life where people give stuff away. There's no money in that. You can't make money doing that. And they do it all year. Buy two, get one. Buy two, get two. The industry is crashing itself, but the vendors are looking to try and get more sales and the customers getting used to paying nothing. Think about it. If I do a BOGO, buy one get one and my markup is 2x, I made nothing. Why would I keep my doors and lights if I can't make any money? I can't service anybody.
Vendors don't get the revenue. But the vendors cause this. You know, they encourage BOS. They encourage people to give stuff away because they give stuff away. Makes no sense. I've never went to Mastro and said, you know, oh, do you have that porter house steak buy one get one free? Yeah, I don't think so. Not going to happen. I think over the next 6, nine, maybe 12 months, a lot of the pretenders are going to be gone. You see it with a lot of the brands that are no longer here. Big companies like Herbal, one of the biggest distributors in the state, folded once, stuck everybody for money. And it's really no different than the problem in the
restaurant industry where you take in a dollar and you think you have a dollar to spend. You don't realize you only have a dime cuz everything else has to pay for everything else. If you want to be successful in any retail business, it's like baseball. There's four bases in baseball. If you hit a triple and you fan three more times, you didn't score. Product, service, atmosphere, value. You got to have all four. If you don't have all four, you become a trivia question. What was the name of that shop over there I used to get my weed from? I don't want to be a trivia question cuz I don't have hedge fund money. This is our money. While Noel runs Mecca like a traditional retailer where every product
is meticulously vetted as an extension of the store. Jay does the exact opposite. Uba in both name and design is a marketplace. Products are sold on consignment and parts of the store are subleasased to brands themselves. Urba isn't curating, it's aggregating. Customers aren't told what to buy. They're invited to discover it themselves. Every customer gets treated the same. I don't care if it's the homeless guy at the bottom of the ramp who's coming in to get his medicine to be able to sleep at night. Some people just want to get high. Some people have anxiety. They want to knock down their anxiety. Being a business is making sure you have something for everybody. I have something for the $88 and I've got 80 and $90 eights for the person that wants
that real perfect nug. I'm here to serve everybody and quite frankly, we're here to take their money. Nobody should walk out of here empty-handed. Because Urba runs on consignment, Jay doesn't buy any product upfront. His 1,200 SKs eclipse that of Noel's and is closer to the scale of a Trader Joe's. At Urba, brands supply their own product, and they willingly give up upfront sales in exchange for shelf space at his four dispensaries. There's no carrying cost or inventory risk for him, and both sides only make money when something sells. As a result, Urba is not as deeply involved in the same price war as other dispensaries. Jay's not ever worried about predicting the next
hit strain, falling behind on quality control, or needing to match the competition on boos. Instead, his responsibility is to bring in potential paying customers. And the rest is up to each and every brand within Urba to close the deal for themselves with whatever they've chosen to stock. You always do good here. You guys are good to us. Yeah. Well, and you guys are good to us. That's what it's about. It is what it's about. It's a win-win. You know, going to consignment to me was the best way to go. moving forward. It's good for everybody. If the vendor is giving it to me on consignment, he still technically owns it. So, he doesn't have to worry
about, oh my god, he's never going to pay me. I can just take my merchandise back. It's good for me because the vendor has control about placing orders. I'm never out of stock on product that sells. And of course, it's good for the customer because the customer has continuity. But it's not a walk in the park. Consignment is only possible when the shelf space is perceived as valuable. If Urba starts slipping in audience or relevance, brands won't stick around.
Thus, even though quality control, stock, selection, and pricing is largely out of his hands, Jay is responsible for everything else. He creates the space, supplies the labor, brings in the traffic, grows, the brand, and enforces service standards. And it's on him to make sure that it's all going up every day. He makes it a point to interact with every single employee at each of his stores and he drives through the neighborhoods watching for competition. You have to be out there to the public. So when we open a store, you'll see as we go from Venice to Pico to Cula, they're all within 10 minutes of each other. So it's owning a territory. So the other guys when they come in, we
just don't let them come in. We make it hard for them. That's our job. And we have a great reputation in the neighborhood. We do things right and we're good for the community. Kicking ass. There's nothing more important than the personal touch. Knowing your staff, being greeted by your staff that they like you, you know, and they embrace you when you come in. We'll talk football, we'll talk basketball, we'll talk going out clubbing. But it's also when I go into a store, I know the customers. It doesn't matter what store I go to, the customers know who I am.
There he is. Hey, buddy. Everything's good. How you doing? Good. Everything's great. You looks like it. Happy 420. Anybody can sell weed. Every dispensary in town sells the same thing, but you have to sell the experience. And part of the experience is I know the owner. Before Urba, Jay spent three decades running restaurants across LA. In his 20s, he worked in Asia for his family's import export business. He's never touched weed, but he knows numbers. He knows people. And he knows how markets move. I'm not a cannabis user. I never was. Customer asked for help on a product. And I just turned around to her and I said, "Lady, I'm the last one you want advice from on this stuff." Because me,
my job is the green in the register. That's what I deal with. That's what I like. That's how I take care of business. Today, the problem is not the existence of the black market. It's that the city has let them thrive while taxing the very few that are left playing by the rules. In LA, legal cannabis has become the exception, not the norm. There are almost 10 times as many illegal trap shops selling weed under the table today than there are legal dispensaries in the city. Literally, I could take a baseball from my corner and hit the trap shop. 2 and 1/2 years. I called the captain of the division. I called the area commander for West Bureau. I called everybody I knew. I called my council people. We had
video. We showed people going in there at midnight with backpacks of weed. Completely illegal. Could not get anyone to come out to do anything about it. Eventually we did because if you put up a big enough stink and you finally get to the right person, they'll come out. But it should never take 2 and 1/2 years to close down a trap shop. It's not that California or Los Angeles has turned a blind eye towards illegal cannabis. Even though street value has declined, the state has confiscated progressively larger amounts year after year. In 2024, the governor boasted that
his office had seized over half a billion dollars of illegal cannabis with the vast majority of bus occurring in Los Angeles County. But all this enforcement has been concentrated on the supply side. There's no questioning the effectiveness of the American military-industrial police complex when applied to kicking down doors, scoring headline buss, and throwing the nth drug dealer in jail. Yet, the war on drugs has demonstrated time and time again that cracking down on supply without ever addressing demand is ineffective. Cut off one head and another will take its place. The reality is that taxation, regulation, and enforcement are not separate. They're all connected as part of the same system. But taxation has
become the black market's greatest subsidy. The more aggressive the tax, the more customers are forced underground. As pessimistic as Jay sounds, he's not given up. He's thrown himself into civil service for the longevity of his business and the greater industry, one council meeting at a time. I currently sit on the West LA Sautell Neighborhood Council. I'm the co-chair of the budget advocate team. budget is not sexy, but the fact of the matter is it dictates what services you get in your community. So, if I want more enforcement on trap shops, I got to have budget. If the police don't have the budget to do it, I'm not going to get enforcement. It's that simple. I have access to all the top people in the city
and I have their ear. This year, we were able to pass AB1775, which allows consumption lounges to sell non-cannabis product. I couldn't sell a bottle of water to someone who was dehydrated from smoking cuz I'm not allowed to sell non-cannabis product. This year, the governor actually signed it at our assistance. So, now we can sell coffee, tea, soda, juice, things like that. Urba grosses $35 million a year across all four stores. Store level operating margins sit at 12% higher than conventional retailers like Target or Home Depot, but not as high as vertically integrated stores like Mecca.
Lower margins are natural with a consignment business model. You trade away profits and pricing in exchange for better cash flow, minimal inventory risk, and greater product mix. In our past episode on sneakers, we covered Legacy, which netted operating margins of 16% with its consignment ccentric business, which is comparable to Urba's 12%. The reality is that consignment is not entitled, but rather earned by an elite few operators. Wholesale is a standard across industries as every brand looks to secure volume and revenue upfront. Getting so many vendors to buy into consignment, especially in an industry as fragmented, low trust, and competitive as cannabis, is a feat that
requires both a steady hand and deep reserves of social and political capital. All of which Jay uniquely provides. All right, let's check on all the stores here. Pico, Venice, and Culver. Nice, nice, nice. Just checked all four stores. It's about close to 270 to 300,000 so far. Good. Busy day. Welcome to 420.
Thanks for calling Herb. This is Nick. How can I help you? And how many of those would you like? And one of those would that be all for you today? Bobby and Nick founded Herb, LA's longest running independent cannabis delivery service. The pair met in the 2000s, and when the opportunity came to go legit, they bet on that future. Herb has outlasted the Silicon Valley Uber for weed startups who all burned through millions but couldn't survive the industry's strict regulations. Unlike food delivery, cannabis delivery is tightly regulated. Every driver is a W2 employee, can only work for one dispensary and must handel every order.
There's no proprietary algorithms, cuttingedge AI, or legal loophole to scaling a delivery network in this industry. In a market where everyone sells the same products, Herb has sustained by sticking to the basics of customer service. Hey, this is Nick over at Herb. I missed your call. As an e-commerce company, the only true interface we have with customers is when our delivery people go to meet with the customer and deliver the orders. We're never rushing people off the phone. you know, we'll have the conversation with you and really guide you into the product that fits best for you and treating customers like humans, which is one of those longforgotten fundamentals of business.
You've got the eases of the world that raised a quarter of a billion dollars and they've been bought and sold three times now, and they were just bought out of receiverhip. Again, by saying no as much as we did, we preserved our ability to keep doing what we're doing with independence without a board of people controlling us and a mandate to be able to exit within 7 years at a 10x valuation, you know, which in hindsight certainly wouldn't have been possible. 11 years in, Bobby and Nick have kept their team small and hands-on. They still answer the phones, and when drivers are busy, they'll make deliveries themselves.
Okay, cool. Well, I'll take these three. Uh, everything's packed. All right, sounds good, man. The model is asset light. Herb is located in an inconspicuous neighborhood, but the lower operating costs come at the trade-off of visibility, but since every dispensary also offers delivery of their own, being lean only helps with startup, not growth. The lower barriers to entry means it's faster and cheaper to get started. But at a macro level, it's much harder to get a seat at the table without a physical presence. In California, 66% of weed delivery services have shut down in the past 5 years. That's a failure rate that's nearly three times higher than that of brickandmortar dispensaries.
Herb's business is built more on product markups than delivery fees. To drive volume, there's minimum order sizes. Customers get free delivery when they spend $50 or more. But without the face-to-face interactions of a retail storefront, Bobby and Nick need ways to compensate for this missing Goodwill. All of which reduce profits but have helped Herb stand both above the crowd and the test of time. All right, Monty, I got three for you. Um, we're gonna start with that girl. She's going to give you the old one, and then you're just going to bring it back. So, you should have the three that you're going to take already, Nina, Callie, and Dylan.
If you look at consumerism in general, people want delivery. They value their time, and they're willing to pay someone else to bring their products to them. So, we think that delivery is really where the retail industry will end up. We don't need to pay for a security guard 24 hours a day, which is a regulation for storefronts. We don't need to worry about the exterior appearance of our business. Get a really nice spot on a hightra corner uh like storefronts do. So, their rents in general going to be higher. Their buildout's going to be more expensive. Some of the downsides are that we don't get that walk-in traffic. We get I don't know if shadowbanned is the right word but on Google Maps they if you have a
physical address they prioritize your business. So we get deranked in the algorithm which is hugely important for us to be showing up as high as possible. We're one of the only companies that do exchanges and returns and we have like a I think like 30 days satisfaction guarantee. We just do things that, you know, at first don't make sense to like, oh, like the bigger business, but financially. Yeah. The 3% cash back came out of like, you know, competing with storefronts. You know, how do we get people to come back?
All right. So, I'm going to get my driver to go out there and exchange that for you. I'm also going to throw uh $20 on your account for the issue today. In theory, Herb could handle deliveries for other dispensaries, but most already run their own and are struggling to hold on to their shrinking customer base. In these times, every player is focused on holding on to their slice of the pie. There's a strong reluctance to share clientele and little appetite for shotgun marriages. This is why there's little opportunity for Herb to build its future in B2B, even though they have the superior network and logistics. and Bobby, Nick, Noel, and Jay all share a common enemy.
There's a shop very close to us that we've witnessed being raided eight times over the past year, and every time they open up the next day. And all of this is being done right in front of the government, you know, right in front of the police force, right in front of our regulators, and very little is being done about it. There's obviously a problem with the system. I think the law needs more teeth. Perhaps if they adjusted the tax rates, some of the customers from the illicit market would start shopping in the legal market and they would make up for that tax revenue. It creates a really difficult dynamic for anyone who's trying to do things legally, which we certainly are at great
expense to ourselves. Unfortunately, I don't believe that the government's lived up to their end of the deal. At some point, I'm sure that we'll find equilibrium. Uh the question is how much bloodshed will there be before that happens? Herb grosses on average $250,000 a month for an annual run rate of $3 million. Their operating margins sit at 5%. Which is low compared to the brickandmortar dispensaries. But when you compare their margins to other ondemand delivery companies like Uber as an applesto apples comparison, Herb falls right in line. Even with significantly higher payroll costs, employing drivers as W2 employees. At the end of the day, you know, when we're old men, um, you know, I think
we'll probably look back at this time and laugh. At least I hope we will, you know, despite all the struggle that we've gone through. I think uh or I hope it will be worth it, you know. It's been a fun journey so far. Yeah, for sure. Yeah. And keep it rolling. Yeah. Noel, Jay, Bobby, and Nick are all part of a dying breed of legal operators in LA who have each found ways to win in the most saturated market in the world. Noel's edge lies in product and vertical integration, which allows her to tailor her supply chain towards serving this one specific neighborhood and to slowly expand towards B2B from B to C. Jay's edge is in operations and relationships,
where his primary customers are brands and staff, who all thrive off his political and social capital. Bobby and Nick's edge lies in convenience and range. With a business that's shielded from real estate and foot traffic fluctuations, their respective expertise in LA is what's fueled their success over the corporations. These big companies just don't have the means beyond mass advertising and first mover to win meaningful market share. This is why every multi-state operator has effectively left California in pursuit of easier, uncontested dollars elsewhere. Noel, Nick, Bobby, and Jay are all doing things that don't scale.
Whether that's running deliveries, picking out their own flower, or greeting every single employee, and they all do this so they can spot trends faster, outmaneuver the competition, and maintain a foothold in this one city in California. But Urba, Herb, and Mecca are all outliers in the grand scheme of things. Their solo wins at the micro level in this one city are not enough to stem the bleeding across the state and industry. The collapse of legal cannabis is a modern case study that proves that America is just a business. It's a country where politics follow the economy and not the other way around.
The industry's current state is more so a failure of policy than business. Politicians saw legal cannabis as an infinite money glitch where this magical never-ending tax revenue would fund these flashy headline public projects that could propel them further in their own careers. It had nothing to do with the progressive populism, social justice, or medical advancements that they campaigned on years ago to win votes as advocates of legal cannabis. These politicians aren't interested in the long-term health of the industry, only in the short-term collection of license fees and taxes to further their own self-interests. These politicians in this regard are ultimately no different
than the venture capitalists that pumped and dumped weed stocks. But to return to business, the greatest skill is to make something out of nothing. Noel, Bobby, Nick, and Jay could have all exited or migrated to a less competitive state a long time ago. But in the end, they're builders who are in it for the long haul. They're still playing their cards, no matter how weak the hands are right now. It's not the venture capitalists or the corporate suits, but instead these bootstrapped owners who have the real business acumen that's worth learning from and are savvy, tough, and shrewd enough to turn a profit year after year in this crazy crumbling industry.
