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After a period of solid growth, cannabis markets in many regions, including Massachusetts, have begun to plateau due to heavy competition and market saturation. While more mature states have been hardest hit, others like Vermont or those still in their growth phase are learning from peers and planning for what comes next.
What we advise, and what the most profitable and prevailing operators have been doing all along, is to take an impartial look at business operations to determine cost-cutting and efficiency strategies that could boost your bottom line.
The following eight areas of focus are a good place to start.
- Vendor Relationships. Evaluate all or some of your main vendor relationships to see if they are providing the best value for your investment. Consider joining buyer groups, as well, to get more competitive pricing on products by making purchases as part of a group of other cannabis operators. Look into your insurance coverage and see if you can restructure it in a more economical way. Talk to your insurance advisor or your insurance company and revisit policies to make certain you still have the right coverage. When you do, ask about ways you could save on premiums.
- Cost Structure and Operations. Evaluate operations consistently over time to adapt to the changing market landscape and economic environment. When you do, take a deep dive into overall cost structure along with operating expenses and salaries. Reassess business hours to see if you might better manage expenses by reducing or adjusting hours to accommodate slow or peak periods, shrinking coverage, and using part-time labor as appropriate.
- Utilities. Cultivators face high utility costs to grow and produce their product. To better understand where those costs are allocated, audit utility bills periodically. Some utility companies have energy programs to help assess facilities and provide expert efficiency recommendations. Look, too, into conservation strategies like alternative lighting, high-efficiency HVAC systems, and rebate programs.
- Embedded Intangibles. Embedded intangibles are sometimes bundled into new equipment offers. As you purchase new equipment, consider products that come bundled with rebate programs or energy-related credits. Certain energy-efficient choices could also help you qualify for a lower electricity rate.
- Automation. Consider areas of operation that could be enhanced by automation. For example, many cultivators hand trim leaves at their facilities when machines could be used to automate that function, thus reducing labor cost. Other automation options include kiosks or online ordering capabilities that streamline the sales process and may reduce the quantity of budtenders needed.
- Retail Space and Buildouts. If you are just starting out, take an impartial look at actual square footage needs along with aesthetics and retail display merchandising. How much more will your customer spend and profits grow with a more extravagant build out? Some of the more successful dispensaries we have worked with are unadorned and crammed with product. Look, too, at profit margins associated with displays. Could you bring attention to higher-budget products in prime positioning instead? For cultivators, lean toward more functional high ceilings and multi-levels versus single-level facilities of greater cubic footage.
- Tax Strategies. Assess your books and make sure you are capitalizing on anything that maximizes Cost of Goods Sold (CoGS). Allocate everything that belongs under CoGS appropriately to obtain the full allotted tax deduction. On a federal level, you might qualify for the Employee Retention Credit. On the state level, look into R&D credits along with incentives for workforce inclusion programs or for the employment of veterans or formerly incarcerated individuals. Other potential tax strategies exist for employee benefit programs, 401(k) plans, and Employee Stock Ownership Plans (ESOPs).
- Cost Segregation Studies. A cost segregation study may be of particular benefit to cultivation and manufacturing facilities looking to decrease their income tax by pulling assets into a shorter depreciable life. Keep in mind, though, that this may potentially increase excise tax at the state level. So, weigh the outcome thoughtfully.
Cost-saving strategies will vary based on the type of license you hold, i.e., whether you are a cultivator, retail operator, manufacturer, or laboratory. So, consult with your advisors, consider all options, and see what works for your operation.
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