Multistate Distro: Catching Up With Nabis – Cannabis Business Executive

It is always edifying getting caught up with a distributor, especially a cannabis wholesaler whose bones were built in the hardscrabble California markets, where buzzards get fat on the unwary, the unlucky, and the lazy. To that end, Cannabis Business Executive recently spoke with Nabis co-founder (with Joon S. Lee) and CEO Vince C. Ning to get a sense of the development of the San Francisco-based company and the market since our last profile in November 2022.

It had been a productive year because of headwinds, reported Ning. “I would say business has increased by a couple of percentage points,” he said. “A lot of that came from the fact that in this market environment, brands who used to prefer self-distributing their own products no longer chose to do so when capital became more expensive. Everyone is trying to go asset light, if you will, and particularly as a brand, their main functions are sales and marketing and storytelling. I think they don’t necessarily view distribution as a core competency. They built their business that way out of necessity, and now that they’re trying to expand out of state into other markets to grab market share as well, they’ve had to decide whether to continue building that distribution muscle, and a lot of them choose not to. That’s where we come in, and I’d say today we probably deliver about 12,000 orders on a monthly basis. Multiply that by 12, we probably deliver about 140,000 orders a year. It was about 100,000 orders per year when we last spoke, and we have grown to around 140,000 orders per year.”

Nabis also announced in April the opening in Woodlake, California of “the largest cannabis-dedicated distribution warehouse in the world, an investment that enables the company to increase capacity by as much as 400%.” The 87,000 square-foot custom facility, which will ultimately add 100-150 jobs to the Nabis payroll, an addition of almost 40 percent, was long in the planning stages.

“Since we opened our super center in Woodlake, California” said Ning, “folks have thought we decided to build in response to something this year. In fact, we decided to embark on that project about two years ago, before a lot of recent events occurred. Timing is always of the essence, but we had projected that we would run out of space in our existing warehouses, and not necessarily that there would be such continued growth in the market. I guess those two go hand in hand, but I don’t think that we foresaw such spurred growth in the last year. I would say that it’s certainly been to our benefit, and we just felt like we needed it given the division of our distribution infrastructure.”

But its addition is not only about capacity. “California is a long stretch of a state that’s vertical,” noted Ning. “We used to only have warehouses in Oakland and LA, in the major demand centers of California, but for efficient distribution networking, we decided we wanted to create a hub-and-spoke model where instead of storing inventory in each local region, we wanted to store inventory in the center of the state so that our customers have a better turnaround time to deliver products anywhere across the state. Previously, one of the main challenges was how to balance inventory across Northern and Southern California, and as a brand, particularly a newer brand, you just don’t know where your sales volume is going to lie month to month.

“And so, it was constantly this back and forth,” he added, “where I shipped an order in Southern California, but I still have one lingering unit up in Northern California. Part of the solution that Woodlake brings is that we now store all of our main inventory there and then treat our NorCal and SoCal facilities as sort of layover cross-dock facilities. That has allowed brands to treat their inventory like cloud inventory if you will: one set of inventory for the entire state, no matter where you’re delivering to. So, that’s the experience we wanted to solve and the main reason we wanted to put a warehouse in central California, and I think the capacity issues that it solves certainly came in handy around this time of year as well.”

Even better, it has capacity to spare and more to construct if needed. “We’ve filled about two thirds of it at this point, so there’s still a good amount of capacity left,” said Ning. “But it’s by no means running at full capacity, which also means there’s a lot more room to grow. We serve just over 20 percent of the California market share, I’d say, and based on our current capacity constraints, we predict that we can fill about just under a third of California’s market in our current warehouse in Woodlake. If we do start to reach 90 percent capacity in utilization, we contractually have the land and options to build three more of the same exact size warehouse right next to each other. So, capacity should not be an issue for a while, as long as we start those construction projects soon, because it takes more than a year from a lead time perspective to get things sorted out.”

Growth has also brought more brands into the Nabis fold, which currently has about 300 brands in its portfolio. “There were probably just over 200 mid last year, so we’ve grown significantly in terms of the number of brands,” said Ning, “but the unfortunate situation is that while the unit count has gone up, the price per unit has actually gone down, mainly because flower became a lot cheaper. Since then, flower has bounced back in terms of price per pound, but at the same time things have gotten competitive. In terms of market share, while the number of units has certainly continued to skyrocket a lot more than the dollar amount that we’ve shipped, everything still exhibits an upward trend. Today, we ship just over $400 million worth of wholesale products per year, which equates to just over 40 million units per year. $10 per unit is about what I would benchmark across the platform as the average wholesale price per unit of any given product. Some are 20 bucks, some will be five, but the average on our platform is about $10.”

It sounded as though California remains a competitive market overall for brands, but Ning said appearances can be deceiving. “There are a lot of ways to measure this,” he said when asked about the market. “Objectively, it’s still competitive, probably still the most competitive space in the tier of the supply chain. But recently, due to the competitiveness, a lot of brands have fled the market in California, whether they’ve gone out of business or, as I’ve noticed a lot of brands doing, they actually leave California, hit the pause button, and then launch their products in other state markets where it’s less competitive, in order to make margin and continue to build consumer loyalty in other regions, and to save the opportunity to come back to the California market once the environment is a bit less choppy.

“I mean choppy from a brand-to-brand competitive standpoint,” he added, “but even beyond that, there are AR problems where retailers aren’t exactly paying their vendors on time for one reason or another. I think a lot of that is spurred by the market environment as well. With that in mind, yes, the numbers probably state the clearest picture, but I would say that there are a lot of brands that have left California in the last year than we’ve normally seen on the platform. And, for better or worse, I do think that has probably created in the last six months a little bit more stability in the brand space, just given there’s slightly fewer players, and some the remaining ones are finding creative ways to consolidate as well.”

A Taxing Pain

The last time we spoke also, Ning had said that high tax liabilities among retailers was “bad.” Was it still a problem? “Probably the biggest change in the last year was that distributors used to be responsible for collecting and remitting the excise tax to the state, but the tax responsibility was transferred over to the retailers,” he said. “It felt logical that if the retailer was collecting the excise tax from the consumer, why pass it up one more rung of the ladder to distributors only to pass it the state, which felt it could just collect directly from the retailers and save everyone some trouble.

“Since then, though, what’s occurred is that a lot of retailers haven’t paid their taxes,” he added. “From what I understand, the state has missed a lot of their tax revenue goals in this endeavor, and there’s probably a few reasons for this, but ultimately what’s going on is that retailers aren’t exactly paying taxes on time. It’s a challenging environment out there, and I think it speaks to how difficult it is to be a retailer. California in particular has a challenging environment because of the fact that not just the taxes, but a lot of these local municipality ordinances drive the licensing. So, while there are over 1300 retailers in California, it’s hard to open up new stores, and every store has slightly different regulations because they’re beholden to local ordinances as opposed to one state-level law. That also means it’s hard to just scale a business if you’re a local retailer. I think those are some of the reasons why it’s difficult for retailers to collect enough tax and save it up to pay the state.”

Has that dynamic impacted Nabis? Has it had trouble getting paid, or had to cut off retailers? “I would love to say no, but we certainly have,” replied Ning. “We try to be more lenient, and there are retailers that are a bit more slippery than others, but generally speaking on our platform, we have a consignment model where brands sell directly to retailers. We provide all the logistics and collections functions, but at the end of the day what is stated on the invoice is that the seller is the brand or the manufacturer, and the buyer is the retailer. So, we generally try not to get in the way of a sale from occurring, because that sort of receivables exposure falls squarely on the manufacturer, or the brand, and they should be free to make their own sales decisions.

“Given our collections activities and how much we see in the market,” he added, “this is where our data provides a ton of insights. We created a proprietary credit scoring system that resembles the FICO score, and we make it transparent to all. That is different from a normal distributor that keeps this information in-house as part of their IP. For us, we know that in order for us to collect properly on time, it starts with the sales decision. So, we try to arm the brand who’s doing the sales with as much information as possible about the retailer’s credit worthiness before they make that sale. It also makes our lives easier at the end of the day when we go collect AR on behalf of the brand. But generally, we try not to restrict unless the retailer is very delinquent or fraudulent.

“So, across our platform, from a percentage basis, I would say we probably restrict less than 5 percent of all retailers,” he clarified. “And when we did that last year when the credit market fell out, at first the brands were not quite in agreement with our restrictions. But I think at this point, a lot of folks have made certain mistakes selling to bad credit retailers, they understand who the bad actors are in the space, and they trust us now to make that decision, because we’re actually providing the data to support that decision as well.”

Eazing the Load

Nabis also recently announced a new partnership Eaze. I asked Ning about the significance of the deal. “We work with every retailer in the state to fulfill to them,” he said. “The significance of this is that there is a pretty large segment of the market – a double digit percentage of the market – where retailers create their own private label brands, and as a fulfillment platform we’d like to be able to service that market. Previously, when you’re someone like Eaze or even another retailer starting your own private label brand, given there’s only a limited number of stores, you can self-distribute to your own stores pretty easily, because you’re not actually delivering it to 1300 retailers across the state: you’re delivering to perhaps your 10 stores, or even fewer. And it’s not something that we’ve been able to demonstrate that we can provide value for as a logistics player in the market up until now. Eaze has dozens of delivery depots, and it’s actually quite difficult for them to get their products to that many store locations, especially if they’re spread out across the state. They started having trouble with how they distributed, which resembled more of like a self-distributing manner, and as a result they came to us and asked us to deliver those products to them.

“So, basically they are a consumer delivery service, meaning they deliver from their depots to average consumers across the state,” he clarified. “We deliver from our depot – in Woodlake, or NorCal or SoCal – to their individual consumer delivery depots. So, we do wholesale delivery to them, and they do the last mile delivery to the individual. We’ve always done that for third-party brands, like Rock Garden, but the difference now is they’ve handed us their distribution rights on the wholesale delivery side for their own brand as well. So, while they got 20 percent of their shelf space from us before from independent brands, they created a brand called Circles, and that’s strictly a brand that sells into Eaze. Those products, which they used to self-distribute, now sit in our warehouse, not theirs, and are delivered by us to their depots.”

Do they also want to sell that brand into retail stores? “The strategy may change eventually, but for now it’s an exclusive brand you can only find on Eaze,” said Ning. “As a marketplace platform, you want to have certain exclusive products so that people have a reason to come back. It’s kind of like when you go on Netflix; they have like Netflix Originals, which keeps you coming back to their platform as opposed to Disney+ or MAX or something like that.”

Eaze has always had access to brands that are on the Nabis platform,” he added. “The main difference now is that we handle the delivery of their products to their own stores. What’s significant about that is that it marks another capability of ours, which is to continue knocking on the self-distribution door, and to start serving retailers and their own products, which we were not able to handle before. That has been a big change in how the market views our platform and our ability to be able to service various segments of it.”

More Funding with FundCanna

Nabis also recently entered into a new partnership with FundCanna to shore-up funding for stretched producers. Ning explained, “Our platform comes with this arm of the business called Nabis Capital, which basically is a factoring service that allows brands to be able to get a more guaranteed and instant cash flow from us rather than waiting for the retailer. The unit level workflow is a brand will sell, let’s say, $10,000 worth of products to a retailer. Oftentimes that order is sold on credit, so it’s sold on net 30 terms, which means they have to wait 30 days for the retailer to pay them back. So, the invoice is due in 30 days, but brands often need that cash to be able to start producing their next batch of inventory, so what they’ll do is they’ll sell that invoice, which is an asset on their books, to us for, let’s say, 97 cents on the dollar. We’ll buy that invoice from the brand, and then we will hold the invoice and wait 30 days to collect from the retailer, but we’ll just pay a slightly discounted price to own that invoice, and the brand gets to take our money and go start producing our next batch of inventory.

“That creates a more efficient supply chain,” continued Ning. “Brands get guaranteed payments sooner, and they get to start increasing the speed at which they produce and sell their inventory so that they never run out of products on the shelves, and they don’t have to wait until it sells through before producing again. What the partnership with FundCanna does is, whenever we buy an invoice, we definitely check and underwrite the retailer that the invoice lists on the piece of paper to make sure we have a guarantee of collecting it 30 days later. So, we factor for probably 50 percent of the state of retailers out there, and our underwriting mechanisms don’t necessarily mean that a brand can sell all of their invoices to us so they can get enough cash flow to actually start producing their next batch of inventory.

“Where we aren’t willing to continue extending credit to the market of brands,” he continued, “FundCanna can provide that. They are an actual debt fund and credit fund, so they can provide larger lines of credit than we can. We are a distributor that has credit capabilities, and while we will continue to build that strength over time, they’re more specialized as a credit provider and can provide larger amounts of capital than we can. So, it’s more of an augmentation on our Nabis Capital platform, so that if a brand grows larger than what we can provide from a capital-based perspective, we will refer that brand to FundCanna to underwrite them for a large line of credit.”

Expanding the Team

Ning also spoke to the decision to expand executive roles at the company with key leadership appointments, including a new president. “I would characterize it as another year of continued maturation of our internal talent team,” he said. “We pride ourselves on hiring the best folks from all sorts of industries, whether it’s cannabis or tech. I think those are given. And our new president, Sean Arroyo, who we just hired, is a veteran who actually started off his professional career in the military. He brings a level of discipline and rigor into our internal organization, and he’s been around the block. He started his own microbrewery, so he’s been an entrepreneur in a regulated space, and beyond that, he was a former executive at Lime, the scooter company, where he was the head of new initiative and helped launch Lime in France. That is a company that is at the intersection of technology and transportation in a highly regulated environment.

“And so, certainly when thinking about bringing a president into the organization, we wanted a person with an eclectic background in order to be able to grow our team and build the vision that my co-founder Joon and I set out,” he continued. “But we’re currently also a Series B-stage company, and the way we want to grow our business is to eventually go public. In order to get from here to there, we need to build a lot more internal rigor around reporting, KPIs, OKRs, monthly business reviews, and more. So, for all intents and purposes, what Sean brings to the table is that he’s seen what a public company needs from an internal reporting perspective, and he’s helping shepherd our company to grow into having that capability and muscle. I think our executive team is finding it to be an interesting and strong learning experience to continue to grow into that mold, and it just allows Joon and me to be able to free up our bandwidth and time running these highly important meetings and also focus on even more strategic endeavors.

“For me especially, it allows me to focus on national expansion,” he added pointedly. “We’re about to launch in New York, we just got a warehouse here – I’m actually in New York right now – and we’re starting to look at many other states as well across the nation. So, those all take time to go explore diligently, and it certainly allowed me to be able to free up some time to go do that more effectively.”

Expanding the Footprint

How is Nabis going about expanding in this new sort of asset-light environment? Is it a capex-heavy scenario where a lot of money will need to be raised to build more massive warehouses, or will it be a slower, more methodical opening up of new markets, taking perhaps a regional view?

We’re taking a state-by-state view,” said Ning, “but there are certain markets where it makes sense to go asset heavier, like we have in California. New York is a big enough market where it makes sense, and it’s far enough away from California that we’re going to need a whole separate set of infrastructure there upon federal legalization. Even so, the way we see it, we’re going to have to have a distribution network that spans all 50 states once federal legalization occurs – before or after – and I think for us it’s cherry picking which markets are the best to plant down that infrastructure today. So, for instance, if you have infrastructure in New York, do you really need a beefy set of warehouses in New Jersey, because you can’t cross state lines. But perhaps eventually, you can get to New Jersey from one of our New York warehouses, and that’s where we need to make the decision about what we need long-term and then work backwards from there to decide where we want to plant down that expensive infrastructure today.

“For a state like New Jersey,” he added, “I think it’s okay to wait a little bit longer to get into that market, because we can eventually back our way into it from a state like New York that’s more of a central hub in a region. But at the end of the day, we need presence there, and one way we do that is by being in California and New York, the two brand capitals of the world. So, having relationships with the strongest brands that will eventually be national is a big leg-up for us once that time comes. Beyond that, we’re also thinking of other ways to become more asset-light and provide our factoring services, or a subset of all of our platforms, into a market like that. So, whether it’s providing just our wholesale marketplace or our factoring services, there are other ways to step into a market and get a foot in the door to get Nabis’s name out there without doing the heavier fulfillment side of things in that market. It’s where my statement about every state is its own decision right now comes from, because not every state will require the same playbook.”

That said, wherever they do decide to construct, is he planning on building automated robotic, futuristic warehouses in the Amazon model? “We’re not quite at the stage where we need full-on Amazon robotics just yet,” said Ning. “Fortunately, cannabis is relatively light, and we can get away with our operational staff and human labor to be able to move boxes around. But we’re definitely getting to a point where everything is sort of palletized, and orders are getting larger. We sell beverages by the pallet, for instance, and so a lot of the heavier assets require heavy machinery and automation.

“It’s not quite there yet for the industry,” he added, “but I think the heavier hardware automation will be needed sometime after interstate commerce. For the states that we’re in right now, we do set up the warehousing, the logistics, and all the software technology to route and manage our inventory, and that’s how we’re thinking about it today. We definitely leave room and space to be able to continue leveling up our internal hardware to continue automating our system to make our order fulfillment more streamlined, but today it’s not quite where Amazon is right now.”

But the future if coming and nothing can stop the automation of the industry, at least as far as scaled fulfillment is concerned. I wondered what Ning thought of the potential catalysts hanging out there – possible rescheduling or passage of a Safe or SAFER banking bill.

“I do think that rescheduling itself is a strong move,” he said. “We’ve been waiting a long time for anything to happen on the federal level from a policy perspective, so whether it’s SAFER Banking or reschedule or deschedule, people have their preferences about what will help the market the most. They will all help, but my preference right now is getting rescheduling through, because that would immediately remove 280E tax regulations on so many businesses that exist in cannabis today.

“Just anecdotally,” he added, “after speaking with various operators across the industry, you’d bring back up to 20 percent of peoples’ bottom lines back to their business. And it’s important to note that that capital will be brought back to people’s balance sheets either immediately within the same year or in the following year. That is a huge windfall to the industry, because it’s not diluted. It’s not like SAFE Banking, where even if that passes banks have to create their own internal compliance, so it will still take a while before the capital starts flowing into the industry, and brands will have to go and raise that capital, which could still be dilutive, and it will cost them something.

“But if you’re getting money back from the IRS because you’re paying less taxes,” he continued, “that’s immediate money you can use for working capital to grow your business. So, I do think that is probably the biggest upside. It’s not a silver bullet for saving the industry, but I do think that it will have the biggest net effect on the industry in the biggest positive way, and it’d be the fastest impact compared to all the others.

“But I wouldn’t complain if SAFER passed,” he added. “I think that is the first time it’s passed the Senate Banking Committee, but it still does need to hit the floor and pass the Senate itself, and I do think Senator McConnell is a big block to a lot of these cannabis bills. I’m not trying to be a pessimist, but I’m not as excited as the market is just because it passed the Senate Banking Committee, because it needs to actually get through the Senate. If it passed, though, I think that it would renew a lot of interest in the cannabis space from capital providers, so I’m not against it by any means. I’m just a bit more conservative on the outcome.”