Ben Kovler, the CEO of Green Thumb Industries, presides over a cannabis empire that operates in 12 states and stretches from coast to coast.

Kovler is based in Chicago but Pennsylvania has a special place in his heart. GTI operates nine retail stores across the Keystone State under the Rise brand and cultivates its own cannabis strains in an expanding growhouse in Danville. It has the ability to open a total of 18 stores in Pennsylvania.

“Pennsylvania has unbelievable dynamics,” said Kovler in a recent phone interview. “It’s a highly regulated state with 12 million people and a great marijuana program that’s just taking off. It’s such an amazing state.”

In mid-December, GTI opened a Rise Dispensary in King of Prussia. It quickly followed that with its first store in New Jersey, another tightly regulated market for which Kovler has high hopes. The company plans to open a marijuana growhouse in Paterson in early 2020. With tough barriers to entry and strictly limited permits to operate being granted by the two states, GTI is placing big bets on both sides of the Delaware River.

On the national level, GTI is going great guns. Given the company’s relentless focus on shareholder returns, analysts consider GTI among the three top tier cannabis companies. Vivien Azer of equities research firm Cowen and Co. marveled this month at GTI’s adjusted operating profit margin, which had reached 21% in the third quarter despite a $17 million loss during that period. And, in a capital-starved environment, GTI has enough cash on hand to fuel expansion, Kovler said.

It’s not just financial types impressed by GTI’s achievements. The company’s proprietary Brownie Scout strain — believed to be the strongest marijuana flower ever grown at 37.5% THC — was enthusiastically embraced this year by cannabis aficionados.

Following MJBizCon, the massive cannabis convention earlier this month that drew 35,000 people to Las Vegas, The Inquirer spoke with Kovler. Though cannabis stocks took a beating this year, Kovler said the best is yet to come.

This interview has been edited for clarity and concision.

Why has the marijuana industry focused on the Mid-Atlantic states and what makes Pennsylvania and New Jersey so attractive?

Pennsylvania and New Jersey, like my own state of Illinois, have a very limited number of operators and huge amount of demand. We just completed a big expansion in Pennsylvania and we’re going again. It’s all about the return on invested capital. It’s the standard with which we judge our business.

New Jersey has been around for a while, yet it’s an undeveloped market. Until recently, there were only 60,000 patients. As of last week, there were six dispensaries and only one had concentrates. We opened a retail shop in Paterson last week. It’s like Prohibition is ending and only one bar has hard liquor. So here we come. We’re [metaphorically] going to make vodka and people are going to like it!

Why have you avoided California? When you spoke in Las Vegas, you said it’s because you “don’t have an edge there.”

The core of it is that it’s not a good business opportunity in California. And that’s for exactly the same reasons that it’s a great business opportunity in Pennsylvania, New Jersey and Illinois.

In California, the deck is not stacked in our favor. There’s a huge market with a lot of people who consume cannabis and like it, but there’s an unlimited number of licenses and there’s a huge illegal market. There are hundreds of illegal stores in Los Angeles alone that aren’t registered with the state. That’s a foreign idea in places like Chicago, Philadelphia and Boston. In L.A. they’re like pop-up stores that spring up and then go away. Still, we’re very much watching and being strategic about how we gain market share in California over time.

Ben Kovler, CEO of Green Thumb Industries, believes Pennsylvania and New Jersey will eventually legalize cannabis for recreational adult use.
GTI
Ben Kovler, CEO of Green Thumb Industries, believes Pennsylvania and New Jersey will eventually legalize cannabis for recreational adult use.
What are you up against in Pennsylvania and New Jersey?

In Pennsylvania, we’re up and running — we’re already the largest operator in the state. We have nine stores and recently opened in New Castle and King of Prussia. We’re opening 18 stores total in a very steady disciplined approach. We’re building production and our lines of branded consumer goods. We’re already through three expansion phases, starting the fourth, and penciling out the fifth.

Patients are getting product but the challenge is there’s not enough supply.

The state has added a number of new qualifying conditions [this year, such as anxiety to a list that includes chronic pain and nearly two dozen other ailments] and it’s easy for people to become registered patients. But maintaining adequate inventory is a challenge. It’s not the number of suppliers but the amount of capital that can go into creating the product. In Pennsylvania, there’s not a Mendocino, Humboldt County, or an Emerald Triangle [all well-developed marijuana farming areas].

What do you think is causing the drought in smokable flower?

It’s because the market has taken off. There’s a huge demand. It takes time to build facilities. And the market needs more capital to expand. Because of federal laws, we just don’t have access to capital in the same ways that most other businesses do.

Have GTI crops been hit by mold?

Mold is not a problem for us. But growing plants has challenges all over. We’ve heard of others having problems. It’s a challenge through the summer months.

How did the vape crisis effect GTI? Have sales rebounded?

We’re focused 100% on consumer safety. We’ve seen consumer trends shift and move to consumables. The problem has been vitamin E acetate added to illicit products from illegal manufacturers.

What about edibles such as infused gummies, chocolates, and drinks? And how big can that market get?

It represents an opportunity for growth. Both the Pennsylvania and New Jersey markets should be $1 billion in size. It’s up to the operators to educate the consumers about it. There’s a tidal wave of demand for this product.

Will cannabis businesses be able to access capital soon?

No, I don’t think so. But it could happen slowly over time. Last year was a frothy year but things have tightened up again. Without a major change out of D.C., it’s not going to get better.

You’ve said you’re investing heavily in people. What are you looking for that other large cannabis companies aren’t?

We win because of our team. Like [famed UCLA basketball coach] John Wooden used to say, “the star of the team is the team.” Essentially, we’re looking for “athletes” — people who are smart, nimble, and flexible with an ability to execute. We’ve had the luxury of people seeking us out. So we’ve invested heavily in talent retention. What we’re doing has never been done. For an individual who has been successful in a Fortune 500 company and wants to practice standard operating procedures, who is looking for instructions on how to build a marijuana company, this is not the spot for them.

Why is the industry emphasizing cannabis as a “consumer packaged good,” and is that approach new for GTI?

When we started in 2014 we said this would be about branded consumer products. When we first went public, we were one of the first to talk about it. We believe it’s similar to alcohol, tobacco, and food and beverage.

We have a singular focus on brands. It’s all about putting the consumer first. We carefully think about who that customer is. Are we talking about a single middle-aged male who prefers flower, are we talking about a pain-relieving ointment, or an older female who needs to sleep living in Florida. Each of the brands we have appeals to different consumers and we’re heavily investing in that.

Is the cannabis industry delivering on promises of jobs and tax revenues?

It depends on where you’re talking about. It’s good where there are continued legal, regulated sales. In those states, consumer access is going up, which translates to more jobs, more tax revenue, fewer opioid deaths, and a better night’s sleep. As the data materializes, I also think you’ll see decreases in drunken driving and alcohol and related incidents.

We think the only state that has a tax problem is California because of the illegal market. As other states get going on the adult-use side — as in Massachusetts, Colorado, and Illinois — we think the tax revenue will materialize.

Everyone in the weed world usually talks about their “exit strategy." Are you planning on eventually selling GTI to Big Alcohol, Big Tobacco, or Big Pharma?

It’s hard for those kinds of companies to put capital in the space because marijuana remains federally illegal. We view this as building a long story, three to five years out. The systems and scalability will make it attractive, but we’re not building this business to sell it.

However, in a world where tobacco is shrinking 6% to 7% a year, and beer, wine, and spirits are struggling for low single-digit growth, cannabis will become very attractive for those companies. We’ve already seen Altria [the tobacco giant formerly known as Phillip Morris] go with Cronos, and Constellation Brands [the alcohol powerhouse that owns Mondavi and Corona] go with Canopy Growth.

But we’re not playing for this month, this quarter, this year. This is a long-term business model that has material upside. We’ve spent four years building that footprint.