Charlie Bachtell: The Inside Story of Cresco Labs & Impact of Rescheduling #TheDime

Charlie Bachtell: The Inside Story of Cresco Labs & Impact of Rescheduling

Charlie Bachtell: You have to make sure that you're pulling on those levers to make yourself as competitive as you can be with the rules that exist today, with an eye on what the future could bring. But you've got to be able to play the game with the rules that currently exist. Bryan Fields: What's up guys, welcome back to another episode of The Dime. I'm Bryan Fields, and with me as always is Kellen Finney. This week we've got a very special guest, Charlie Bachtell, founder and CEO of Cresco Labs. Charlie, thanks for taking the time. How you doing today? Charlie Bachtell: I'm doing well today, thanks. Thanks for having me. Excited to be here. Bryan Fields: Kellen, how are you doing? Kellen Finney: I'm doing really well, really excited to talk to Charlie. For those of you who don't know, I'm a huge tech and science nerd, and Cresco Labs I feel like has always been on the forefront of innovation, especially in the cannabinoid space. I remember reading their patents back when I was an operator and consulting, so just really excited to talk to Charlie today. Additionally, I think there's some West Coast alignment here — we both maybe have an Arizona history — so very excited to share that. How are you doing today, Bryan? Bryan Fields: Yeah, that's great, and I'm glad Kellen you set that up, but just to clarify — we know Charlie grew up in Arizona, but of course with his operations closer to the East Coast, I didn't know if maybe his loyalty could be a little more mixed. So Charlie, we got a little East Coast/West Coast battle — if you had to choose, which one are you choosing? Charlie Bachtell: I had to clarify this. I believe Arizona — not only did I grow up there, went to undergrad at University of Arizona, going back there for Christmas, my parents still live there. So yeah, I have an affinity for out west. Bryan Fields: Let the record reflect. So Charlie, before we dive in, we'd love for you to give our listeners a little sense of what makes Cresco Labs more unique compared to some of the MSOs they may be more familiar with. Charlie Bachtell: I think we've always had a focus on the consumer product side of the category, going back to the earliest days of evaluating the space. I know that doesn't sound like a point of distinction today because everybody talks about it, but when it's authentically part of your DNA, part of the foundation and really the mission of how you built the company, I think the data supports there being a point of differentiation there. We take pride in having the highest market share in states like Illinois, Pennsylvania, and Massachusetts from a branded product portfolio standpoint. We take pride in having the number one branded product portfolio in the country. That's one of the things that has always been at the forefront of Cresco's approach to the marketplace. And then, of course, firmly rooted in helping cannabis develop into a normalized, professionalized industry — for us that's a big emphasis on government affairs, both at the local and state levels and at the federal level too. I think if anything, the last year has shown this sector that some form of federal reform is going to be required in order for the sector to be valued at what it should be valued at. So from the standpoint of creating value for shareholders, it's a big part of the way that Cresco has always approached the industry and always will. Taking it one step further from an infrastructure standpoint, we've seen the emphasis shift from wholesale to a focus on retail. Focus on data has been at the forefront for us for the last three or four years, with a lot of emphasis on the tech side. We have our own proprietary system at retail, and we use the retail data now from our roughly 70 Sunnyside stores across the country. We use that data heavily to know our consumer, and that data feeds what we do on the product side, the brand side, and also tells us how we're competing in the marketplace. Kellen Finney: How much can you use the data from, say, the Illinois market when you're looking to make decisions in a Michigan or an Ohio, or even a new state you haven't been in — is it comparing apples to apples, or do you have to change the lens you're looking through? Charlie Bachtell: They're data points for sure, but each of these markets is different. There are 40 states now with a robust medical or adult-use program, and not one of them is exactly the same. Consumers tend to look and feel and want similar things from market to market, but the market structures themselves make certain approaches more viable than others. The nuances of regulatory structure have to be fed into it too — maybe a little different from traditional CPG, where there isn't as much emphasis on local regulatory components. But yeah, we get great intel from a state like Illinois on what consumers like, what they're responding to, both from product formulation standpoints and in how we approach that consumer through our e-commerce platform for Sunnyside — what promotions they respond to, what drives tickets, what drives visits. All of that gets aggregated and we try to use the data as well as we can across the footprint, with nuances state to state. Kellen Finney: There's got to be a prediction element to it where you're unsure — can you give us a scenario that comes to mind when decision-making with data where you feel confident about 60% of the information but the other 40% is gray? Charlie Bachtell: I've learned a lot of lessons in the space, like any entrepreneur in an emerging industry — you're going to stub your toe, you're going to have foot faults, and you try to mitigate and minimize them as much as you can, and make sure you only learn them once. I was actually just out in Ohio last week, and that was part of the conversation with the local team — we've been through a few of these now, so we've learned a lot of lessons from getting things almost right and totally wrong. It's okay to get things wrong; we just don't want to relearn the same lesson twice. There's no straight line in how these markets develop or transition from medical to adult use — there are curves and roadblocks — and that's all okay, we just want to incorporate what we've seen before into what we do going forward. Bryan Fields: On this journey, you've taken different approaches in different states — in Illinois you have beautiful manufacturing facilities, and in some states you're wholesale and retail. Can you talk us through why you've approached different states that way — is it in preparation for federal legalization, or more about fitting into the regulatory environment of that state? Charlie Bachtell: I think it's probably both. If you go back to the very early days of Cresco, the main reason we focused on the branded product side was this thesis: in the long term, cannabis looks and feels like traditional CPG, and in traditional CPG, brands matter — that's where a lot of value gets created. You'll have specialization on the production and distribution side, but brands matter a lot. So that's our North Star, making sure we're applying the right resources and focus there for long-term shareholder value. In the interim, you have to play the game with the rules that exist, so finding the right levers to pull in each state — based on how many licenses they allow on production versus retail, or otherwise — figuring out the best combination for that set of rules is what we've been focused on, especially the last 18 months or so. Kellen Finney: That's perfectly said, but I want to push on it a little because that's not easy — there are no exact right answers, given geographic relationships, cost for infrastructure, and other factors. Is that the benefit of having a central HQ and asset partnerships, integrating into a geographic portfolio, so you have assets ready depending on how a scenario plays out? Charlie Bachtell: Yeah, absolutely, and it's the benefit of having built the muscles in those different categories too. Coming in focused heavily on branded product and not retail — while that might be the right long-term strategy — may not be viable for the interim period, and who knows how long that interim period lasts. We recognized that probably four-plus years ago and really started getting into retail, not just bringing in retail assets but retail capabilities. I said back in '21 that instead of being a company that has retail, we became a retailer. I still feel that's what we've tried to do — we are a retailer, a distributor, a producer, and a manufacturer. Having muscles in those various disciplines allows us to pick and choose and pull on the right levers based on the market dynamics we see in each market — whether that's asset-heavy, full vertical, maxed-out licenses and big production facilities, or an asset-light approach somewhere in between. Bryan Fields: Are there certain brands your team favors when entering a new market — a go-to brand — or is it more about mixing in data associated with that new market? Charlie Bachtell: The easiest example is Remedy, one of our original brands, which is a very medicinal-focused brand — we used to call it "clinically boring," but it was intentional, fairly white packaging without a lot of frills, because it was appealing to a consumer who wanted something that would look at home on the shelves at a CVS or Walgreens, as opposed to a High Supply brand or a Floral brand, which is more of a connoisseur-leaning line, or Wonder, which is our kind of fun, freewheeling Vegas brand. We've developed brands that approach different consumer bases very directly and appropriately, and you could extend that to what type of market it is, what type of consumer base, to help inform which brands we launch with in a new market — whether it's Remedy on one extreme or Floral on the other. Kellen Finney: As a retailer, with the data, it's probably pretty clear what might be an opportunity for Cresco to move into a certain market with a certain product category. Charlie Bachtell: Certainly directional, for sure. I don't know if it's always right, but it's always directional and helpful, and then you learn from the experiences of what a consumer base looks like as a mature medical market versus early days of adult use versus a more mature adult-use profile — all three are different. Kellen Finney: What's the law of averages in terms of bringing a brand to market successfully in the cannabis industry — is it like one in five? Charlie Bachtell: I don't have perfect data for you on that, but it's more challenging than it is easy. Bryan Fields: Rescheduling seems to be a major catalyst on the horizon, maybe sooner rather than later. What specifically does rescheduling do for Cresco's business? Charlie Bachtell: Primarily it's the economics of rescheduling. We've been spending a lot of time over the years thinking about how you mitigate the impact of IRC 280E — the draconian tax consequences of being a Schedule I or Schedule II substance. I don't think, two or three years ago, that getting it rescheduled was the clearest path to mitigating 280E, but it's presenting itself now as the most likely and most near-term opportunity to get out from underneath that. That would be the largest impact for Cresco as a company. For cannabis in general, it's a federal-level reform, and while there's a valid debate on whether it's sufficient or the right way to go about it, everybody has to acknowledge that if it happens, it's the first example of federal reform we've seen in generations. Usually I don't think it'll be the last — it allows for research to be done incredibly simply, and data is helpful for legislators to make decisions too. So the longer-term impact of rescheduling is that it puts you on a path to broader federal reforms, and in the long term the economic impact of that will dwarf the impact of 280E relief. But in the immediate sense, 280E relief will be very welcomed and impactful. Bryan Fields: Are there scenarios internally where, if this happens, you'd invest the freed-up capital into growth in new markets or fortifying existing markets? Charlie Bachtell: There's definitely discussion around what to do if that happens, but it's secondary to developing the 2024 plan, which does not include it. We've learned over the last couple of years that you can't handicap federal reform — it's difficult. Bryan Fields: Does federal reform automatically mean, say if rescheduling happens, that you could immediately start taking material from your Illinois manufacturing facility and selling it in the Michigan marketplace, for instance? Charlie Bachtell: You would need something passed that allows for interstate commerce. In theory, a Schedule III designation could allow for that if the operator and products went through traditional FDA channels and complied with all requirements for producing and distributing a Schedule III substance. But in reality, none of the state programs our businesses currently operate in would comply with the FDA approach to producing and distributing a Schedule III substance. So effectively, we're still just violating federal law in producing and selling Schedule I products today, and we would do the same thing violating federal law producing and distributing Schedule III substances if rescheduling happens in the near term. Bryan Fields: You referenced 2023 as the "year of the core" strategy. What is 2024? Charlie Bachtell: We haven't unveiled 2024 yet, but with the success we've created in 2023, you can expect some extension of that approach in '24 — maximizing what we started in '23 and continuing to lean into it, creating the healthiest Cresco Labs possible, which is how we create the strongest and most valuable Cresco Labs too. In years past, as we thought about the macro placement of cannabis as a sector, I've said cannabis isn't going to wait for you — we've got to move, we've got to create it, we've got to go. What we're seeing now as the macroeconomic environment in the sector converges is you have to be urgently patient, and do the things you need to do to make sure you've got a strong, viable company no matter which way the winds blow. That doesn't mean we take our eye off growth — we like the growth in our footprint. We're staring at Ohio, Florida, and Pennsylvania as growth catalysts, and we also always have one eye on other states, and if the right opportunity presents itself we wouldn't hesitate to capitalize on it. Kellen Finney: How much time do you spend actively preparing your business for federal legalization based on conversations on the Hill? There's been a boy-who-cried-wolf situation with things like SAFE Banking. How do you balance that rhetoric without getting whiplashed? Charlie Bachtell: You do, and in the same way you personally have to balance it too. You can't build a plan that includes the expectation of something happening at a federal level, and you really can't allow yourself to do that at a state level either. That's what 2022 and 2023 have shown us — it's not just at a federal level. We were supposed to be selling adult-use cannabis in Virginia on January 1st, and we weren't. And the way New York has transitioned from medical to adult use — I don't think anybody could have drawn that up if you go back a couple of years. You have to make sure you're pulling on the levers to make yourself as competitive as possible with the rules that exist today, with an eye on the future, but you've got to prepare to play the game with the rules that currently exist. Bryan Fields: Is there a market you're more excited about between Ohio, Pennsylvania, Florida, and New York? Charlie Bachtell: They all have their pros. From an absolute size standpoint, Florida could be really impressive, but you still need legislation passed before you get there — that hurdle still has to be crossed. Pennsylvania — we have a really large position and market leadership there, so a transition from medical to adult use would be a great opportunity for Cresco, but the legislative hurdle still has to be crossed there too. Ohio has already crossed the legislative hurdle, so you can start preparing for what adult use looks like. Not only do I think Cresco has an opportunity to improve our position on the retail side — where I think we have either the largest market share or are definitely top-tier — but not necessarily on the production side, so there's an opportunity to get up to our standard there too. And the delta between what the market is as medical and what it will be as adult use is the biggest of those three markets on a percentage basis. So if I had to pick, with the regulatory hurdle already crossed, I'd take the bird in hand — Ohio has the greatest upside for both us as an operator and the market itself. Bryan Fields: When we did our due diligence on Cresco Labs, people talked about the importance of data and technology internally. What was the origin of that focus? Charlie Bachtell: A lot of things come into it. Maybe it's the curse of a legal background — I like to flesh things out and get the right amount of data before a decision gets made, though you could argue I sometimes wait too long. We've also brought experienced professionals into the organization over the years who came from traditional CPG and are used to making data-based decisions, so the expectation was that we needed to get there — making decisions in the dark, flying blind, taking guesses just doesn't mesh with my personal approach. And credit to the tech leadership we have — arguably the best mix of industry experience and cultural engagement matched with professional capabilities. Our senior leadership on the tech side has been around cannabis for a long time in traditional markets, and their skill sets are best in class. We're very fortunate. Kellen Finney: What was it like melding those two cultures — tech people and legacy growers — in the early days? Talk us through building that culture. Charlie Bachtell: It's still an evolution, and it's never perfect, but one thing that was very helpful was that Cresco was formed to be a stakeholder-focused organization that cared about helping this industry develop. I did not get into cannabis to sell weed — I got into cannabis to help develop what I thought could be one of the most impactful industries this country has seen in generations. I actually teach a course as an adjunct at Northwestern Law School, part of the entrepreneurship clinic, on the dynamics and legal and regulatory issues in the emerging cannabis industry. What I tell the class every year is that successful entrepreneurship requires two things: you need to be able to spot the opportunity, and you need to figure out what you can bring to that opportunity to help it achieve its potential. When those two things get married, you see very successful entrepreneurial endeavors, and that's what Cresco has done from the beginning. With my experience in legal and regulatory work in banking, I saw what happened when an industry went through a total regulatory overhaul following the mortgage meltdown and the Great Recession in 2008, and I knew I could bring that experience to cannabis as it went from relatively unregulated to very regulated on a state-by-state basis. The other professionals who joined saw an opportunity to bring their professional backgrounds to help develop a normalized, professionalized industry around cannabis. Everybody at Cresco recognized that the only way cannabis gets to federal legality is if it becomes more normalized than it historically has been — you couldn't go from 2013 straight to federal legalization; it hadn't happened in 40-50 years of prior efforts. You had to develop a normalized industry where naysayers could see the sky didn't fall with medical, which allowed the adult-use conversation, and the sky didn't fall there either, allowing incremental progress. I think that's how we were able to bring cultures together — legacy culture and people who'd never tried cannabis but saw it as an incredible social change agent. Bryan Fields: Does the data your team has internally help with conversations with lawmakers and policymakers? Charlie Bachtell: Absolutely, and it's been both the challenge and the opportunity with cannabis — data wasn't available in the early days, and every year that goes by we get more of it. Think about the conversation happening in D.C. right now around the more progressive view of the social impact and responsibility cannabis has to shoulder versus the concerns of a more conservative viewpoint — the thing conservatives can wrap their heads around is public safety, and data is how you bring both perspectives together to show that a responsible, respectable, and resourced state-legal cannabis industry can achieve both. Without the resources it needs, and taxed at whatever crazy effective rate because of 280E, you're not going to get a diverse and inclusive regulated industry, and you're not going to get the public safety benefits either, because the illicit market or alternative unregulated intoxicating cannabinoids will flood in. Data is the basis of all of those conversations. Bryan Fields: We're almost at a critical point where if you don't loosen the chain on legal MSOs, you'll keep providing opportunity for the illicit market to thrive — New York is a perfect case in point. It's not easy to run a licensed retail location in Manhattan right now competitively. Charlie Bachtell: I use New York as an example in conversations on both sides of the aisle. You can look at it as a very progressive approach to cannabis, well-intended from a social equity standpoint but not currently successful in achieving those goals. You can also look at it as a giant public safety risk, with roughly 400 illegal dispensaries that popped up and around 598 armed robberies of them in the last 12 months. No matter how you view it, New York shows what happens when the regulated approach doesn't have the resources it needs — it won't achieve the desired outcomes. The best part is we have the opportunity to improve going forward. A balanced approach is going to be needed for cannabis to make progress — if you're at either 10% extreme, the market won't function, it'll create gridlock. Bryan Fields: Do you believe Cresco's internal data program is best-in-class and a big separator between you and your tier-one peers? Charlie Bachtell: I do, partly because there aren't many peers to compare against — the data set is fairly limited and we all kind of know what each other is doing. You could argue we've made investments others haven't burdened themselves with, which allowed them to do other things. But taking a long-term view, I'd rather have the information and systems we've built because I think they can add compounding value pretty significantly over the coming years and create real separation. Bryan Fields: I don't think that does enough justice to the investments Cresco has actually made — you built these systems from the ground up rather than just licensing existing software. Charlie Bachtell: Correct, especially the retail e-commerce platform, which is really unique, super functional, and very valuable in decision-making across the rest of the organization, not just retail. Bryan Fields: Has it been fun to put your tech hat on developing the software and then switch back to talking cannabis and cannabinoids? Charlie Bachtell: We're very fortunate to have the team we have — not only on the tech side, but that team is arguably as steeped in traditional cannabis culture as any department, and it's great to have that under one roof. That team is also probably as integrated with retail, production, commercial, and brand as any other department, and we're fortunate that dynamic came about naturally rather than us trying to force it. Kellen Finney: One topic near and dear to me — automation, mentioned specifically in your Q3 investor deck. Could you elaborate on how these technology advancements are aimed at optimizing manufacturing costs and improving gross margins? Charlie Bachtell: It's a broad category. In the traditional sense, think of a pack-out line — sure, it includes that — but there's also connectivity from a cultivation standpoint, crop steering, and using technology and data to do very strategic and specific dosing. If you go back three or four years, we're now able to do things with the plant that people thought were beyond its capabilities. The systems that run that and create the data that let us make these decisions and implement them repeatably is what we mean by automation — broader than just a pack-out line. Focusing on the year of the core, focusing on markets where we've created scale, we need to lean into that, and make sure we're not diluting our resource base on things that aren't going to be main drivers of the business over the next two to three years — difficult decisions, but you've got to make them — and that allows us to allocate resources to automation that brings down cost of goods sold on the production side. It also creates greater connectivity between production, retail, and commercial, so the business functions as one unit instead of disparate units, which used to be the more traditional way companies like this worked. Kellen Finney: It's very unique to have an industry where you plant the seed, harvest it, package it, carry it to retail, sell your own products, and sell your competitors' products too — usually the same seed doesn't always make the exact same plant. How much has automation assisted in stabilizing specific flower designated for your brand portfolios, creating consistent products in terms of strains and characteristics? Charlie Bachtell: The systems and technology have allowed us to become a lot smarter — that's where we wanted to get to and want to continue getting to. That automation and the data it feeds back allows us to reduce the aperture on what the possible outcome from a harvest is going to be. It's a lot more forecastable than it historically has been. Bryan Fields: That was really well articulated — that's a giant advantage. Let's slightly switch gears and do a quick rapid fire. True or false: doing regulation well is a business model. Charlie Bachtell: True. Bryan Fields: A life-changing book? Charlie Bachtell: The Obstacle Is the Way was a phenomenal book for me. I also like Trailblazers by Marc Benioff. Bryan Fields: Cannabis beverage — yay or nay? Charlie Bachtell: Yay, in the future. Bryan Fields: What outside company are you drawing inspiration from when building Cresco? Charlie Bachtell: Great question — I'd have to give it to Salesforce, based on their philosophy that corporations can be the largest positive change agent if they want to be. Bryan Fields: Under-the-radar state you think most are sleeping on? Charlie Bachtell: I don't know if anybody's sleeping on Ohio anymore — that would have been my answer two months ago. Florida — it could be really, really big; the numbers look massive. Bryan Fields: What happens first — the Bears win the Super Bowl, or cannabis is federally legalized? Charlie Bachtell: That's personal — not fair, geez. Cannabis gets federally legalized. Bryan Fields: What's something you truly believe in that most people disagree with you on? Charlie Bachtell: Great question, I want to skip that and come back to it. Bryan Fields: Dream session, three people, dead or alive? Charlie Bachtell: I'd throw Bob Marley in there. I'd love to smoke a joint with Representative Dave Joyce — I think that would be super interesting. And, interesting enough, my stepdad will always be in that circle. Bryan Fields: What question do you wish more investors asked you? Charlie Bachtell: I feel like they ask me every question under the sun. Bryan Fields: Most bullish product category growth over the next five years? Charlie Bachtell: A lot depends on what happens with the regulatory structure, but it's hard to bet against flower — though I think vape is a much more palatable, scalable, less intimidating entry point for the next consumer coming into the cannabis space. Bryan Fields: An aspect of your business you were personally skeptical of that has grown faster and better than you anticipated? Charlie Bachtell: Possibly the retail side. Bryan Fields: What aspect of your business keeps you up at night? Charlie Bachtell: All of it. Bryan Fields: A message to retail investors who have been burned in the past? Charlie Bachtell: It's got to be a long-term investment. When regulatory or legislative change is needed, you've got to be willing to stick it out — this is not a get-rich-quick opportunity. Bryan Fields: If you could put anything on a billboard, metaphorically, to get a message to billions of people — an image, quote, or word — what's the first thing that comes to mind? Charlie Bachtell: The Obstacle Is the Way. Bryan Fields: What is one fact about the cannabis industry that would shock or surprise people even within the industry? Charlie Bachtell: 280E. Most don't know about it, and it's hard to fathom — you can't have a business that can't take deductions; nobody can wrap their head around it. Bryan Fields: Five years from now, what has your team accomplished? Charlie Bachtell: The team has fulfilled the vision of Cresco — the vision was to be the most important company in cannabis, and I think we will be. Five years from now you'll be looking at Cresco and saying that was the most important company in cannabis. Bryan Fields: When you got started in the cannabis space, what did you get right, and what did you get wrong? Charlie Bachtell: What I got right is that responsible plus respectable is how you get to robust. What I got wrong — I probably underestimated how challenging this industry would end up being, but I'm all right with that too. Bryan Fields: Prediction time, Charlie — in the future, how will Cresco's data-centric approach inform strategies when entering new markets, and is there one data point that stands out above the others? Charlie Bachtell: At the very first step of whether or not you get into a market, it's going to be a data-led decision, and the data point that stands out is the economic viability of the market structure — there needs to be a structure that allows for success to happen. Kellen Finney: I'd say twenty years from now, the decision will most likely be about deciding what form factor is most important to enter a marketplace with — the national average of which form factor consumed has the largest market share will be the most strategic data point, whether it's a drink, a gummy, or another way to consume THC. What do you think, Bryan? Bryan Fields: I think the map slide was extremely popular among MSOs, and as things develop you'll see the geographic reach from big hubs and facilities like the one in Chicago becoming key — the ability to reach surrounding areas once we adjust the rules for interstate commerce, however that ends up. Amazon has it now with hubs that let them reach endless consumers, and I think that will be the critical differentiator as we go from where we are today to the next five to ten years. Bryan Fields: Charlie, for our listeners who want to get in touch or buy Cresco Labs stock, where can they find you? Charlie Bachtell: crescolabs.com, our website. Bryan Fields: Awesome, we'll look it up. Thanks for taking the time, this was a lot of fun. Charlie Bachtell: Thank you both for having me, this is terrific.