Pot O' Gold? HERBL CEO Outlines Promise, Struggles Of Marijuana Distribution

Since launching simultaneously with the 2018 enactment of California's Proposition 64 that legalized recreational marijuana, HERBL has become one of the largest cannabis distribution companies in the state, providing supply chain solutions to more than 850 storefronts and delivery services across California.

It currently provides scalable distribution software and infrastructure consisting of five licensed warehouse buildings across three campuses, utilizing more than 35 armored trucks to deliver top brands like Cookies, Raw Garden, and Henry's Original.

In June, the company announced it had acquired Blackbird, a premier cannabis distributor, and software solution company in Nevada, for an undisclosed amount. This gives HERBL access to 98% of all cannabis retailers in Nevada and California. 

This market capture has made the company extremely attractive to investors, including blank-check firms. On Friday, Reuters, citing unnamed sources, reported the company may go public through a merger with the special purpose acquisition company BGP Acquisition at a $600 million valuation, to eventually be listed on the NEO exchange in Canada. 

HERBL declined to comment on the Reuters article.

In an interview with FreightWaves, founder and CEO Michael Beaudry explains his career transition from leading executive teams at United Natural Foods Inc. (UNFI) to an industry he has enjoyed since high school, the similarities between the growth of the natural food industry and the cannabis industry, and the difficulties of distributing such products.

This question-and-answer interview was edited for clarity and length.

FREIGHTWAVES: You have had a successful career in natural foods and dietary supplement distribution. What attracted you to what many see as the taboo industry of cannabis?

BEAUDRY: "I have been an active participant in this industry since high school, so I have always had a fascination with it, and back then it was almost incredulous to me to picture in 2014 that cannabis would be something that actually ended up in a supply chain that was legal.

"When I went to the MJBizCon in 2014, it was basically love at first sight for me because I felt like I went through a time machine and got spit out in 1980 at the natural products trade show. It had the exact same problems: bad labeling making claims you shouldn't and couldn't really make, and it was very small.

"At UNFI, I led operations, and the correlations [between the two industries] were the exact same: It was basically an industry being born — small brands, small independent retailers and no channel for distribution.

"I came back [to MJBizCon] in 2015 and the trade show exponentially changed, including the number of professionals and the overall size of the show. I was absolutely mesmerized.

"Because I started in cannabis at a very young age, I was like, ‘If this is going to become a CPG supply chain-type of industry, I have to be a part of it.'

"In December [of that year], I resigned from my job and moved to California to start working on this."

FREIGHTWAVES: How did you go about building a distribution company within a new market?

BEAUDRY: "I spent two and a half years of full-time due diligence in California, including a lot of relationship building. Frankly, I was building the model of what a distributor would even do and how they would need to do it. I was continuously reading regulations as they were constantly changing.

"Eventually I found a building, got it licensed and started hiring a team, raised some money and launched the business in 2018."

FREIGHTWAVES: What were some of the distribution hurdles you had to solve for?

BEAUDRY: "When you think of distribution, picture my vans, where I not only have cannabis, which has tremendous street value, I also have cash. So we are always transporting extremely valuable things. One of the first things we did was build a fleet of about 40 secured vehicles that included bulletproof glass, bulletproof doors, run-flat tires and seven live cameras.

"California's cannabis market is also very fragmented. We serve 850 retail points. About 650 are brick and mortar and a couple hundred are direct-to-consumer delivery companies. They have also been operating in a quasi-legal environment since 1996, going from legal to illegal depending on their jurisdiction. Now they have no limitations — you could own 500 dispensaries if you could figure out how to do it.

"Then there is the supplier side. There are a tremendous amount of growers who have been legacy operators for some time. You have to build relationships with them to win their trust. That is why, when I first started, I spent two and a half years just learning the industry and building a brand for me, not for HERBL. I made an effort to go out and shake hands, meet people for lunch, have drinks, and smoke products with a tremendous amount of people before we could launch the business.

"Since we started with such great relationships, we easily did about $106 million in revenue in our first year so we were basically bolting the wings on a plane while in flight. We eventually installed JDA Software (now Blue Yonder), which is a pretty world-class, tier-one technology for distribution, and opened up new buildings to support the growing need for distributors.

"I am not kidding: Scaling this is the hardest thing I have ever done in my career. At UNFI our typical building had 25,000 SKUs, thousands of brands, and retailers. This is harder."

FREIGHTWAVES: Why is distribution particularly important to the cannabis industry?

BEAUDRY: "So remember we have about 850 stores to service, right? If you are a self-distributing brand in the state of California, I can assure you, you are not in 850 stores. 

"To [distribute to] the whole market, from a logistics perspective is entirely difficult. It's a massive state with complicated and massive amounts of traffic. Carrying such a high-value product, they would have to set up a network of distribution centers with world-class technology to create a self-distributing environment. 

"Our secured vans alone cost $125,000 each. Without those vehicles, all it takes is one issue with one brand that could take their whole company down.

"Secondly, and what I think is the most important one, is retailer fatigue, which I witnessed in natural products as well. Because consumers are constantly looking to try new products, how can a retailer work with 100 different brands when it comes to demand planning and delivery schedules?

"When you look at the largest retailers across all industries, everything they've done is to limit the number of touchpoints to the store's back door and limit the number of deliveries a week. With the number of brands dispensaries are working with today, they could be getting 20 deliveries per day."

FREIGHTWAVES: Do you foresee the legalization of these products at the federal level?

BEAUDRY: "I don't know if there will be full legalization, maybe a watered-down version of it, but there will be something. I also think it will happen during this [presidential] term.

"Once it is legalized, I think there will be a lot more people entering the market, including a number of folks that I know are sitting on the sidelines waiting for that to happen. There is a part of me that loves the fact that this moment of time has allowed us to operate freely without some multibillion-dollar company coming in, but we are extremely well-positioned for that moment.

"I am looking forward to the cash management side of things; you can't imagine the amount of work that we have to put into that. Solving that problem would bring enormous amounts of capital into the industry.

"If you study the 21st Amendment and the lifting of Prohibition, it really just puts the decision-making process back in the states' hands, and there are still dry states and counties to this day. So I envision a similar world where the federal government will defer to the states and they will set their own regulatory and tax structures for it. 

"That being said, changing the laws federally doesn't change a lot with us in terms of our near-term strategy.

"We probably wouldn't shift to another state from here anyways because of traveling distances. In the food industry, I could send out a 48-foot tractor-trailer today, do seven stops, have the driver stay overnight at a hotel, and leave their vehicle in the parking lot. We are not doing that here, ever. We want all of our trucks back within 10 hours with very minimal stops."

"You could maybe get away with that on the East Coast where states are smaller, but you also want to make these moves in the daylight, which limits the hours you can drive, especially in the winter months when it gets dark early."

FREIGHTWAVES: Is that a lava lamp on your desk?

BEAUDRY (laughing): "It's pretty funny. We have about six of them in the office and I was like, ‘I haven't seen one of those in so long.' Of course, I had one when I was a kid. It was pretty normal to have one in your bedroom, but not your office. So they ordered me one, and I have had it there ever since."

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Image by GAD-BM from Pixabay