Home Grow HERBL CEO Mike Beaudry Sees a Natural (Food) Arc in Cannabis Distribution

HERBL CEO Mike Beaudry Sees a Natural (Food) Arc in Cannabis Distribution

by Team Marijuana News

In California, the nation’s largest legal (and traditional) cannabis market, distribution, the literal lifeline of any CPG industry, is kind of a free-for-all. If you want to do it, get a license, and do it. Whatever floats your boat. It is a blatantly laissez-faire model consistent with the patchwork nature of cannabis regulation in the state, and not for the faint of heart. But for Santa Barbara-based standalone distributor HERBL – which has established itself as a powerhouse in the state by servicing 850+ storefronts and representing top brands with thousands of SKUs – distributing in California has been a labor of logistical love from the start, fueled by respect for both the plant and the profound complexities that come with building a distribution network. As explained to CBE by CEO Mike Beaudry, a logistics veteran who founded HERBL a measly three years ago, the story of his company’s arc follows closely the growth of regulated cannabis in a state where weed is a cherished crop with generations of lineage steeped in genetics, culture, and economics.

“I came to California in 2016,” he said during a recent call. “I’ve got five years on the ground here, which will give you a pretty good understanding of what I’ve seen. In 2016, if you went into a dispensary, you saw basically large jars of flower and folks selling it by the gram or the eighth, and very few CPG-style, finished products. Along with that you saw growers who were selling mostly flower, going in with the product and showing it to the buyer and negotiating the price. So, very much not a distributor model, but a brand direct model. I say brand not because they named all the flower, but certainly people knew who each farmer was, and who the cultivator was.

“From 2016 to 2018,” he continued, “it was slowly evolving into something a little bit more typical from a supply chain perspective. A few distributors did enter the mix, and they did start aggregating products and bringing them to the dispensaries, but if you could picture the moment in 2016-2017, there were dispensaries that were anti-distributor because it was a change, and they looked at it like they didn’t quite understand why a distributor was needed. Why am I not talking to Tom anymore? Why am I talking to Sarah? And that evolved over 2016 and 2017 and into 2018. There were not a lot of distributors, frankly, but we did not enter the market until August of 2018.”

That translated into about two and a half years of full-time due diligence, something Beaudry said was basically inevitable. “We never intended to launch before January 1 of 2018, because that was the change between Prop 64 and Prop 215. We didn’t want to be operating under Prop 215 for lots of reasons – legal, accounting, audits – so we launched the business in August. We were aggregating brands, bringing them to retail, and selling out of the catalog with sales folks in a very classic style of distribution. It has evolved a lot since then, but I would say that from a foundational perspective, HERBL started the business in very classic distributor fashion.”

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Beaudry knows foundation. “My background is 30-plus years in supply chain distribution, a decent part of it at extreme scale,” he said. “I worked for UNFI for 10 years, and we were doing $5 billion when I left in 2010, so I know what scale looks like. For us, it was putting the building blocks in place for people, infrastructure, fleet, technology, SOPs of course, and building the partnerships between the brands and the retailers. All those foundational pieces really were the beginnings of HERBL, and we’ve actually learned an awful lot in three years. I say learned because we, my whole team, myself, all have deep experience in traditional supply chain, and we have a tremendous number of folks on our team with significant cannabis IQ who have been in the industry for a long time. But even with those important ingredients, it doesn’t mean that it wasn’t extremely challenging and doesn’t continue to be extremely challenging.”

The way he explained it, the state is still in a sort of formation mode. “It is starting to look a lot more like a traditional supply chain, but there are still not a lot of distributors. I’d say there are quite a few smaller [distributors] that are focused on certain parts of the state, but there are only a few that are doing the entire state. We cover 98 percent of all dispensaries in the state, and there are only a few people doing that. And I think that’s because it’s both challenging and expensive to build out an infrastructure that can do that, having the tech that can do it, and having the people that can do it.”

Now, however, and at least as far as HERBL’s operations are concerned, things are looking up. “It is evolved to a point where if you came to our distribution center, any one of them, I think you’d say it looks largely like a distribution center you’d find at Cisco Foods, or UNFI, or McKesson Drugs, or whoever; you know, in a traditional sense,” said Beaudry.

So, how did he grow HERBL so relatively quickly in a state that is a literal patchwork of laws? “It’s been a patchwork since day one,” he said, “so my thesis five years ago was relatively simple, which was that direct delivery from a brand, self-distribution from a brand, is possible, but it’s typically not scalable, and it’s typically not the core capability of the brand, which means as it scales, things break. And, whether it’s people, process, or technology, [brands] don’t have the infrastructure to support it all and have not raised enough capital to support it. So, my thesis was, okay, I get this moment, I get self-distribution quite well. I come from the natural products industry, and it’s how that industry started. But I also felt two things; one, that there is a big difference between serving 100 doors in LA and serving 850 throughout the state of California. And when I say there’s a big difference, I mean it’s more than a multiple of eight…it’s far more than a multiple of eight! Because it’s not just that I need eight times more people, and eight times more trucks; it’s that the capability to do something at scale is very different than running some vans around in LA.”

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Putting his thesis to the test also was a process of education, he explained. “When we met brands early on, and they’d say, we don’t really need a distributor, I’d say, why do you think that is? And they would say, well, because we’re doing it ourselves. And I would ask, how many doors you in, and they’d say, 70. And I’m like, you’re right, if you want to be a brand in 70 doors, as long as the retailers accept it and you can get shelf space, then you can self-distribute. But if a brand is going to be a brand, and I think a brand certainly wants to be at least be penetrated in a state – typically brands want to be penetrated in the country – but if you’re a brand and want to be penetrated in the state of California, that means each brand is going to have to build what we built, they’re going to have to raise what we’ve raised, they’re going to have to hire people who we’ve hired, and think about it, each one of them wants to scale. So, that’s problem number one, in my opinion.”

Beaudry said he saw problem number two ultimately occur in the natural food channel. “It happens logically with the number of SKUs and the number of touchpoints that a retailer has, where the retailer ultimately decides how this works,” he said. “And in my experience, the retailer is going to say, ‘Hey, I can see 100 different vendors, or I can see five or 10.’ I gave this analogy early on to someone who was very anti-distribution, and had been in the industry a long time, owned some retail here, and we were debating this concept. I said, ‘Okay, so if you’re right, then we should be able to go back to Whole Foods in Austin, Texas today – and UNFI supplies a significant amount of that store and every store in the country – and we should be able to flip back to the self-distribution model, because you’re saying it’s more efficient and it’s cheaper.’ So, he started laughing, and he said, ‘Well, you could never do it now.’ And I said, ‘Why is that?’ And he said, ‘Because it’s too much scale.’ And I just paused and said, ‘Well, just think about what you just said.’

“And so, my thesis from the start has not changed: As this industry continues to mature, and as the industry evolves in scale, traditional supply chains are there for a reason. I can’t emphasize the importance of the retailer’s role in this. They are just not going to be capable as this industry grows and SKU proliferation happens. I’d say we have probably 1500 SKUs in each of our buildings right now, somewhere in that vicinity. I come from a land that had 25,000, 30,000 [SKUs]. If you’re managing that number of SKUs, that means you’re managing that number of brands, so back to the retailer’s perspective, they can’t possibly have a self-distributed model. Anyway, that is the thesis behind why I started this business, why I studied for two years before I moved here, why I spent another two years doing full time due diligence, and why I finally launched the business. It was all based on the original notion that this evolves to a place where traditional supply chain initiatives are in place. That’s really what I believed and what I’m seeing come through as we speak.”

As penetrative as HERBL has been in California, however, Beaudry must see huge unfulfilled potential. “Correct,” he said. “Significant. I think we could still grow 2x or 3x in the next three, four years. So, it was never lost on me why I started here. I moved here from the other side of the country. I lived in Rhode Island my whole life. I picked this state because it was obviously the largest single market, but it was also the way the regs were shaping out back in 2017 and 2018. The distributed model fit, whereas it doesn’t fit in every state. So, I picked this state to build a foundation, and the idea was to build the foundation, really refine it, and then go from there. And so, coming up on year three in operation, we’re finally at that point where we’ve installed world class tech, we’ve got a world class team, and we’ve got a very good understanding of how to do this, but I refuse to pick my head up outside the lane of distribution in the state of California until that time, because I’ve been asked 100 times why that is, because my background is in national expansion, and distribution across the country. My whole team has the same muscle memory. It’s because of that that we’re not doing it until we’re ready, because we’ve done it, we know what works and what doesn’t. We’ve skinned our knees and taken our lumps through the years, and the one thing we’re all sure of is that you don’t repeat it until it’s repeatable, and that is really what has been our motto.”

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Since our conversation, HERBL has taken the leap to another state with the acquisition of Blackbird, a “premier cannabis distributor and direct-to-consumer software solutions company based in Nevada,” read the press announcement. “The transaction allows HERBL to leverage Blackbird’s ecosystem of national retail and logistics insights to enter the Nevada market and create the most comprehensive supply chain platform in the industry.” The move by HERBL is if anything consistent with the expansion of cannabis distribution networks as Beaudry explained it to CBE. “What I believe is that over time, the large markets will require a model similar to what California has done with a distributed model, whereas with the smaller states – and I come from the smallest state, Rhode Island, and they have five or six dispensaries, whatever the number, it’s only a handful, and you’re not going to set up a distributorship in a state with six dispensaries, maybe never – that model will probably work different than the others. How it worked with natural foods was that we had a facility in New Hampshire and one in Connecticut, that serviced basically all the surrounding states right from those two central points. In the absence of being able to do that, it’s going to be a while before the smaller markets have a traditional supply chain [for cannabis] that exists in food. In the meantime, there is an enormous amount to do in the larger states that we believe will play out very favorably for distribution.

“Use New York as an example,” he continued. “It will probably be sometime in late 2022, would be my guest, before New York is operating in the adult use market. And it’s probably going to look similar from a regulatory structure to what we’ve seen [in California.]  The question will be, is it a limited licensed state? How many dispensaries will be allowed? We know the market size and population and cannabis use will be high, but what is the footprint of the of the dispensaries themselves? It’s still obviously a little bit TBD, but that’s an example of a market we’re watching very closely, and several others.

“We believe that there will be enough of those [markets] as things progress,” he added. “If you said tomorrow that we could do the whole country, it would take us some years anyway. You can’t just blitz the country, as easy as it might sound. We have to take this in pieces, and that’s what we intend to do. We believe there are enough pieces on the map to keep us extremely busy over the next few years as this evolves. My other guess, and it’s just my opinion, is that there is a likely chance that cannabis might be a little bit different than alcohol, where alcohol distribution is done state by state. But because of the limited number of outlets [for cannabis], I think if distribution were to happen nationwide in more of a model like this, I think it would probably evolve to where states got together and bound together and [we would] be able to cross state lines and set up a distributorship in Connecticut, as an example, that would cover New York, Rhode Island, and Connecticut.”

Developing regionally, in other words. “I think so,” said Beaudry. “We’ve heard pretty darn good intel that the states are having those conversations, that the western states are doing it, and some of the eastern states are also doing it as we speak, from what we understand.”

I asked Beaudry how he sees the cannabis industry developing in terms of the survival of rsz herbl 31brands large and small, and whether he sees any similarities with the natural foods industry. “I’ll bring it to natural foods first, and then I’ll bring it back to here,” he said. “What the independent natural food stores would often do – especially as Safeway, Kroger, and Whole Foods got bigger, and could do things with pricing that the others could not – was to of course have the staples in stock that people were asking for, but they also developed an assortment architecture that was totally different than Whole Foods, that was different than the basic selections of a supermarket. And if you play that forward, I don’t think it plays out terribly different [with cannabis]. If you look at what makes up the important reasons why you go back to a store, frankly, I think it starts at in-stocks. If I got something that I loved and I go back, I want to get it again. I think that is quite common consumer behavior. So, execution is going to obviously be important at retail. You’ve obviously got marketing and packaging, and those type of things matter, but what I’ve found over the last five years, immersed in this business, is that when the quality-to-price ratio is on, its magic. Meaning, that’s a really amazing price for that product. It might not be the best product, but it is for that product price, it is fantastic.”

So, that product moves? “That product moves,” he repeated, “and when that happens, it’s magic. I think assortment and selection at the store also is important, no different than a restaurant has a specials menu, no different than Trader Joe’s, a phenomenal retailer, which has a staple number of things, but they’re always changing the mix. Because people like that fluctuating assortment. At the same time, the mistake I see, at least early on, is that not every dispensary is doing the basics of retail in terms of having the top sellers. If the top sellers are obvious in the state at this point, you really should have them, because now you’re begging your customer not to shop at your store if you don’t have them. They will say, that’s my favorite brand, and for some reason you don’t carry it, so I’m shopping over there. And while I’m there, I’ll probably get other stuff. That’s the risk I think people take. So, when I look at it in the conventional sense, and I’m back in my old life, and if Clif Bar wasn’t in a store, the store was asleep.”

With three campuses throughout the state, five licensed buildings, 27 armored vehicles, and more than 180 employees and 20 dedicated salespeople, HERBL is big and getting bigger by the day, but when I saw that Amazon had just announced it was going to stop testing most of its workforce for cannabis, I took it as a first step toward delivering the stuff to the masses. Beaudry had fully assessed the situation already.

“I do a tremendous amount of research – it’s just my rabbit hole – and I’ve read a tremendous amount and watched Amazon from the start,” he said. “Obviously, they’re good at a lot of things, but if you take a nuanced thing like cannabis, I liken it to food. When Amazon bought Whole Foods, I was already gone from UNFI for seven years, but I still got calls from analysts asking me if I thought Amazon would break the contract with UNFI. I was like, guys, I’ve been out of the industry for seven years. Once we got past that, I said, if you want my honest opinion, and I did live it for years, it makes no sense to me.

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“There are things that Amazon is extremely good at,” continued Beaudry. “They started as a bookstore, and they expanded that bookstore and they got really good in supply chain logistics and at the warehouse level and automation and all those things. And for many, many years, they used UPS, USPS and FedEx. They only got into doing it themselves relatively recently. But the difference between perishable items and selling a toaster would take me hours to explain.

“Cannabis is a perishable, highly differentiated industry unlike anything I’ve been part of, and I’ve been part of food, which I thought was pretty complicated,” he added. “So, Amazon’s quote unquote ability to just come here and set up shop I think is a gross misunderstanding of their capabilities. And I’m not naïve, by the way. There is no scenario where I say Amazon is not part of cannabis at some point. I’m just saying that this isn’t simple, where any big money gets to just come here and set up camp. Many have tried it so far, and just about every MSO has come looking at California as an example. But there has not yet been a lot of success in California from an MSO, and I think that has a lot to do with the complexity of this market. Could a retailer gobble up a bunch of retailers? Of course. But Amazon’s model is not anything like what we do, and frankly, if you said Door Dash, I’d say that’s more likely,

Because it’s perishable to perishable? “Correct,” replied Beaudry. “It’s more analogous. What Amazon does extremely well is between tech and execution and supply chain and the warehouse level, where they built an unbelievably efficient network that is both physical and tech, that allows me to jump on Amazon Prime and tomorrow I can get something I just ordered. I’ve been involved in both, so I know the difference, and that is very different than what we experienced in the cannabis industry.”

As we wound up, I asked Beaudry if there was anything about HERBL people needed to know. “I think what’s important is that we started this business with a deep respect for the plant itself, but also for the culture and the legacy,” he said. “It’s extremely important to me that that never gets lost in translation. I’m only here because a large number of people spent a tremendous amount of time fighting for legalization of this plant, and we have deep respect for that. I think we’ve built a company and a culture that respects that and is following that tradition. We’re a company that’s going to scale and continue to be an important asset for the cannabis industry. That’s really what we’re building.”

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