Interviews

California Cannabis Entrepreneur Shareef El-Sissi Talks Retail And Regulation

An in-depth interview with the serial entrepreneur

From his early days as a budtender at Garden of Eden, to the portfolio of cannabis-related businesses he’s created today, Shareef El-Sissi is building a professional cannabis operation with a strong strategic and customer-centric focus. His many other business partnerships provide the backbone of the retail function of Garden of Eden, namely the cultivation, IT/enterprise, and R&D areas. El-Sissi is also a founding partner of Excelsior Analytical Laboratory which was dedicated to providing cleaner, safer, and more direct treatment of medical marijuana patients before shifting its focus to pure R&D. He co-founded Honeycomb Farms in Livermore, CA, a large farming operation specializing in sun-grown organic cannabis with both high-THC and high-CBD strains yielding pharmaceutical grade extracts sold to dispensaries and he is also a founding partner of TREEZ, an enterprise software platform that automates cannabis dispensary operations. His latest venture is Eden Extracts. Shareef sat down with us to talk about the California market and what the cannabis industry means to him as a serial entrepreneur.

 

Marijuana Retail Report:                      Can you tell us a little bit about your background and how you first wanted to get involved in the cannabis space?

Shareef El-Sissi:            I’d been in the traditional market since I was probably 18 years old, and as soon as I discovered the medical industry, I was instantly intrigued because I knew there was going to be an incredible opportunity in an emerging space. Once I saw that cannabis was being widely accepted for medical use in the states, I knew eventually the global market would catch up so I began working fulltime in medical cannabis after I graduated from college. I had met my current partner, Soufyan AbouAhmed, at his dispensary Garden of Eden around 2005. Garden of Eden was his second dispensary which had opened its doors in 2003. We kind of officially started working together in 2009 because we had a very similar vision about what cannabis businesses should be and we’ve been working together ever since to make that vision real.

We started out by making a super-curated menu, being very detail-oriented and only accepting super high-quality products. We also had an opportunity to take our quality control and patient safety to the next level because my brother is a scientist by nature and by trade, so we started an analytical laboratory. The laboratory originally started out as a side project that actually rolled into a very major component of our business today. So that was kind of our first endeavor outside of retail, and we just continued down the path of cannabis science and began doing extractions and R&D, and started making vape cartridges very early on, and kicked around as many new and novel concepts and processes that we could find. Now we’ve settled into our groove, and that’s providing super-high-quality manufactured products, and that’s kind of translated into our company culture, providing super-high-quality products across the board.

We have a few more product lines that are due to be released this year and in 2019, and we’re just trying to continue on with our core values, some things we’ve gotten away from in the past, but we definitely now understand what our bread and butter is, and we’ve been sticking to it. It’s been quite the learning experience along the ride.

 

Marijuana Retail Report:                     How have the new regulations affected your business?

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Shareef El-Sissi:              The regulations are very wide and they touch so many different aspects of the business that we could talk about regulations for the rest of the day. I don’t think that the regulators fully scoped-out what the transition period was going to look and feel like, and I think that we’re experiencing some of those pains, especially around the excise tax and product packaging. For the month of February, essentially, there was a shortage of exit bags available in California. There are only a few factories that make them in the US and there are only a few factories that make them in China, and after you talk to them, they were essentially backed up with orders through the remainder of the transition period.

So there are parts of it that weren’t thought out, parts that couldn’t have been predicted, and California is simply a giant market. Taking what’s worked in Colorado with the archaic plant tagging seed to sale system, and expecting it work here in California is not realistic. Here, because of Prop 215, things have been regulated much looser, so to expect an overnight shift into that same degree of regulation is not realistic. Colorado’s tracking system launched at the same time as their medical program so there was no transition period where regulators attempted to herd cats.

What we see today in California is the black market, which is comprised of Southern California illegal dispensaries and deliveries, who have already deflated regulation in the past, and Northern California farms, lining up to rally behind Weedmaps, whose whole business depends on those people staying open, so we’re watching a 12-round bout of heavyweights between Weedmaps and the black market, and the State of California, their regulations and their legal system, and though it hasn’t come to a head yet, but you saw the first jabs with the exchange online between the BCC and the CEO and president of Weedmaps, so I can tell you I have my bag of popcorn out and I can’t wait to see what’s going to transpire.

 

Marijuana Retail Report:                    How has the CBD popularity explosion adjusted your strategy, or has it affected you at all?

Shareef El-Sissi:              You know, one of the first products that we wanted to bring to our shelves was clean, certified CBD. At the time, we’re seeing a lot of products coming online. Unfortunately, the dosages and the CBD ratios were inaccurate. A lot of stuff was just being sold as having one to one CBD ratio because the strain had been known to have this kind of attribute to it. So one of the first things that we wanted to analyze was CBD content. What we did was we gathered up quite a bit of raw CBD plant material and made a bunch of extract, and we’ve been making formulations and selling them in our dispensary ever since. But I think that the market has taken a hard, hard turn, starting January one, to a lower price point. The flower consumption is steadily dropping and it’s just coming in line with the normalized markets of Colorado and Washington. This is all stuff we’ve seen before. California does have some stark contrasts between the other mature markets, however, because I think that you’re going to see the concept of a brand and loyalty to that brand here in California become stronger and stronger, whereas, in Colorado, a branded flower isn’t really a thing because of the way that the regulations rolled out. They were initially required to be vertically integrated, so dispensary automatically assumed that “Hey, our Blue Dream flower that’s being sold at our dispensary is going to be branded as our own”. Now that they’ve moved away from that model, branded flower never really picked up there.

Honestly, CBD isn’t the hot topic in our industry today. The hot topic in our industry today is what brands are people’s loyalties aligning with? You see companies like Select do a very good job of coming from out of state and branding their products. There are a few others like a lot of California homegrown operators, but for the most part, 80% of the market was caught with their pants down. We’ve been living in this Pax Romana where manufacturers and cultivators barely played in the regulated market. They just showed up and sold product to the dispensaries when they wanted, or they went to the secret sesh or the popup sesh or the High Times Cup and they sold products, and for the most part, they probably weren’t taking running a small business seriously. Those people are quickly exiting the space.

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Marijuana Retail Report:                    How do you determine which strains to use? 

Shareef El-Sissi:              We try to take a different approach to choosing what’s going to be on our shelves by curating our menu. We’d like to think that even the lowest price point product in our store would be considered top shelf at any dispensary. We definitely carry high THC strains for the people that are only after the high THC strains, but we also like to carry strains that are familiar to people. We like to have some consistency across the lower and mid-shelf, that way people that are coming in for value products can depend on what they’re buying.

There’s an undeniable new-school movement in high-grade flower that is driven by social media marketing, and it’s very shifty. What is cool today may not be here tomorrow so we pay attention to those trends and we work with some of the better growers, but that’s not really the name of our game. The name of our game is quality. If you want to be on our shelf, you can be one of those trendy strains, but you still have to meet our same quality requirements. Those requirements carry a basis of being organic, being soil grown, and being indoor. You’re not going to make it to our top shelf unless you meet those three requirements.

 

Marijuana Retail Report:                     Considering how restricted marketing is for the cannabis market, how do you break through that firewall and reach your consumer?

Shareef El-Sissi:              So the reality is good quality products have word of mouth branding. If a person comes into your store and they’ve gotten exactly what they paid for and they feel good about their purchase, they’re going to tell somebody about it. We’re now in an era where there are very well-established brands on Instagram that you contact, and they don’t even have any product for sale. You have to take a very slow and steady approach, or we’ve been taking a slow and steady approach to marketing. We have hyper-localized marketing through billboards, but we really try to impact the people that are closest to our shop.

We’re now evolving our social media presence by not blasting our products in your face, but trying to curate our image and let people understand the kind of things that we represent, so we’re moving, treading lightly into that realm. I think that still, quality speaks for itself, and I think that our success up until now can demonstrate that.

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Marijuana Retail Report:                     As a person coming from a financial background who has an understanding of the market, can you talk a little bit about how 280E affects your business?

Shareef El-Sissi:              In northern California, large cannabis operators, the successful cannabis operators, have been under attack by the IRS. The same applies to southern California and across the nation. If you are doing good, you are going to come under scrutiny by the IRS. We’ve experienced multi-year audits, and the way to defend against that has shifted over time. I’m lucky enough to have been a customer of Hank Levy, a good friend of mine and partner in some of our businesses, as well as Henry Wykowski. Those are the two guys that wrote the book. They were Michael Jordan and Scottie Pippen of defending against the IRS’s attack. They’re the ones that basically set the precedent on whether the defense at the time was the compassion model, the model where you’re doing more than just selling cannabis, you’re doing holistic healthcare and that is what allows you to deduct more of your costs, or if the defense had shifted to heavily folding in operating expenses in to cost of goods sold, or the newer defense model which says, “Hey, I’m not just selling cannabis. I’m selling T-shirts and pipes and pens,” and all these different accessories that lighten the ability of the IRS to attack you with 280E. But this is a very dynamic situation where we have to proceed with caution. At one point we had to juggle being not-for-profit while trying to protect ourselves against 280E. People were starting management companies. People were starting professional service companies. There had been 101 different ways to try to protect yourself against 280E. We are assuming that 280E’s application will be diminished in the next few years.

How many more years can a cannabis business expect to operate without turning a real profit, or while having an effective tax rate in the 70% or 80% range? So we’re all sitting around waiting on the IRS to make their judgment on the Harborside case. That’s what everyone’s been waiting for. It was supposed to have been due out already, but we’re proceeding as if 280E has left the building, and that’s a very, very forward-thinking approach. If Harborside doesn’t accomplish getting rid of it, there is another strong case behind it, and another strong case behind that. It was only because of one case, I believe it was the Olive case, that we lost so much ground. There have been four or five cases that really set the precedent, and they’ve all been going in the right direction, but we’re on the front lines along with all the other operators who I know who are waiting in line for their appeals to begin.

 

Marijuana Retail Report:                     How important in your opinion is it to reach verticality in cannabis?

Shareef El-Sissi:              Well, it kind of ties into the last question you asked. Imagine if your retail operation is basically getting gutted by the IRS year after year. If you’re not operating with a vertically-integrated model like having cultivation, which has rarely come under attack by the IRS, or manufacturing, which has rarely come under attack by the IRS, or distribution, which has rarely come under attack by the IRS, then it may come to a point where it’s not worth it for you to continue fighting. Luckily, we’ve been involved in cultivation, manufacturing, and getting into distribution now, so our goal is to be completely vertically integrated with a portfolio of high-quality products, while still curating a slim line of value products just so we don’t alienate any of our current customer base.

There is a tried and true retail model and you’re seeing it demonstrated in the Apple stores of today, and other retail operations trending towards that. MedMen has that look and feel. I don’t know how vertically integrated they are yet, but I do hear chatter of all the other well-rounded operators in the state moving towards producing as much of their own product as possible and offering an in-store ‘experience’ that breaks the barrier of the over the counter sale.  

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Marijuana Retail Report:                     Speaking of California as a whole, what’s your growth strategy? 

Shareef El-Sissi:              We like to take a slow roll to growth. We’ve made some hasty decisions in the past and grew too fast and ended up folding some of those projects. Currently, however, we are focused heavily on Alameda County. Alameda County essentially has no dispensaries in the southern region and that’s an area that includes Fremont, Newark, Union City, and we’ve just been granted our second and third dispensary permits in Sunol and Union City. Union City is a campus project with retail, manufacturing, distribution, and cultivation. It was the only cannabis project to be permitted in the city, so very strategically placed dispensaries in areas that are currently under-served and are not going to have a lot of competition so we are focusing first on southern Alameda County. But no, gunning after the whole of California or the rest of the 50 states is not who we are today. You can’t grow at a hyper-pace and maintain your level of quality. Those two things just don’t work out, so we’re going to choose to maintain our DNA, have a focus on quality, and grow at a pace that we’re comfortable with.

 

Marijuana Retail Report:                     If you had one tip for other dispensary owners, what would that be?

Shareef El-Sissi:              Lower your prices. If you’re correctly pricing your product, there’s no more room for an additional tax, and people woke up overnight and now they’re selling $90 eights. The reality is the pressure shouldn’t have been applied to the consumer. The pressure should’ve been applied to the supply chain, and instead of cultivators and distributors are coming with price increases, the big players in the market should’ve done what Walmart does in normal retail and said, “Hey, we’re not going to pay that much for this product. This is the new price for the product, and if you can’t afford to sell us that product at this price, we’ll go to the larger supplier.” That is the name of the game. That is the commercialization of cannabis. Instead of crushing the consumer, I think it’s, unfortunately, the supply chain is going to get squeezed. All the predictions of $350 pounds and $300 pounds, all those things are accurate. I’m just promoting the swinging of the pendulum to come sooner.

 

Marijuana Retail Report:                     What is next for you?

Shareef El-Sissi:              We have a very well thought-out pre-roll line that we’ve been working on for some time. We’ve taken a lot of cues from the tobacco industry on how to make that a success. We’ve been rolling out our vape lines. We’re very proud of those products because I think that they’re the best in the industry. Then just continuing to build up the Eden brand.  Establishing ourselves further in southern Alameda County, becoming that Apple model, providing a lot of our own products, and trying to gain efficiency by centralizing many functions of the business. Businesses in cannabis have been forced into compartments to survive. You’ve been spread around.

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I literally can rewind to five years ago where I said, “I wish we could have a campus. I wish I could do all these things in one place. I wish I had the efficiency that’s granted to other businesses,” and finally that’s come around. I’m looking forward to operating out of a hub and just having all of our team in one place. We’ve outgrown our businesses and outgrown our buildings consistently for years and years and years, so I’m just looking forward to the efficiencies that other businesses are afforded.

 

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