Business

Power Players: 4Front President Kris Krane

avatar Alex Halperin / Mar 16, 2020

Kris Krane, president of Multi-State Operator (MSO) 4Front Ventures, has been involved in cannabis reform for more than two decades. For roughly half that time, he was in advocacy at NORML and as Executive Director of Students for Sensible Drug Polic. He moved into the private sector in 2009. 

Today, 4Front, which he started in 2011, is a vertically-integrated, publicly-traded company with operations in eight states. In 2019 the company merged with Cannex, a dominant player in Washington state. 

In a wide-ranging conversation with WeedWeek, he discussed market conditions in key states like Illinois and Massachusetts, how his non-profit experience informs 4Front and what cannabis equity looks like in the real world.

This interview has been edited for length and clarity.

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From Non-Profit to Corporate

WeedWeek:

First, can you give us an idea of the scope of your business. A lot of people have heard of 4Front. They’re not necessarily sure what you do.

Kris Krane:

Some of that confusion is probably because we made our name as a consultancy. We worked with applicants all around the country to help them win licenses in competitive processes and help them set up their retail operations. 

WW:

How did you get into that business?

KK:

It’s a long story. I come from the advocacy world. I was one of the founders of Students for Sensible Drug Policy in 1998 and then basically spent the whole 2000 in the DC policy world. Then I was recruited by Steve DeAngelo in 2009 to move to Oakland and start a consulting business to help people get licensed and replicate the Harborside model in California. 

It was way ahead of its time. A lot of veterans of those early-model operations [ such as Sparc and Berkeley Patients Group ] mixed with folks like myself who had come from the reform movement. We were sort of the first group in the country to bring in really professional operating talent, in terms of how you document scalable, replicable retail.

We brought in a woman who had been on all of the ops protocols and training protocols for Einstein Bros. Bagels, Disney Stores and Panera Bread.

WW:

You were able to get someone like that in 2009?

KK:

Yes, she was a professional structural designer. She was at the original [Einstein Bros.] store in Utah, and took them to 300 stores in two years. She created the original Harborside operating manual and really created the first professional IP around a cannabis business.

What we were doing was not rocket science, it was just that nobody had done it. Now every MSO has a team of app[lication] writers and lawyers. That didn’t exist back then, so for us to be able to use operating protocols that looked like that, with a team that came from the policy and regulatory world, we were able to kind of dominate in competitive applications.

But it was just too early and the company fell apart in late 2010. We made a lot of mistakes, learned from a lot of mistakes I should say. But from that, really came 4Front. That’s was our reputation. We could win licenses.

WW:

But now you’re not really doing consulting. 

KK:

We still do some, but it’s very limited in scope. It’s largely in states that we have some interest in, but we don’t necessarily want to go into yet, and there’s a group that we think it’s worth having alignment with. But primarily, we are doing our own projects.

WW:

Let’s move on to your MSO. You’re called Mission?

KK:

Mission’s our retail brand. 4Front is the parent company, and then we’ve got three operating divisions within the company. We’ve got Brightleaf, which is Cannex, they run cultivation and production for us everywhere in the country. Mission, which is our retail division. I’m the president of that division and additionally president of the parent company. I don’t do a ton of our day-to-day ops, but my role there is sort of high level leadership and helping develop the Mission experience and brand. And we have a CBD division called Pure Ratios. We have a 96-hour patch that is the bulk of our sales. 

Building a Market

WW:

How would you describe the competitive dynamic between MSOs?

KK:

It’s so different from state to state. California is very unique, way more mature than most places. You’ve got business protocols in place here that don’t exist in other markets yet, slotting fees at dispensaries and stuff. You’ve got all kinds of different product companies, you don’t have that in a lot of other states. Washington’s probably most similar, but a lot fewer license. Well, actually tons of licenses but different types.

KK:

We’ve been able to dominate in the Washington market because we figured out low cost production at scale better than everybody else. So we can produce a really good quality product — we’re not going for the connoisseur class — but we can produce a really good quality product at a better price point than anybody in the state. And usually it’s not even close.

WW:

Is that where you see the companies are really competing with each other?

KK:

It depends on the state. In a state like Illinois is very much like that. There’s only 20 large scale cultivators, there’s only 60 retailers, and that’s all filling up, but not by a lot. 

There’s generally a belief that first movers have a big advantage. I’m not actually sure that’s true. But you’ll see there’s competition to be first movers. There’s competition over getting the best real estate for the retail side. So right now there’s a lot of companies competing to get the most coveted real estate in Chicago. Similar in Massachusetts, in or around Boston. 

That’s kind of where they’re competing much more than on price. In these markets wholesale sells for $4,000 a pound. If you have any product available for wholesale, happy day, you’re going to sell it at a high price.

WW:

$4,000 a pound? Why?

KK:

There’s no product.

WW:

Why not?

KK:

There’s not enough licensed capacity yet. There’s not enough licensed capacity or the licensed capacity is not up and running yet.

WW:

Gotcha.

KK:

So Michigan, Illinois, Massachusetts’s, pricing is all around $4,000 a pound. And you’re lucky if you can get it. We have a retail store open in Ann Arbor Michigan, we rarely have any flower on the shelf. It’s just not there. It will be, there’s a bunch of cultivation and licenses in the last six months but none of it’s up and running.

WW:

What are you stocking then?

KK:

Vape cartridges, concentrates, edibles, whatever we can get. I mean, really whatever we can get. Same for Illinois. We’ve done better on flower than most in Illinois because we’re vertically integrated, but even then when I call people about traditional retail. And how you handle your menu and how you handle your inventory control, none of that works here. You can’t do any of that here. 

It’s all like, ‘a cultivator has something to sell us, great, how much is it? Great.’ When we buy it, it’s going to be out two hours after we put it on the shelves. So we can’t even have displays that reflect our product mix. We’d be having people swap them out. Our menu changes five, six times a day.

KK:

A couple weeks ago [In Illinois] we got a delivery from one of the cultivators that actually had product. They offered to sell us all their flower. And we got it and there was two SKUs, one of them I think there was 48 and the other was like 23. That was all we got.

KK:

With 23 eighths, so like half of that was gone to the staff before it even hit the shelf. You put it on the menu, it’s going to be gone in like 20 minutes.

“We have a longer view.”

WW:

You come from the advocacy world. How do you think that changes your perspective compared to your competitors?

KK:

A lot of people came from Wall Street. And to be fair, a lot of my partners came from Wall Street. It’s not my world, but you get a large enough public company you’re going to need that stuff. But I think we have a long view of the industry. We’ve never chased the get rich quick schemes in the business.

WW:

What do you consider a get rich quick scheme?

KK:

Oh, like get this license and do it up and flip it quick. That kind of stuff, where we’re going to like extract every dollar out of this project that we possibly can, at the expense of our shareholders, and make a bunch of money, and then hopefully we’ll figure it out later. When something starts making money, we put it right back into the business and keep growing the business.

So we have a longer view. We don’t get as worked up or panicked by the political news of the day. We take it all in stride. When [then- U.S. Attorney General Jeff] Sessions tore up the Cole Memo, and most of the industry was freaking out, I was like, “This is worrisome, but I know what it was like to have to do raid training for your staff because you were worried the DEA was going to come in gun blazing.” If you’re just coming from Wall Street to the industry and all of a sudden something happens that’ll have a negative effect on the business, it’s like, “Oh my God, what’s going to happen?!”

We chose Mission for the name of our stores because we consider ourselves a mission-driven company. We think we’re about more than just selling cannabis. The whole idea behind founding the company in the first place is that if we can demonstrate to the public that cannabis can be distributed in a way that is professional and socially responsible, that that’s going to do as much to change public perception and change the laws. And that’s the work that I’ve been doing as a non-profit advocate. 

I saw, and still see,  the industry as an extension of the advocacy movement, and that guides the way that we try and do business. And there are times when my advocacy and business priorities are a little conflicting and I usually fall on the side of advocacy.

KK:

A good example is whether states should allow people to grow their own. I wrote a column saying they should since banning it is wrong and bad for business. I tried to put a business lens on the advocacy point of view. In that instance I’m saying home growers buy a lot of weed. And if they brew their own beer, they buy a lot of beer. 

They don’t just drink the crappy IPA that they’re brewing in their basement. They do it because they’re beer enthusiasts and they want to try and brew. They cut a little bit down on their cost but like it’s hard to brew really good beer, it’s hard to grow really good cannabis. People who are growing cannabis at home are probably not only smoking the blue dream they’re growing at home. They want to try the good stuff at stores, and they want to buy vape cartridges and everything else.

WW:

What’s the situation with coronavirus and the vaping supply chain?

KK:

From China? I don’t know.. We haven’t been impacted yet. The only impact I’ve seen so far is with the folks at Asia Horizon, with whom I’m friendly. They’re a couple of Arcview principals that started a massive scale hemp company in China.

It’s an interesting project. I mean, I actually put in a little bit of my own investment. [CEO] Brian [Sheng] is really smart. Everything’s at a standstill right now. Nothing’s moving in China. No equipment is moving. Everything was like, go, go , go and then just…They’ll be fine, but they can’t really do anything at the moment. 

WW:

I heard that with vapes, if you’ve got a supplier, you’re in better shape, but if you’re looking for a supplier you’re totally screwed.

KK:

That makes sense. It’s all coming from China. Look how fast that world moves. That is one of the more interesting developments in the industry last year. All of a sudden on the trade show circuit, a fifth of the vendors are Chinese, selling direct to the manufacturers here, rather than to third party distributors.

Massachusetts’ Massively Different Standard

WW:

Let me go back to MSOs. If I were to visit Maryland or Massachusetts, what are the questions to ask? Who is succeeding and what’s going on?

KK:

Yeah, I mean it would be different questions in each of those states. The big story in Massachusetts is just how slow the state’s been to implement and why. (Krane wrote a column for Forbes about this.) I think they really messed up in requiring these community agreements. That’s probably the biggest story in Massachusetts right now.

WW:

How are they different than what goes on California, where every city has to set their own rules, and they can set their taxes however they want…

KK:

It’s the host community agreement requirement that’s a problem. Most places, almost anywhere else  what you need to demonstrate is zoning approval from the city. In Massachusetts, it’s a massively different standard. And towns are using these agreements to keep cannabis businesses out.

In Massachusetts the only thing a town can’t say is, “I’m not granting you a host community agreement because I don’t want cannabis in my town.” But if they say there’s a lot of opposition from the community, or we don’t like your location because we think it’ll cause too much traffic, or we have concerns about the background of one of your operators, or whatever it is. They just have to have a reason, it doesn’t matter if it’s a good reason, and they can say we’re not granting you a hosting agreement. And so most towns just aren’t granting them. Or they’re granting one when the state law says they should grant 10. 

it’s outrageous that there’s one REC store in Boston three and a half years after we got that ballot initiative. Boston has changed its process for getting hosting agreements three times. Meanwhile all these applicants have been pending, that are now on their third different application process they’re waiting on. 

Real World Equity

WW:

You’re one of the few MSOs that has shown any interest in equity, which is obviously happening very slowly, if at all. How should equity work to be effective?

KK:

That’s a tough question. It’s getting very hard to [build these businesses] without adequate access to funding for the equity licensees. That’s the big problem right now. It’s one thing to say, ‘We’re going to create a pathway to licensure,’ which is great, but if you don’t create a pathway for investments and capital, what are these licensees going to do? They’re left in a really difficult position. I think Illinois on the face of it is doing a really good job. So far so good. I think Massachusetts has a good framework at the state level, but at the local they’re making it almost impossible. 

States really need to prioritize providing capital to the equity licensees if they really want to take the next step. Because if not it becomes really difficult. Where is that money coming from for someone who doesn’t have a business background and doesn’t have access to high net worth individuals, in family offices where all the money is coming from?

KK:

It becomes difficult. And then operationally, It’s difficult business. You know, just because you give someone a license doesn’t mean they’re going to succeed. And now they have to go out and compete with a bunch of businesses that have been in this for a while and know what they’re doing, and have more money and more experience. 

KK:

Number one, states can facilitate revenue by enabling businesses to operate, and use a chunk of that revenue to fund equity licenses. Even with what they’re doing in Illinois, that’s only going to fund a fraction of the funds needed by equity licensees. 

So for me, the big question then becomes how do you produce a system where the MSO’s and the better capitalized players can capitalize the equity licenses. Because realistically that’s where all the money is going right now. 

The capital markets are terrible right now. It’s hard for the big guys to raise money, it’s damn near impossible for the little guys to raise money. But the reality is that the big guys are the only ones that can raise. So for most investors, they may look at like, oh I can take a big slug at this equity license and take a chance on somebody that doesn’t have much business experience, and is going to have to go up and compete against big guys, or I can just buy a whole bunch of GTI stock. Or 4Front stock. Or whatever.

KK:

You’ve got to form some sort of marriage, since the MSOs have become the only realistic source of capital for the equity players. So then the question becomes, “Are they doing it in a way that is exploiting the equity licensees?” 

There are cases where an equity licensee is fronting for a big company, so they don’t really own the business, and they don’t really make any decisions. But big companies can also empower the equity licensees in a win-win situation. I think a lot of people are going to disagree where the line falls. But I think we have to come to an agreement. Until we get access to banking and lending, its the only solution.

A brand licensing agreement can be real way in. There’s a reason why most people don’t open Bob’s hotel, they’ll license the Hilton brand. Because people are familiar with the Hilton brand, they have operating protocols, they can come in and manage it for them, and the owners still get a nice payment, and they have a nice job, and they manage staff day to day but they’re in the Hilton system. And that may be enticing to an equity licensee. It’s like I can go up against GTI, Harvest, and everyone else, or I can run a Sunnyside or I can run a Mission. And if that license agreement is done in a way that doesn’t take all the money out of the business, that makes a lot of sense. There can be agreements where the parent company gets shelf space in an agreement that’s not punitive. 

It’s a hard discussion to have, because when you start talking with hardcore business people they don’t want to do this, you talk with some of the activists, they think everything is vindictive and the bigger businesses shouldn’t be involved with them at all. And the equity access should give them power to do everything on their own, but that’s not the real world. And it’s certainly not the regulatory world we’re living in.

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Alex Halperin
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