Delivery services – on its’ face – might seem to be a natural acquisition at this point for a retailer.
Sure, enhancing verticality and capturing incremental margin could be seen as widening the tent (as it were). But delivery services are relatively homogenous, low margin, and hold few barriers to entry (although legal cannabis delivery in Ontario remains regulated) . Transport in general has been disrupted in recent years by the entry of Uber into territory traditionally held by taxi/livery licenses. And Uber is also entering the cannabis delivery space, albeit only as pilot project initially.
Moving stuff from point ‘A’ to point ‘B’ – whether food or people…..or now, weed – is their raison d’ tete. Logistics is the business. That’s what they do.
Fire & Flower ($FAF) announced yesterday that its’ dropping $11MM to buy Pineapple Express Delivery (PED) outright.
Subscribers might recall World Class Extractions ($PUMP) announcing their purchase of a ‘controlling interest’ in PED back in April 2020. Announced by CEO Rosy Mondin as an ‘acquisition’ – the deal ultimately turned out to be neither of those things. Sure, there was an option to take it out: that never happened.
The most important part of the deal was that PED relinquished voting control to $PUMP for a 2 year period. 18 months later, $PUMP has now elected to sell the whole thing to $FAF for the same amount of money the company was valued at back in early 2020. PED used $PUMP for financing at a critical time…..but it was never a profitable investment for $PUMP, who stands to recoup about the same amount of money they initially put into it.
If the only viable business model in this thing is as a sole proprietor hiring drivers – which is what it looks like – it begs the question of why $FAF would want to belly up to that bar. Acquiring retail margin in Canada is bearing out to be an incredibly difficult thing – and it’ll become moreso with the discounters (NOVA/$HITI) coming to the fore. It reveals the in-the-trenches ground war for cash that retail lives within.
If it’s an attempt at getting in front of Uber – good luck to that idea.
Anyhow, a side story to this is how pitiful World Class Extraction has become. The notion that they’d eventually build PED and take it out was hopelessly naive in hindsight. $PUMP has borne out to be been nothing but a lifestyle enhancer for management – who has done virtually nothing of any note commercially for their entire existence. They burned investors hard on a bunk patent-play – and I can’t hold a dimmer view of the company and its’ management. To me, $PUMP is a horrible reflection on the cannabis sector in specific, and Canadian capital markets in the general. It’s reminiscent of the Namastes ($N) and the Harvest One’s ($HVT) out there – shams filled with the inept and sleazy – poster children for the risk one takes when investing in or holding stocks, cannabis sector or not.
I don’t doubt there’s some profitability in PED somewhere. It generates a pretty consistent 25% margin which $FAF might be able to enhance. It’s also turnkey, and could (should?) allow $FAF to path sales as well.
While the rest of the large retailers is going ‘value’…….and running headlong into sub 20% margin territory…..$FAF is approaching business from a more traditional angle: broadening business segments rather than focusing on volume.
The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in any of the companies mentioned.