Cronos Group CEO Believes Regulation Is The Solution For Vape Protection

This interview was conducted between Green Market Report’s Editor-In-Chief Debra Borchardt and Cronos Group CEO Mike Gorenstein in New York on September 17, 2019. It has been edited for purposes of length.

Green Market Report:
One of the big negatives happening right now in the cannabis industry obviously is the vaping issue. Do you think that the cannabis industry needs to do more to fight that battle? Or what can the cannabis industry do?

Mike Gorenstein, CEO Cronos Group:
This is a big reason why legalization can help, when you think about the markets we’re in, right? If you look at Canada and the big question we get is, what’s happening with your vape products? We actually haven’t been able to launch because we only operate in fully legal markets. I think what’s happening is even as we have a lot of consumers aren’t sure whether there’s something legal or not when they are going into dispensaries and they’re expecting a regulated product. This is why we need to have strictly regulated products. You can usually have safety standards, but I think that’s the argument. Why we need to have as an industry and to go toe to toe with regulators. We should all collaborate in nature. We have the right standards and we can make sure we transparently have regulated products on shelf.

Green Market Report:
I had heard that the vape sales for cannabis hadn’t been affected yet though. That the consumer, the cannabis consumer is already making that differentiation, that it’s more of a PR issue versus an actual consumer issue at the consumption level.

Mike Gorenstein:
Seeing the exact data that would say one way or another. I think it’s an opportunity for responsible companies. Like the work that we do with Cronos device labs in Israel. We’re going through all types of different safety checks. When you know the heating coil and making sure that you have the right heating coil and looking at the ingredients that would be vaporized. Making sure that the way that they interact is safe. Making sure that we have data there and then going always through the supply chain, making sure that we know that nothing is being swapped out with no impurities. And those are the important things to do so that when consumers are going to the store, you can maintain that trust. That says, here’s that transparent data. What we’ve done is to make sure that this is the safest product that you can get on the market and people are going to be using these products. We should make sure we get them the safest possible product.

Green Market Report:
Are you engaging in any of these kinds of codes that can be put on the packaging so you can be sure that it is the right product that it hasn’t been counterfeited? Will Cronos be working with any of those companies?

Mike Gorenstein:
I think we’re in a unique situation because the market that we’ll be launching in is Canada, You’re actually wholesaling into the government and the government is distributed. So because you have one point for each province and distribution. For example, in Ontario, we ship everything to the province and then all the retail store’s purchase product from the province and with uniform packaging. So it’s less than I think of a risk of counterfeit because there’s one source the retailers purchase from.

Green Market Report:
Let’s talk about Altria (NYSE: MO). They have taken a fairly big position in your company. Any concern about that?

Mike Gorenstein:
For them having too large of a position? No, no, we look at it as a partnership. I think that they’re great partners to have. I think that there’s a lot they can help us with. They’ve seen just about everything over the last hundred years, but from distribution, marketing, manufacturing, and it gets it all. As a young company that is great for us to get and we can focus on innovation, focus on the consumer, on a cannabis consumer, and then we can leverage a lot of that expertise. So having them is really helpful for us.

Green Market Report:
The only comparison I see is the Constellation Brands (NYSE: STZ) and Canopy Growth (NYSE: CGC) relationship. It looked like a good deal in the beginning and now everybody feels it’s really not Canopy Growth anymore. It’s really Constellation Brands. How can you as Cronos Group protect yourself from that happening?

Mike Gorenstein:
Just becoming a branch of Altria? My job as CEO and chairman is to do its best for shareholders. And I think one of the reasons you have corporate governance is making sure that ultimately I shouldn’t be the only person that can make every decision. You know, it’s good to have experts across the whole board. They can bet certain decisions. So it’s not about protecting ourselves, it’s about protecting shareholders and making sure that you get the best possible outcome. You know, I think one, one key difference when you look at the industry is you’re coming from, there’s not a risk of cannabis cannibalizing the tobacco industry.

Mike Gorenstein:
Yeah. I think all is a company that’s, you know, the last, the last few decades of focus has really been how do we reduce risk and increase new choices and new opportunities. And I think that this is an avenue in part of that diversification. You know, seeing an opportunity to invest in a business that’s different than tobacco.

Green Market Report:

What is the relationship between you and Gotham Green at this time?

Mike Gorenstein:
I spend my time on Cronos. I don’t have any operational or any other responsibilities at Gotham Green.

Green Market Report:

What is the current status on the joint venture with MedMen (OTC:MMNFF)?

Mike Gorenstein:
Yeah, we still have a joint venture in Canada and I think a lot of what’s, what’s changed is the regulatory environment. So we’ve had a few changes in provincial licensing for the retail stores. We’ve had a quite a bit of evolved changes and it hasn’t made economic sense for us to actually pursue a license given the lottery dynamics and the supply dynamic. So it’s still something that we have open. We still communicate frequently and the idea behind it still fits the Cronos model, which is being very focused, staying in our lane, part of building that ecosystem is bringing a best in class retailer. Having them be able to manage retail stores around them and us going and building out our own retail stores is still there.

I think it’s still a great brand and it’s a great operation. The challenge is just, we don’t know how the licenses are going to be issued and given the lottery system and the limits on LP control right now, it hasn’t made sense. As things open up and the market matures, I think that’s when we can get a little more visibility and be able to build the business case specifically to open the stores and where it opens stores.

Green Market Report:
You just recently closed on the Lord Jones acquisition. How do you plan to grow the market share?

Mike Gorenstein:
We feel like it’s pretty differentiated where it’s at. And I think one of the things we’re excited about.  We look at it as a, as a premium CBD brand. And when we think of the skincare opportunity being in Sephora, being in Soul Cycle and the unique distribution channels – it allows it to be a separate differentiated product. We don’t think of it as a state by state cannabis market. We think of it as a national marketing global CBD opportunity.

In the brick and mortar,  their biggest distribution is really their skincare. And that’s the thing we see as a pretty differentiated opportunity there. That’s one of the things that was very exciting for us. You haven’t seen a lot of companies build brand equity and in that area and I think it’s an area that will grow and it’s pretty exciting.

Green Market Report:

You recently inked a deal with MediPharm Labs. Was scale the reason behind that?

Mike Gorenstein:
Yes. As we scale and get to market, then we’ll use multiple contract manufacturers and we take a very similar strategy to CPG companies where we want to make sure that we can focus on the consumer demands focused on getting the products right and rather than trying to build all the infrastructure upfront and ourselves, we’ll leverage sharing partners to be able to get products in the market.

Are you able to keep your standards by using these different providers? So we have very strict quality agreements. We dictate the standard operating procedures and where the actual cannabis is coming in. What we’re doing is standardizing a extracted crude oil.

Our whole model is about being able to standardize what the formulations are and we need to be able to do the same thing in Canada. This is typical across all CPGs, these are the standards you operate. So pick any pharmaceutical, which is about the most standardized industry yet and Pfizer is using co-manufacturers to make their, their pharmaceuticals.

If you look at our history of how we’ve grown. We’ve been very careful about the way that we’ve done this stage in the company’s growth, if there’s not a culture fit, if there’s not an alignment of vision and strategy, it can be very difficult. I have a background as a corporate M&A lawyer and I think a lot about how all these pieces fit together. Integration is a very key focus and it needs to fit the things we’re doing.

Green Market Report:

The cannabis group is as a whole, stock wise, been down. Do you think that the group is going to need some kind of green swan event to bring things back?

Mike Gorenstein:
It’s a very young industry and it is going to be very volatile. So it’s understandable. I think we’re also in a fortunate position where the capital markets don’t favor cannabis. We ultimately believe that the macro outlook is still great, and we’re in a great cash position that we can be opportunistic.

Debra Borchardt

Debra BorchardtDebra Borchardt

Debra Borchardt is the CEO, Co-Founder, and Editor-In-Chief of GMR. She has covered the cannabis industry for several years at Forbes, Seeking Alpha and TheStreet. Prior to becoming a financial journalist, Debra was a Vice President at Bear Stearns where she held a Series 7 and Registered Investment Advisor license. Debra has a Masters degree in Business Journalism from New York University.


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