- Focused on medical market with organic marijuana
- Large scale production to reap benefits from economies of scale
- Partnerships with utilities to lower power costs
As one of just two producers of organic cannabis and with a million square feet of low cost production planned, the Green Organic Dutchman Holdings Ltd. (“TGOD”) is set to capitalize on Canada’s looming supply shortfall. The company is growing its competitive advantage in a way that appears to run contrary to established dictum by focusing not just on differentiation but also on cost leadership. Typical generic strategies are either one or the other. This unique approach is winning friends and influencing people. TGOD has, to date, closed $112 million in private placements, which includes $55 million from marijuana industry powerhouse Aurora Cannabis Inc. (OTCQX: ACBFF) (TSX: ACB). As Canada draws closer to legalization of the consumer market, TGOD is looking good. The company’s highly anticipated IPO is planned for March 2018.
Writing in the 1980s, renowned Harvard professor Michael Porter excited attention with his theory of how companies should pursue the elusive grail of competitive advantage. A company’s basic strategy should be based, he argued, either on producing at a lower cost than its competitors can or on differentiating itself by offering unique features. A company should also decide on market scope by selling to selected market segments or to the broad market.
As a guide, Porter’s analysis helps to develop strategic focus. However, real world conditions often blur the dichotomy between the cost and differentiation strategies that he detailed. While TGOD can attempt some differentiation by its concentration on organic methods of cultivation, such methods are obviously not unique to the company, which is why a hybrid approach may be the right one. As a result, TGOD is pursuing a low cost strategy in the limited scope market segment of organic cannabis.
The low cost aspect of its mixed strategy has a good chance of succeeding. The company’s production operations in Ontario and Quebec together command 970,000 square feet of ultra-high technology greenhouse facilities. With such a mammoth scale in play, TGOD should benefit from large economies of scale. Moreover, TGOD has an agreement with Eaton Corp., the $36 billion global power management company, under which Eaton, by providing research and optimization, will allow TGOD to have some of the lowest electricity input costs in the business. The collaboration has facilitated the development of a six-megawatt cogeneration natural gas power plant on TGOD’s Ontario property, which is expected to drive kilowatt-hour cost down from its present $0.13 to $0.045.
At that Hamilton, Ontario, facility, TGOD is planning a two-phased approach, under which annual production will be expanded from 1,000 kilograms per year to 14,000 kilograms by the end of 2018. At $8 a gram, this translates to revenues of $112 million. Total build-out capacity to achieve that output will be 150,000 square feet. The operation currently consists of a 1,000 kilogram-per-year indoor production facility, which acts as a beta facility for the larger expansion.
Construction at facilities located on TGOD’s 75-acre property in Quebec has begun. The facility covers an extensive 820,000 square feet capable of producing 102,000 kilograms of organic cannabis. The first phase of this expansion is underway, and construction is expected to be completed by Q2 2019. This first phase will consist of 220,000 square feet capable of producing 22,000 kilograms of cannabis. Second and third phases, which will add 250,000 square feet producing 26,000 kilograms of cannabis and 350,000 square feet producing 54,000 kilograms of cannabis, are expected to follow.
For more information, visit the company’s website at www.TGOD.ca
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