How Decibel disrupted Canadian cannabis: Q&A with exec Adam Coates

Decibel Cannabis is a rare breed among licensed producers in Canada.

The company’s ascent to the top of market-share charts in key product categories came not from costly and severely dilutive mergers and acquisitions – a strategy employed by some larger rivals.

As of April, the Alberta-based company said its national share was 7.1% – good enough for second place in Canada’s hotly contested market, though market analytics firm HiFyre had Decibel as No. 1 in the key provinces of Ontario, British Columbia, Alberta and Saskatchewan, according to a recent research note by the Bank of Montreal.

The key for Decibel thus far is being nimble, innovative, financially prudent and having exceptional operations.

“I think it’s not a crazy secret sauce, but it’s really understanding the customer, where they’re going, what they’re looking for and why they’re looking for those things,” Adam Coates, the company’s chief revenue officer, told MJBizDaily in a phone interview.

“And shaping our products and brand offerings to fit that and then having really great customer service.”

For instance, the company’s infused pre-rolls disrupted that cannabis segment, beating out more capitalized rivals.

Coates suggested that what a lot of the big licensed producers forgot to do was ask, “Who’s actually consuming it now?”

Instead, they asked, “Who do we want to consume this five or 10 years from now?”

“And how are we creating products for them that will then lead to more consumers entering the category?” he asked.

“I think they (large rivals) were fishing where the fish weren’t.”

Decibel has reported 10 consecutive quarterly positive adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), the latest being 7.1 million Canadian dollars ($5 million) in the fourth quarter of 2022 and a small net loss of CA$569,000 in the first quarter.

Decibel, which trades as DB on the TSX Venture Exchange, also generated CA$8.3 million in positive cash flow from operations in fiscal 2022 while recording a net loss of CA$4.5 million.

For the final quarter of 2022, however, net income was a positive CA$654,000.

MJBizDaily spoke with Coates about Decibel’s relative success and what the company does differently to stay ahead in Canada’s hypercompetitive cannabis industry.

Can you give an example of how has Decibel has tried something new and failed – and then found a solution?

We had been chasing down infused pre-rolls. We saw what was going on in California and were really excited about it.

When Health Canada issued a memo in August 2021 clarifying that a cannabis product including dried cannabis and a cannabis extract is classified as a cannabis extract product, that gave us clarity on how infused pre-rolls would be categorized by the regulator, and that we could begin production of these types of products.

This ultimately was the green light we needed to roll out our infused pre-roll strategy.

After two or so months, we launched our first infused pre-roll.

It was really exciting for a very short period of time, and then it was devastating really, really quickly. The joints didn’t work. They didn’t pull.

It was a flop for all intents and purposes.

But we really believed in the product and believed in the insights about understanding what consumers were looking for in Canada.

We still felt really good about it. We reformulated the product, came up with a new product and continued pressing forward.

Today, there’s no question we’re the leader in that category and only still growing.

The Ontario Cannabis Store is increasing its margin on some products and lowering it on others. The margin for pre-rolls is doubling to almost 30%. How will that affect the market?

It’s literally the million-dollar question.

I think what you’re going to see is prices (of infused pre-rolls) will rise for the retailer and then to the end consumer.

I think that will impact the velocity and the growth rate you see in this category, which competes really hard with (illicit) market offerings.

That’s not to say there isn’t control within the LP’s hands.

But the LP has to decide whether they’re going to eat the margin and keep the price the same, or if they’re going to pass some along to the retailer and then the end consumer.

That’s a big decision we have to make. We haven’t made our decision in terms of where we’re going with our pricing. That’s to come later on this summer.

I don’t think there’s a lot of LPs out there who are going to be able to handle that reduction in margin, considering that they (infused pre-rolls) are very costly to make, the excise burden on them is huge.

Some of your competitors wouldn’t still be in business were it not for the Bay Street capital spigot. How do Decibel’s executives approach the business differently?

Our executive group has more or less been with the company since Day One, or within the first year.

We don’t have a ton of ego. The belief in what we’re doing, the brands we’re building, the products we’re making, I think really help.

We run really, really lean from a people perspective.

And we’re very, very cautious about making investments and ensuring they have good rates of return.

We’re forced to do that. We’ve been cash-strapped, basically, since 2020, and have been able to grow the business massively without really raising a whole bunch of extra capital.

That’s forced us to be really prudent and fiscally responsible.

I think if you compare where we sit on the market-share table to some of those other companies, I think our leadership team and our senior leaders are much more involved in actually doing the work and helping make sure the business progresses.

That has other benefits, like we understand what’s going on more and making better decisions.

Tell us about a time where you decided to cut off a product that didn’t work out.

As aggressive as we are about launching new products, being innovative and launching new form factors, we’re equally as aggressive in cutting off products that don’t work anymore.

A good example is we launched a whole bunch of different form factors of infused pre-rolls – hash-infused, live resin-infused, kief-infused – and they just didn’t work as well as our champion, which is the distillate-infused products.

So making quick decisions and seeing (what) is clearly not working, understand why it didn’t work and asking if it is something you can overcome by adjusting the positioning or product, or that it is not a viable product/category and move efforts elsewhere.

Hash is a great example. Hash is the top-selling concentrate, and pre-rolls are growing like crazy, so it would reason that a hash-infused pre-roll would make a lot of sense.

But what we figured out is hash consumers like to roll their own joints. They tend to be a bit more of an older demographic that is set in their traditions in how they consume.

They’re not as interested in a pre-roll form factor, and so, instead of trying to keep pushing on something that doesn’t work for the consumer, we moved on and focused on the products consumers want.

How has innovation helped Decibel grow when others barely struggle to maintain what they have?

I think we have a really good handle on what the consumer is looking for, what it is about certain products they’re drawn to, aside from just price.

What we know about the cannabis consumer is that (legalization) is still very new, and they want to try a whole bunch of different things.

Having constant innovation, constantly having something new – even if that’s just a new cultivar or a new flavor – has been really important.

Let’s go back to 2019 and vapes.

We asked, “Why are people buying vapes? What are the things about vapes that they like? And what don’t they like? What are some issues that they’re having?”

We figured out how to position ourselves in the category amongst all those monsters (larger competitors).

It didn’t happen overnight, but in a year and a half, we were the No. 1 vape brand in the country.

I’d be remiss if I didn’t call out a really flexible and hardworking operations team.

You can’t have a strong commercial strategy without an exceptional operations and supply-chain team.

Source: https://mjbizdaily.com/decibel-cannabis-positive-cash-flow-chief-revenue-officer-adam-coates/