From Mainstream to Cannabis is an ongoing series that asks cannabis executives to talk about their personal and professional journey to the industry.
For Scott Grossman, who joined Louisville, Kentucky-based Turning Point Brands (NYSE: TPB) last May as Vice President for Corporate Development, the move to the venerable consumer products company presents an array of professional and personal prospects for the experienced investor and
Turning Point is an interesting amalgam of brands and investments arranged by divisions, or segments, as Grossman calls them. “It was originally National Tobacco,” he said of the company and its tobacco roots. “Today we run three segments. What we’re really known for is Zig-Zag, which is our smoking division, with the number one share in papers and wraps and cones. Turning Point owns the perpetual license for North America, including Canada. We’re in over 200,000 stores, and it is about 45 percent of our business today and about two thirds of our profit. The segment is enjoying a lot of tail winds from legalization of cannabis for a variety of reasons.
Our second business,” he added, “and why we’re in tobacco country, is because we own Stoker’s, which is a leading player in the moist snuff tobacco space. It’s about 35 percent of our business, a cash cow, growing, and in the value categories, so it’s stealing share from the big boys. Third, we have a distribution asset called New Gen, which also houses a lot of our cannabinoid investments.”
As the head of corporate development for Turning Point – which also has offices in Connecticut, Miami, Florida, and Santa Monica, California – Grossman will lead M&A, large strategic initiatives, and large commercial partnerships. It’s a job for which he says he is well-prepared. “For some context, my relationship with cannabis started over 25 years ago when I was a freshman in college at Columbia,” he said. “I walked into a NORML meeting just by chance, and it changed my world in a lot of ways. Not only did I learn about the plant and the grassroots effort to legalize it at the time, but as an econ major it set me off to deeply analyze the social and economic impacts of illicit markets in general, how it impacts organized crime, and I just became a champion of legalization efforts behind the scenes before it was in vogue. I didn’t understand why it was banned, and as I got deeper into it, I grew to understand the racial and social implications of trying to prohibit cannabis use. That was my first personal journey.”
The NORML meeting had taken place on campus, in New York City, in one of the Columbia University buildings, and I wondered if the location was at all relevant to the development of his interest in cannabis. “Obviously, it was a very liberal college,” said Grossman, “but I also was a competitive athlete and couldn’t afford to be hung over. I also had an older brother who went to Phish shows and grew up with the Grateful Dead, so I had been around it. I never understood the war on drugs, and I never understood the fascination with multiple parties telling you this is the devil’s drug. I just never got it.”
That was his personal experience with cannabis. Professionally, his journey to the industry is a classic “From Mainstream to Cannabis” story. ‘I spent over 20 years as a public markets and public and private equity investor on Wall Street, investing mostly in consumer companies and industries undergoing what I call transformative change. So, mergers, new management, turn-arounds, restructuring, cradle-to-grave type of investing on both the public and private side in the markets. And regardless of what I was looking at investing in, there was always an underlying macro of secular change, and that we were impacting the specific companies.
“I focused mostly on consumer; so, retail, food and beverage, alcohol, leisure, hospitality,” he said. “And my worlds effectively collided about seven years ago when many of the companies I was invested in – big and small CPGs, beverage companies, alcohol – all started to embrace the idea of getting smarter on cannabinoids. Not necessarily doing anything with it, but they were all interested. Some were more worried than not, and some were more excited than others, but I took it as a major sign that boards of public companies were starting to look at this. And I took it to be a major sign that this was a generational opportunity for folks like me to not only create great businesses, but for me personally to really move the needle. I kind of picked up my head and decided to see if I can get a role in the cannabis sector by leveraging the experiences and skill sets that I developed over 20 years in an industry that I thought would require those skills.”
The timing of his first engagements aligned nicely with the emerging legal industry. “2015 is when I started being in meetings with management teams where they were surfacing the desire to get smarter on cannabinoids, and in 2018, I started investing personally,” he said. “Then, in 2020, I was running my own hedge fund called Vindico Capital. Vindico means to champion, to defend, and it was a vehicle to invest in these types of situations that I described before, backing great management teams to create hopefully enormous value. And so about three years ago, I just decided to go all in and try and do something within the industry, to not only have a seat at the table, but to be a part of an industry where I think we all want to do good by being good. I think that’s kind of table stakes in my world, and I’m very lucky, but for me, this is all about creating real change.”
Because of his experience with Vindico, I wondered if cannabis was an inkling in Grossman’s head as he was investing in other sectors. “Always,” he replied. “I was on the board of Reed’s, one of the largest ginger beer manufacturers, a $50 million company. It’s also publicly traded. I joined the board in 2017, and one of the first new initiatives that they launched was a CBD beverage. That’s pretty early. So, I’ve always been watching it.
“Like I said,” he added, “I’ve been a champion behind the scenes, and I’ve met many of the management teams that are running the Green Thumbs of the world. I think for guys and gals like me who have been in the investment space, where it’s clearly in some ways still very taboo, there were real repercussions to be associated with it, and I was effectively waiting for the right time. And there never is a perfect time, but I decided to join and I’m very lucky. The CFO of Turning Point is a business school friend going back 15 years. Actually, before he even joined Turning Point, he had asked me what I thought about the cannabis industry in general. This is 2018 or so, and my eyes lit up. So, I was always looking to join. I just didn’t know where, how, or when. I just knew the why.”
When the time came to make the leap, “It was very simple,” recounted Grossman. “Like I said, Louis Reformina, the CFO, is a friend of mine, and we stayed in touch after he joined Turning Point and had conversations frequently. One day he called me. At the time he was doing corporate development, effectively my role today, and he said, ‘I’m going to get bumped to CFO and I need someone to take over who I trust, and I know can do the job. I hadn’t been looking actively – I was still running my funds and enjoying it – but I had come to the point, at least in the hedge fund business, that it just became extremely challenging to raise capital to grow and scale. And it was just time to pivot.
“After he called me,” he added, “it was a relatively short process. I met with the former CEO, Larry Wexler, who also went to the same grad school I did. I just love the team, and thankfully they loved me, and what really attracted me to Turning Point, and even today, was that it’s one of the few New York Stock Exchange-listed companies that is actively deploying capital in the cannabinoid sector, all legal, all aboveboard, and non-plant-touching, while at the same time, we have a very large and highly cash producing asset in Zig-Zag that would also capitalize on legalization. I think in five to 10 years there is going to be a table with I don’t know how many seats – 12 or15 – and I always wanted to be invited to take a seat. As I thought about the ways for me to have the most amount of impact, it was joining an existing successful platform with a desire to go deeper into this market and use the platform as a position of strength to really move the needle.”
I asked Grossman if the fact that so many eastern states were also on the cusp of legalization a factor in his decision as well. “I think we had reached a tipping point well before that and the writing was on the
“When you think about California being the first state, and Colorado,” he added, “it just became this cascade of states, and I never really viewed federal – and still don’t – as the linchpin to make this industry successful. It’s certainly a nuisance. 280E is a nuisance. There are lots of things that require cannabis companies to operate with one arm tied behind their back, but I never viewed federal legalization as a requirement to get into the industry, because I think it’s just too late.
On Offense and Defense
“My role is to source, evaluate, structure, execute, and eventually monitor investments,” said Grossman of his Turning Point duties. “Sometimes those investments evolve into a strategic partnership instead. A good example would be what we did with Clipper Lighter which is a distribution agreement.
The agreement involves distro to over 200,000 stores in North America. “These are convenience stores, like 711, Speedway, and BP,” said Grossman. “The reason why we’re in those is because two of our main products, Zig-Zag and Stoker’s, are sold in them every day. So, putting aside cannabis in general, as we think about new investments, there has to be some sort of synergy. What is it really doing for our bottom line? What do the strategic benefits associated with this investment do for our existing infrastructure and platform? A lot of what I came in to do is both offensive and defensive. As I mentioned, we have a number one share in wrapping papers and cones and wraps for Zig-Zag, but the dispensary channel, and now increasingly the headshop channel, is relatively nascent. There are 10,000 dispensaries in the United States today, roughly speaking, and most of those didn’t exist 5 to 10 years ago, so there is an enormous push for not only Zig-Zag but all brands to get into this new channel.”
The actual distribution of those products into the 200,000 shops is done via traditional logistics companies. “We have a TSM (territory sales manager) model. They go in, we traditionally use CoreMark or McLane as a distributor, but many of our customers buy direct as well.”
But the distributor does not take care of all the details. “There still has to be sales support, and there has to be a TSM going into the stores to refill, take new orders, put up new marketing materials, introduce new products, and make sure that the end cap looks right. All that goes on regardless of whether you’re a distributor or not.”
Is that logistical value chain throughout North America one of the foundations on which he wants to build Turning Point’s future? “Going back to the cannabis market in the United States,” responded Grossman., “there is a big push for us to further penetrate that industry. There are many paper brands out there. But we are a 150-year-old brand, we’ve been around seemingly forever, and we think we have something really meaningful to say. And we believe that while nothing is given, and you have to earn it, we think we should be on the shelves, and we should have a direct relationship with the cannabis consumer. But you have to appreciate that up until three years ago, we didn’t have the word cannabis accessory in our 10k. We were always a roll-your-own tobacco paper, and we still are, to be clear. But the reality is, and you know this better than anyone, that our product has always been used for cannabis, so now it’s about embracing it and doing more.”
I asked Grossman to explain what the offensive and defensive elements of his job are. “It’s probably best to give you an example,” he said. “One of the first investments I made was in a company called Old Pal, a top selling flower company that started out in Venice, California. What’s interesting about Old Pal is that they employ an asset-light model. I don’t know how much you know about that, but they don’t own any grows, and they don’t touch the plant. They effectively sell packaging to single-state and multistate operators, and what’s fascinating about Old Pal – and we obviously spent a ton of time on this before we made the investment – is that their brand equity in states that they weren’t in was as strong if not stronger than the states they were in. They had done a very good job of building a brand with one arm tied behind their back, because you can’t do billboards and all that stuff.
“There’s both offense and defense here,” he continued. “The offense, as we think about Turning Point and our core competency, is being good stewards of brands, building them up, putting out new innovative products, being everywhere, anywhere, high quality, all that stuff. This allows Zig-Zag specifically to further penetrate the dispensary because our relationship with Old Pal mandates it. Old Pal is a roll-your-own cannabis company. Their first form factor looked like a tobacco pouch with cannabis inside, whether an eighth or an ounce, and embedded in the pouch was a pack of Old Pal rolling papers. So now it’s Zig-Zag papers, and Old Pal customers are now seeing our product whether they want to or not. That obviously creates awareness, and there are a lot of downstream benefits from that relationship, because it also benefits us with the cultivator growing the product for Old Pal, creating prerolls. That gives us a direct line of communication with that cultivator or operator.
“The defensive element is that there are a number of companies that compete with Zig-Zag, whether it’s Raw or Vibes, and this allows us to not only go toe-to-toe with them in a new channel, but also aligns us with a cannabis brand,” added. “Because in my opinion, the days of illicitly buying a dime bag and then going into a gas station to buy rolling papers are not over, but the world has changed. If I’m a cannabis consumer – a power user who’s used it for 30 years or a soccer mom trying it for the first time – that experience is increasingly moving from the illicit market into the regulated market, and that is a store that didn’t frankly exist. And because it didn’t exist, that means that customer may or may not know Zig-Zag, and that’s what I mean by offensive. It’s trying to get in front of existing and new customers in a new territory while aligning ourselves with a brand, or brands, as well as creating strategic relationships with the MSOs and SSOs that sell not only Zig-Zag, but also some of the other brands that we have invested in.”
Growth Sectors
I asked Grossman if he knows how many head shops they are in, and also if he knows how many companies produce rolling papers, because there are so many brands it can seem overwhelming at times. “It’s true, there are a lot,” he said. “To answer your question about head shops, it’s somewhat challenging to know exact market share and store count. I don’t know if you know MSA (Management Science Associates), but they do a very granular job of understanding what’s going on in the convenience store channel. There really isn’t an equivalent for head shops, but we are well represented.
“I don’t think this will shock you for me to admit,” he added, “but when you walk into a head shop today, traditionally you see a lot of Raw papers, which is HPI International, and they’re the number two; in some categories, number one. So, it’s an enormously important market. We’re still number one in the room, but we’re continuing to get better through the introduction of new products, whether it’s cones or dog walkers, and we also have new substrates coming out. You’ve seen a number of initiatives that we’ve done in the branding side with our Zig-Zag marketplace. It’s a huge initiative, but I think the shop is a critical part of the value chain that we definitely are doing extremely well in, but certainly can do better.”
So, from which sector will growth come from for Turning Point, I asked. “I think it’s going to come from all the above,” he said. “We have slides in our investor deck that show the impact of legalization on our core business, and specific states that get turned on, and whether it’s going through the dispensary or going through a 711, it’s all of the above. I don’t have an exact answer on which channel is really driving growth, but we also didn’t speak about direct to consumer, which, whether it’s selling b2b directly to stores or selling b2c on Amazon or Shopify, is increasingly a much bigger businesses for us today than three years ago. So, definitely all the above.”
The Turning Point website has a cool timeline tat visually displays the company’s brand acquisitions and investments over the years. I asked if any of the consummated deals had Grossman’s fingerprints on them, and noted that there seemed to be a subtle shift toward plant-based, and even plant-touching products and investments by the company, even though its presence on the NYSE prohibited it from touching the plant.
“Dosist, Wild Hemp, and Docklight [Brands] we’re all done before I joined,” he said. “I inherited them, I monitor them, and I sit on the boards of most of them. But you’re right, and that’s kind of how I ended up with the company. There was a big initiative by the prior CFO to do more of these types of minority investments. We’re in a fortunate position. We generate a ton of cash. Roughly speaking, we generate, call it $100 million of EBITDA, and convert a lot of that to free cash flow. We have $150 million of cash on our balance sheet, and relatively low leveraged, so we are constantly looking for creative ways to deploy capital. That could be in the form of M&A, it could be in the form of strategic minority investments I just spoke about, or it could be in the form of buybacks, but all these things at the end of the day come down to capital allocation, which I think is a primary responsibility of my job. What is the best use of our capital to not only generate an attractive financial returns, but also has strategic benefits down the line? But I want to clarify one thing, just to be clear. In all of these investments, they sell cannabis products, but none of them actually are plant touching.”
In the context of everything he had just said about the enviable financial position Turning Point is in, does that mean they are going to take a lot of minority stakes in a lot of companies and see what happens rather than increase the size of those stakes?
“It’s a phenomenal question and the right question, by the way, and one we’re actively thinking about today,” said Grossman. “Right now, I think we have a relatively full stable with the names that you just mentioned, and without going into too much detail, most of these investments have a path to significantly increase our investment. We clearly didn’t invest $8 million in Old Pal to never do anything with it again. Because the way I think about it is it’s effectively an outsourced incubation arm that has a strategic benefits day one; the Zig-Zag papers in the Old Pal pouch.
“But we also need to be in a position to not only support the management teams – which I do on a daily basis, talking about strategy, finance, how they’re running the balance sheet, cash burn, all that stuff – but also being a position that in the event we can actually do more, that we can capitalize on that. Do we want to have 15 of these [investments]? I think the answer is no. Are we looking at significant acquisitions of significant scale? For the last year, one of the things I’ve been doing is meeting with everybody, because, as you know, the world is very small in cannabis, memories are very long, and we just don’t know how the industry is going to evolve. So, I’ve been just trying to get as smart as I can at the local and state level throughout the value chain, from seed to sale, and that includes grow operators, dispensaries, brands, raw material providers, from terpene manufacturers and distillate hardware manufacturers to lighting. We’re meeting with all of the above. I’m not saying we would actually put capital into most of these companies, but you never know if XYZ company could be a strategic partner down the line, or we could be a source of capital or a solutions provider. We just don’t know, so we’re laying the foundation now, as we have been over the last couple of years.”
Considering he has been at it for only a year, I assume his learning curve has been straight up. “100 percent,” he said. “I generally feel, and I say this is in the most modest way possible, that I entered the business certainly from an external or Wall Street perspective, but with a much better understanding of the products and how the endocannabinoid system works. I’ve been closely following some of the new drugs that are coming out in the market, and I have been immersed in the industry for a while, but I will tell you that when you’re inside a company like Turning Point, it provides an enormous amount of access. I’ve been getting as smart as possible, and the reality is that it’s moving so quickly that you can’t really afford not to be in the flow on a daily basis.
Future Turning Points
As to the future, distant or near, Grossman is in the process of developing strategies that of necessity also need to be flexible due to cannabis’ unique nature. “The way I think about cannabis is that I believe it’s an ingredient not too dissimilar from other markets,” he said. “Alcohol is in this little area and a
“I think about Todd Harrison (founding partner and CIO of CB1 Capital Management), who is someone I know very well, and he thinks about it like CPG 2.0,” added Grossman. “I think we’re in the very early innings of that, where cannabis is the ingredient, whether it’s in a vape product or an edible, and I’m all for it if it means that someone who’s facing anxiety or can’t sleep needs to eat an edible because he or she doesn’t like to smoke. I’m all for smoking, too. I’m all for using the plant as it was designed, but the way I think about the industry and the business of cannabis is that cannabis is going to be an ingredient used in efficacious products and at the end of the day, I truly believe that brands will matter. And brands to me speak to consistent experiences, and loyalty. When you get a hamburger from McDonald’s, it’s the same everywhere, and that’s truly hard to do with a cannabis product. But as it becomes further away from the raw material, so as you get further away from flower, and you start getting some sort of manufactured product, whether it’s a nicely designed Mylar bag or a pretty looking pen, in the end it speaks to what type of experience you are having with that product.
So, I don’t know what inning we are in,” he concluded, but that’s the next inning, and I call it Dispensary 2.0. It’s where you walk into a dispensary just like you walk into a liquor store, and it’s stratified. I envision a world where, if I was going out to dinner with my wife on a special occasion and order an X-dollar bottle of wine, I’m not necessarily going to buy 20 bottles of that wine if I have 20 friends over for a party. We’re not there yet with cannabis, but as that happens for the MSOs and SSOs, who largely control both content and distribution – with content being product – the only way to stratify is to have truly differentiated products, and I think brands are not the only way to present that messaging.”
What is the state of brand loyalty among cannabis consumers? “Brand loyalty with Zig-Zag is exceptionally high, whether you look at reorder rates or market share,” said Grossman. “Putting aside our portfolio, you look at market shares in cannabis and they change a lot. Every state is different, but if you take Massachusetts, for example, a billion-and-a-half-dollar marketplace, it has only been live for about two years, and is very short on flower and biomass, but it has a lot of ramp. But California is the poster child for too many brands, and in my opinion, there’s going to be a shake out, for a variety of reasons. There are a lot of businesses that got started and brands that started that don’t necessarily have a reason to exist. But that’s in any industry, and I think it will shake out over time.
“For the brands that are winning – whether it’s Cookies or 710 lab, or an Old Pal, which is an eight states now, or a Wyld or a Wana on the edible size – it’s very clear that once you achieve some sort of critical mass and scale, there’s a very large portion of the shelf dedicated to your products,” he added. “Ultimately, I think loyalty is going to come down to what the customer prefers, and that could be for a whole host of reasons. Someone could come in because they just want to have fun, or they might come in because they have a debilitating injury. My grandma might not smoke a joint, but she might use a topical. I think right now we’re in the phase where people are trying to figure that out. I’m 44, and when I got introduced to cannabis, a conversation about terpenes and strains and sativa and indica didn’t exist, mostly because you didn’t have a choice. You were buying it illegally, and you took what you could get. So there are generations of people who have been consuming for all this time, but now have the ability to actually figure out that myrcene is really good for them, or if they go over 30 percent THC, it’s going to make them too anxious or, or they prefer a vape over flower, and if they are going out to a party, they want to remain coherent. I think people are figuring it out, and I think when you’re trying to figure it out it’s tough to be loyal. You’re trying so many things, how could you be?
“However,” he said, “once you figure out that this is a good product for you, over time you’re going to say, ‘Yeah, I always like a Wana gummy. It’s consistent, I know how much I can take, and I’m never going to have a Maureen Dowd incident.’ It sounds to me like you have been a consumer for a while, and you know what you like, and you’re a happy guy. But as you think about a $25 billion market potentially doubling, there are going to be a number of consumers that don’t have that education and are now trying to get smarter about cannabis or have the education and are still figuring it out because there are new products being introduced all the time.”
I mention that the industry’s relentless march toward full CPG penetration is why I always ask MSO CEOs who have retail outlets why if everyone is carrying the same products people should shop at their dispensary instead of a closer one.
“I would say most MSO CEOs did not suddenly roll out of bed one day and decide to be in cannabis,” he replied. “They all have some sort of connection to it. Most have been consumers forever, and they all take pride in producing high quality indoor. I think the reality is that there hasn’t been a necessity to build brands because most of these states are limited license. There’s been an enormous amount of supply demand imbalance, combined with the fact that they’re not brand managers. They are there at the end of the day because they’re capital allocators, operators, builders, and they’re amazing at the legal side.
“That’s where we are today,” he added. “It’s incredibly hard to build a brand. It’s incredibly hard to do what we’ve been talking about, and I don’t think it’s any coincidence that we’re starting to see – whether it’s an Ayr buying media or Green Thumb making an investment in Cann, or Turning Point with Old Pal, or Canopy Growth with Wana – that it is clearly in the back of the MSO CEOs minds that they are either going to need to enhance and develop their own brands, which is extremely hard and expensive, or they can leverage an existing brand that has traction and loyalty, and effectively bring them into the channel, because most of the brands they’re looking at aren’t in their stores. And that’s by choice, so as they think about bringing on a brand, there’s an immediate boost in their earnings profile for all these businesses, because now they’re front center on the shelf, and I think that’s something to watch.”
It sounded like what he was saying is there will be a winnowing of brands and that the winners might be associated not with more brands, but with fewer, larger, more penetrative brands. “I think it’ll probably look like a barbell,” he said, “but at the end day I’m just making a prediction.”
Did that mean Turning Point will never touch the plant, I could not resist asking. “Everything is on the table,” said Grossman. “I would say we’re exploring all different ways. It’s a little too premature to talk about, but there are a number of things that we could do or are exploring, and candidly, what makes my job so hard is that we can go in a ton of different directions.”
Our time about up, I asked Grossman how far they plan into the future more than a few years, and if there is anything he wanted to add. “Our time frame is longer than that,” he said. “The recent Zig-Zag Studio is a very powerful initiative that we’re excited about. Basically, it’s trying to personify the Zig-Zag brands more. We started the studio late last year effectively as a media platform, and it launched in December. It promotes talented creatives and innovators from numerous industries through branded content and video. In addition to creating proprietary content, we also launched limited-edition merchandise in collaborations.
“So, going back to the conversation about brands and offense/defense,” he added, “ultimately it’s to drive consumers to actively ask and know Zig-Zag, and I really do think it’s effectively trying to better monetize the Zig-Zag brand and personify it. We think more than 20 million adults will be exposed to the brand in the coming months, and so it’s an enormous initiative. We just hired a new CMO, who’s going to be spearheading the marketing side for the entire organization, but specifically for Zig-Zag. So, there are a number of exciting things on the horizon for that entity, both for new products and the innovation side, but also some of the initiatives I’ve mentioned, and merchandise media, and just trying to have a bigger, more powerful voice in the industry.”
I asked Grossman if they get a lot of feedback from their investor base, and if so, do they want to see the company go in a certain direction? “It’s challenging,” said Grossman. “I think everyone owns us for different reasons. There’s clearly a large portion that believes that they’re getting exposure to the growth of cannabis in a legal and compliant way, and sees Zig-Zag as picks-and-shovels combined with a highly cash generative, stable, oligopoly type business, I don’t necessarily think that there’s a consensus on what we should be doing, but people universally know that we have a lot of options, and want us to just do it in the most creative way.
It is an interesting situation to be in, I noted, where you have the tent pole of a strong traditional brand to build on, but you don’t want it to hold you back as you move forward. “Agreed,” he responded. “And we haven’t really talked about it, but 45 percent of the industry is flower. And as the industry grows, especially with prices, flower share is going to decline. So, as you think about Zig-Zag, which is in a flower category, we have to be cognizant of that. It’s defensive, but as edibles take share, as prerolls take share, or dabbing and concentrates steal share, we have to have a perspective on where we want to play and how we leverage the assets we own.”
That speaks to the diversity of the Turning Point portfolio, I said, adding that Grossman must feel as though he has only just begun what will surely be an exhilarating chapter of his life.
“Like I mentioned, I see a table, and I don’t want to come off as being arrogant, but I really want a seat at that table,” he reiterated. “This is going to be an enormously exciting and enriching industry for a very long time, and I’m in it for the long game. At the end of the day, my goal is to help move the needle.”
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