We have been pointing this one out for months, and now it deserves some more attention given its most recent release: Sugarmade Inc (OTCMKTS:SGMD), a rapidly growing force in the vertically integrated cannabis delivery space in the California market.
The reason we find the story interesting is because this is not a commission-based model. It is a vertically-integrated retailer that simply operates from farm to door, reducing the inconvenience of going to the dispensary – which is particularly powerful in the age of COVID, and likely after as well.
The vehicle through which the company is attacking this market is BudCars, a cannabis delivery service in which SGMD holds a 40% stake with powerful operational control, and the ability to gain an additional 30% to take a financial controlling interest if it should choose to exercise the option.
We have tracked this story because the rate of growth has been remarkable for the past eight months, with sales growing from a $5 million annual run-rate to close to $30 million just in the past few months, as sequential monthly and quarterly topline growth has been consistently eye-popping.
But we felt there needed to be a next-level turn in this narrative to really get the market’s attention. Now, with last week’s release, we may have that special catalyst in place: the data extrapolation feast on the company’s recently announced plans to geographically expand its BudCars territorial coverage footprint.
The Story So Far…
Sugarmade Inc (OTCMKTS:SGMD) recently announced plans to start geographically expanding into new markets. While we haven’t seen management for SGMD explicitly discuss interstate expansion, the idea is far from unrealistic over the course of time given its model, which is mediated through its major and operational stake in BudCars, a leading cannabis delivery brand.
But, even without this extra dimension, the recipe is in place for some potential excitement based on the expansion moves that have already been announced.
Specifically, as announced in a recent Letter to Shareholders, the company is expanding BudCars initially into the North San Francisco Bay Area and the Wine Country Counties. That will be followed by the grand opening of BudCars Los Angeles, which is anticipated to take place later this month.
That suggests a move that could cover Contra Costa, Marin, Sonoma, Napa, Yolo, and Solano counties, which represents a population of over 2.7 million added to the BudCars footprint before we start to even mention LA.
That’s important because the data from the company have been very encouraging in terms of its ROI on marketing where BudCars delivers.
According to its most recent release, BudCars’ current territory serves an area comprised of a total population of 2.6 million residents in Northern California, with 16,252 customers (representing 0.6% of the total population) using BudCars to date in 2020, spending a total of $3.4 million on BudCars’ cannabis deliveries this year, with an average per-customer spend of $213 and an average order size of $129 across over 29,000 separate orders. BudCars has invested more heavily in marketing to residents of Sacramento, where 1.29% of residents have been active as BudCars customers this year, accounting for over half of total BudCars sales.
As always, take any exercise in extrapolation with a grain of salt. But, in this case, Sugarmade Inc (OTCMKTS:SGMD) appears awfully interesting given the data we have to work with, and the size of the BudCars footprint now being contemplated.
The move to stretch out and cover the Wine Country counties north and east of San Francisco, filling in the map toward the company’s home-field stomping ground in the Sacramento area, appears to be a basic doubling of its coverage – in population terms – from about 2.6 million to over 5.3 million. And, again, that’s before we start to talk about the 13 million people in the LA Metro area.
Just based on this first step, we could see BudCars ramp from a topline annual run rate in the $20 million area to double or triple that number as it penetrates these new markets.
In addition, the investments the company has made on the marketing side appear to be very effective given that it saw a much higher market share where it made its larger investments. Armed with that knowledge, we would anticipate increased marketing budgetary deployment as it expands, potentially leading to positive surprises in performance as it adds to its territory.
This would run relatively in line with other business models that leverage geographic expansion as a major engine in overall growth – it is often the case that you see better results in new territories as lessons are learned along the way by any team addressing any relatively complex and nuanced target market.
We would expect nothing different from Sugarmade Inc (OTCMKTS:SGMD) as it starts to aggressively expand its BudCars model to increasingly promising domains.
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