Cannabis Firms: Cut the Cost, Not the Capability

Many weed companies are busy launching cost reduction programs. Unfortunately, many of these reactive one-off efforts will fail to hit their financial targets, while producing long-term collateral damage to the firm’s morale and capabilities.

Cost-savings initiatives are not pre-ordained to deliver sub-optimal results. What they all have in common is a poorly designed, short term approach.

Rather than approaching cost-savings activities as a one-time event, firms should see those cost savings in the context of driving strategic priorities, developing capabilities and aligning their teams.

--> Identify & align on key priorities

Common sense dictates that you aim cost savings efforts against non-core, low-priority corporate activities. However, in a complicated business or in the absence of a comprehensive strategic plan these priorities will not always be apparent.

Asking 2 fundamental questions will help shed light on your true cost picture.

First, what are the major short-medium term product priorities and capabilities that guide your capital deployment?

Second, do most of your costs and resources line up against these priorities and capabilities?

--> Focus your cuts

Once a spend-priority misalignment is identified, the key challenge becomes where, what and how to cut - and where to reinvest for growth.

Hasty executives radically cut costs but at the same time carelessly damage key competencies and hurt morale.

On the other hand, hesitant managers aim only for easy, superficial savings, ignoring the considerable amount of fat lurking just below the surface.

Managers need to cut spending in areas that do not support growth-focused product initiatives and differentiating capabilities.

Start by classifying spending into one of three cost centers. Of course, each firm will bucket their costs differently depending on its competitive position and strategic choices:

1. Differentiating products & capabilities that drive your value proposition and growth.

2. ‘Table stakes’ activities such as customer service and logistics can yield sizeable savings through operational enhancements like adopting vendor management and lean practices.

3. ‘Keep-the-lights-on spending.’ These cost centres (e.g., HR, facilities management, IT) frequently have the fat to deliver major savings through strategies like outsourcing or service/feature cutbacks.

In my cannabis experience, most firms (inefficiently) allocate ~85% of their capital to buckets 2 & 3, while starving mission-critical bucket 1 initiatives.

The conclusion is apparent: focus cost cutting against buckets 2 and 3 activities. If you have more than 2-3 bucket 1 initiatives, it’s time to prune the list and fund/resource the remaining priorities appropriately.

Call me. I help management painlessly reduce cost and position their firms for growth.

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