Cannabis Summer School Is Now in Session

I’m often asked a simple yet important question:  why is the cannabis industry hurting so much?

A partially accurate but reductive, unfair answer would be to blame the cliché villains: stupid, greedy executives and rapacious, out of touch governments.  

Some deeper analysis, however, would find that these causes don’t tell the whole story.  Sector problems are too pervasive and long-lasting.

The origin of industry challenges is more fundamental and should be familiar to those who have studied business strategy.

At the core…

Cannabis is an agricultural product (albeit a highly regulated one) and

Thus….

Is subject to the same indisputable laws of a cultivation-based industry  

I present…

Management guru, Michael Porter, and his 5 forces of market competition and profitability.  

Applying Porter’s analytical framework (others are also useful) to cannabis can explain our industry’s travails and trajectories. 

First, any ‘high’ listed after a force illustrates the size of threat to each MSO/LP, and by extension, the degree of difficulty for them to make money and stand out:

1. Threats of substitutes – High. Weed is a discretionary product (except medical cannabis) and there are other well-known ways to enjoy psychoactive effects.

2. Threats of new entrants – High, save limited license jurisdictions (and these may be fleeting).  The illicit market is ever present and exerts downward price pressure. 

3. Level of competitive rivalry – High. Few companies have any market power to take up pricing, bar competition etc.

4. Bargaining power of suppliers – Low

5. Bargaining power of customers – Low except in Canada, where it is high 

I’ll throw in 3 other negative factors:  relatively static capacity; slow growth in older markets and; scarce, pricey capital.  

Boom & bust cycles are also inevitable in agricultural markets that don't have supply management practices.  Individual firms acting rationally (e.g. expanding production to meet demand) can quickly lead to industry surpluses, triggering high inventories and deep discounting.

With this analysis, it is hard to see how most firms will reach profitability and survive over the long run.    

Some implications

> Without US federal reform, MSOs need to get used to a kind of Schrödinger’s weed business, booming and flatlining at the same time.

> It’s going to remain tough before it gets better.  Industry supply and demand need to align and that means less capacity, fewer firms and more pricing discipline

> Given inflation and the knee-jerk tendency to cut price, margin compression will remain a fact of life 

> There are only 3 ways to compete at scale:  being a low-cost provider, having strategic 'moats' that bar competition or being meaningfully differentiated through brands, innovation etc.

Choose wisely.

#MSOS #LPS #strategy #michaelporter #competition #pricing