Is CPG the Right Industry for Cannabis to Emulate?
“Facts do not cease to exist because they are ignored.” Aldous Huxley
The notion that cannabis firms should be modeled after CPG companies borders on cliché.
This idea did made sense – in the absence of market data - before and immediately after legalization...
But not anymore.
The nascent cannabis industry is challenged in ways not seen with consumer products. Key differences such as industry immaturity, product fickleness and onerous regulations should compel many LPs & MSOs to reconsider their knee jerk devotion to the CPG business model.
But don’t take my word for it. Consider how cannabis firms really perform against key CPG measures like brand development or distribution.
Or ask the legion of consumer goods managers who flocked to cannabis and then quickly exited with their tail between their legs.
Not convinced? Let’s look at public market financial performance.
CPG was an investor darling for decades, consistently delivering 5% growth, healthy margins, and low risk. Over the past 10 years, however, revenue growth has tailed off and margins are under pressure. Despite a focus on innovation and penetrating emerging markets, earnings growth has stalled and now are driven mostly through cost reduction.
Not surprisingly, total shareholder returns have fallen from the top to the bottom quartile not to mention significantly underperforming the S&P 500.
Why the underperformance?
CPG faces a tough macro environment. Traditional strengths like strong brands, marketing elan and disciplined cost control have been compromised by slowing population growth, retailer consolidation, input inflation, and fragmenting consumer preferences.
Sound familiar, cannabis peeps? And did I mention the onerous tax burden and branding restrictions?
To be clear, there is merit in using some CPG practices (which are de rigueur in other sectors) and hiring their talent.
But if much vaunted B2C businesses aren’t putting up the numbers and weed firms operate in an even tougher environment, why would cannabis leaders want to ape the CPG playbook?
Cannabis companies need to look elsewhere for a new vision and lessons.
Outside of their peers, I believe the tech, agriculture and fashion industries offer more inspiration plus elements for a winning operational playbook.
What to do?
Going into Q4, there is no better time to deliberate where your firm is headed in 2025 and how you are going to get there.
These 5 questions are a good starting point:
1. Is your original vision, mission and purpose still relevant?
2. Which of your competitors and role models are doing well, and why?
3. How can we compete better?
4. What is the right formula (e.g., structure, capabilities) to win in cannabis, and do we have any of the ingredients?
5. What is your readiness for change?
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