Is your cannabis business operating on shaky assumptions?

For many companies, the answer is yes.  The scary reality is that leaders are piloting their ship in waters full of hidden icebergs and sandbars. 

Cannabis leaders don’t intend to be naïve or misguided.  They may, however, have a dated strategic or situational outlook, an overly romanticized view of the plant or an inflated sense of optimism. 

Having questionable strategic assumptions around the fundamentals of your business will manifestly increase the likelihood of making poor often fatal decisions.

Here are 4 shaky assumptions that need to critically analyzed - and dumped if necessary:

1) A version of SAFE will pass, opening up the banking floodgates

SAFE’s passing will be a strong positive for the industry but not for every firm.  MSOs with poor operating results and balance sheets won’t attract institutional capital or the desired banking relationships. There is also no guarantee every bank will work with cannabis companies due to stigma, compliance issues and a higher cost to serve.  Despite there being a legal market since 2018, some large Canadian banks still don’t work with cannabis firms.

2) Prices will rebound

Cannabis is not different from other agriculture products in that prices go up and down. For example, California wholesale & retail prices have spiked due to weather effects and capacity reductions.  However, you would be wrong to assume that price levels are on long ascent. Overall sector dynamics - lack of product differentiation, inventory overhangs, high capacity and improving yields – still point to medium term price declines. Longer term, ultra-low cost imports from the Caribbean and Latin America will further depress prices, unless companies can create meaningful brand and production differentiation.

3) Quality is everything

Quality is important yet there is no standard and understanding why consumers care. Many producers seek to (incorrectly) frame quality around high THC and terpene levels because that’s where the growth and margin is.  Ultimately, it depends on where the consumer votes with their wallets. What matters is providing the quality and product profile that delivers on your target segment’s needs at a price they are willing to pay. A cautionary note on quality:  few consumer categories revolve just around quality as its primary market driver.

4) Growth will endure

In aggregate yes, but for many markets, no.  Markets go mature (5-10% annual growth) in as little as 12-18 months post legalization.  Given regulatory barriers between jurisdictions, the presence of different growth profiles will have key implications for your busines model, sales & marketing spend, investor relations and forecasting. A bespoke market strategy and operating model is needed.

#risk #growth #strategy #MSOS #assumptions