MSOs: Time to Get Serious About Cost Reduction
Your access to capital and maybe even survival depends on it
We are midway through earning season and the numbers aren’t good, especially on the margin and EBITDA fronts (and that’s with, GTI aside, non-payment of 280e).
Yes, prices have declined substantially in key markets like Oregon and Michigan. However, this should have been anticipated and mitigated. Almost every MSO continues to have inordinately high cost structures.
MSO cost reduction strategies have followed the standard route: cutting discretionary spending and headcount.
Unfortunately, these efforts have not been enough to decidedly move the margin dial.
Stubborn cost problems need a Plan B:
1️⃣ SERIOUSLY TACKLE SG&A
As a percentage of revenue, SG&A costs are 1.5-2x higher than they should be.
Complexity reduction and SKU rationalizations are 2 major weapons, which I have written about previously.
Another fertile place to find savings is outsourcing. There are many places to outsource non-core activities.
Take marketing. All or part of marketing and corporate comms can be handled better and cheaper by experienced providers. This is not about engaging siloed, pricey agencies but rather proper outsourcers.
I have seen these initiatives drive 20-40% cost reduction AND deliver better marketing performance.
2️⃣ GET SMARTER WITH OPERATIONS
Many MSOs have not fully exploited the potential of technology, automation, and process redesign to reduce cost and increase utilization. Fertile areas include input & energy management (e.g., HVAC, lighting) and extraction efficiencies. In the latter, savings of 15-45% can be achieved by removing the guesswork in process control through better tracking variables and analyzing the data.
And some operations like post-harvest processing can be outsourced with great results.
3️⃣ UNDERTAKE STRATEGIC RETREATS
Unfortunately, there is little more room to sufficiently reduce cost in some markets, especially when key expenses like rent are high and fixed in the short term.
A market cost problem becomes a strategic liability when the firm is already suffering from weak competitiveness or low market share, and they lack a plan and capital to reverse their fortunes.
The best solution might be to temporarily exit this jurisdiction and conserve the cash.
All is not necessarily lost. A strategic retreat can become a corporate phoenix if management uses the released capital, learnings, and time to reengineer their operating model, launch better products etc.
The other side of margin is price/revenue. MSOs should always consider price increases. I’ll tackle this controversial but misunderstood topic at a later date.
Call me. I will help you significantly reduce you costs, improve efficiencies, and find growth in unexpected places.
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