Some (More) Cannabis Hard Truths
“You may not be interested in war, but war is interested in you.” Leon Trotsky
On March 28, I wrote about why institutional capital won’t come to the rescue of most cannabis companies. That was a glum view - and yet only half the story.
A more powerful industry analysis fortifies this pessimistic outlook. Thank management thinker/GOAT, Michael Porter, and his 5 forces analytical framework for this take.
In my opinion, 50-70% of today’s cannabis companies won’t be around in 18 months due to forces & factors that continue to drive retail/wholesale price declines, cash flow crunches and margin compression.
Analyzing the cannabis industry within Porter’s framework illuminates the severe unattractiveness (i.e. ultra low profitability) of our sector today. It’s easy to see why most firms will fail, based on this industry assessment:
- Competitive rivalry: high in most markets, as evidenced by low seller revenue concentration, deep discounting, and copy-cat product strategies;
- Threat of product substitutes: high, thanks to minimal product differentiation and the presence of a highly competitive illicit market;
- Threat of new entrants: generally high, especially in open license markets;
- Bargaining power of customers: high. Brand loyalty is low across most categories.
- Bargaining power of sellers: low. None of them have significant control over key inputs like genetics or delivery mechanisms.
Several other factors are driving price declines and margin compression: low growth in mature markets, perishable products, lumpy capacity additions, rising input costs (especially labour, energy) and excess capacity among many producers.
Simply put, these terminal conditions plus capital scarcity will result in widespread business failure, which will include large MSOs and LPs.
Don’t write off this view as theoretical. Porter’s analysis has correctly assessed the appeal and financial sustainability of many sectors like tech, CPG, automobiles and beverage alcohol who experienced similar conditions early in their market development.
The implication for operators is stark. You will be fighting for your survival. Don’t delude yourself in believing that success is just about producing quality products, minimizing costs, and fostering community. Regulatory salvation won’t come in 2023/24. Even if reform does come, it’s not a slam dunk that everyone will be benefit equally. Finally, the low-cost capital spigot is not about to open soon.
The first step to surviving and then prospering is accepting this difficult reality and then making some important and hard strategic decisions.
I can help. DM me to schedule a frank but helpful chat.
#strategy #funding #regulations #bankruptcies #michaelporter