The Game Theory of Cannabis CapEx
Or how do you invest in new or rapidly growing markets?
That’s a tough but critical question for weed firms, who are capital starved, see a low return on capital or have too many growth options to choose from.
Employing Game Theory can help firms better understand market and financial scenarios, thereby optimizing their CapEx spend.
BASICALLY,
GT is an advanced version of the rock paper scissors game. It is a facilitated, math-based decision tool that guides entities through high reward/high risk strategic choices around things like market entry, pricing moves and possible M&A deals.
This tool is used by sophisticated companies to simulate interactions between competitors and stakeholders in high stakes markets.
With GT, planners can evaluate financial impacts based on the different choices they make and assumptions they have in terms of variables such as the total addressable market, product mix, legal market capture, and potential regulatory paths.
Running different games can help each firm understand potential competitive interactions and predict revenue, market share & profit outcomes as well as well as risk and CapEx requirements.
CANNABIS AS A GT PETRI DISH
In the next 12 months, many cannabis firms will be making expensive decisions on whether to pull the trigger on M&A, enter Florida and Pennsylvania (assuming both go legal adult use), join the hemp THC category or launch into booming international markets like Germany and Australia.
USE CASE: FLORIDA
This huge medical market has another adult use referendum slated for Q4 2025. If it passes, adult use cannabis will hit the market 8-9 months later. Currently, the top 5 MSOs control about 70% of the market; by itself Trulieve commands a ~38% share.
These 5 firms (and others) will need to make some big strategic CapEx bets soon.
In 2024, I built a Florida GT model to understand what would unfold if adult use cannabis was legalized.
Here are 4 conclusions from the game:
1. A destructive arms race broke out between the top players. Every time a certain MSO escalated (i.e spent serious money), others were motivated to keep up. And vice versa. Smaller operators, hoping for a piece of the action, didn’t shy away from the party.
2. Balance sheets can be major weapons. Healthy companies can win in Florida by playing offense - and defense.
3. Time is the X factor. CapEx effectiveness (ie. return on capital) is much more about speed of deployment than magnitude.
4. Strategic focus and capability are enablers. Both elements drive faster market execution (ie time to revenue, margin capture), economies of scale (ie cost reduction, knowledge collection) and consumer relevancy (ie brand building).
Let’s talk about how I can help your teams exploit risky growth opportunities and solve difficult cost & organizational problems.
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