To Invest or Not Invest: That is The Cannabis Question

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” Warren Buffett

Few issues generate more debate among cannabis executives - and for understandable reasons.  At virtually every cannabis firm, profits are scarce, cash flow is precarious and external capital is tough and expensive to come by.

Still companies can’t be too cautious or frugal.  New jurisdictions are coming on line while mature markets still have room to grow.  In most markets, regulatory requirements and operational lead times oblige you to invest in advance of revenue and profit. Finally, your ambitious competitors won't be standing still.

Obligatory cost cutting has its limits:  you can’t cut your way to sustained revenue growth and improved capability. 

The depression-era cereal wars provide an important perspective on the above question.  Kellogg's and Post were battling it out for market leadership in the 1930s. This was an era of economic decline and social anxiety – as well as an upending of traditional consumer norms.  Consumers became more open to new products, both out of necessity and because the times were a-changin’.   Sound familiar, cannabis peeps? 

Kellogg’s and Post faced the same environment and challenges – but acted differently. Out of fear or excessive caution, Post took the predictable route by cutting product and advertising investments.  Kellogg's went the other way, both strategically and with capital spend.  The rest is history; Kellogg’s have owned the shelves since then. 

If you are a good operator with cash, the Kellogg’s strategy could make a lot of sense right now.  Here’s why:

1) Most competitors are (predictably) pulling back – This gives you preferred, lower cost access to talent, partners and inputs plus a golden opportunity to build awareness and trial;

2) Today’s weed buyer is up for grabs – Cannabis brand awareness and loyalty remain low while consumers still seek out new products;

3) Our sector is on sale – Buying when many are selling or going bankrupt allows you to pick up quality assets and cash flow cheap. Moreover, further valuation declines are unlikely given that investor negativity is already reflected in the share price;

4) Markets are still growing – Many strategic and operational missteps will be mitigated by market expansion;

5) Go where the puck will be – Moving early will give you a head start over your more tentative peers when U.S. reform eventually happens;

Bold moves are not for the faint of heart, cash starved or ill prepared.  You need to diligently evaluate your growth options; a decent balance sheet and; well-honed capabilities (e.g., post-acquisition integration).  Finally, defying conventional wisdom takes cojones, a seemingly scarce trait these days.

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