What I would be worried about as a MSO?
A perfect storm of bad developments
Some disquieting developments are beginning to test many MSOs. They ignore them at their peril.
In an earlier LinkedIn post, I posited that the anticipated dominance of MSOs may be overstated. I was prescient. Many MSOs have released their Q1 2022 financial results. Most large MSOs experienced revenue decline in the quarter while only one of the 12 largest – GTI – posted a profit during this period.
For better or worse, their performance may get worse before they get better. Here’s why:
1. Slowing industry growth – Mature markets like Colorado, Michigan, and Oregon are no longer growing at historically high rates. It only takes around 18 months for low growth mode to kick in following a market adult use legalization. MSOs can no longer rely on a rising market tide to raise all boats nor can they ignore key trends such as the shift in consumption from MSO to craft product and rampant brand proliferation. If your strategic plan and operating model is not bulletproof, you will have problems in a low growth environment not to mention coping with declining prices, high taxes and input cost inflation.
2. Less ‘low hanging M&A fruit’ – Easy growth via M&A is now much more difficult. Most high quality, attractively priced assets have been snapped up over the past 12 months. MSOs are either already vertically integrated in their markets or have adopted a more cautious approach towards new market opportunities. Cresco’s purchase of Columbia Care led to some serious analyst downgrades – and no share price lift. It also doesn’t help that MSO's depressed stock prices make it very difficult to use shares for acquisitions.
3. A funding ‘Death Valley’ - Equity capital is very difficult to come by right now. Institutions continue to ignore the sector while angels and family offices are reluctant to seed new companies, especially in mature markets. On the debt side, serious albeit expensive money is only looking at publicly traded companies that have strong cash flows ($3M+ in EBITDA), solid balance sheets and unencumbered real estate assets.
4. No regulatory relief – There is no finalized liberalization deal with sufficient bi-partisan support. The odds are low that something could be crafted and voted on before the November midterm elections. Importantly, it’s not just the existing restrictions that’s the problem. The lack of a clear regulatory roadmap hinders go-forward capital raising, strategic planning, and share price growth.
Yes, there are also some positive industry developments and the long term prospects for the industry remain rosy. Prudent leaders and investors, however, can ill afford to ignore the medium impact of this ‘new normal.’
#trends #strategy #markets #MSO #growth #US