Why the Cannabis Industry Is So Tough?
“Don’t hate me because I am beautiful.” Kelly LeBrock
I recently posted on why cannabis was hard but not the hardest industry. My article garnered lots of engagement, most of which was supportive. Some took reasonable issue with my claim, while others were triggered as if I was calling their daughter ugly.
Today is not about changing any minds.
Rather, I will try to separate the symptom from the disease i.e. go to the root cause of cannabis industry travails.
Conventional wisdom can answer my question, albeit in an incomplete, fallacious, and biased way. Generally speaking, CW arguments arise from reductive thinking, eschew deep analysis and gravitate to easy answers and pre-ordained villains (e.g., dumb govt officials, predatory investors and bad leaders).
The source of INDUSTRY problems are more fundamental and nuanced. If we understand the WHY then we can figure out HOW to deal with the reality.
6 root causes straight outta Porter, Drucker and RAND
It’s really hard to fight the macro….
1. There are too many small firms for the size of the market
Even large MSOs & LPs are small relative to the total market. Industry dynamics make it very difficult to achieve scale economies, avoid downward price pressures and justify cost cutting automation. More consolidation and higher barriers to entry are needed to ensure sector health.
2. Cannabis is a ‘Prisoners Dilemma’ industry
When it comes to major decisions (e.g, pricing, capacity), what’s rational for each firm in the short term is not good for the sector over the long run. The lack of share concentration in almost every market plus scarce capital precludes managers from acting according to long term strategic considerations.
…but firms must accept some responsibility, too
3. Ineffective industry lobbying
How many years have we been at this? The govt is A problem, but WE (with some notable industry exceptions) own the failure to secure new reforms including market harmonization, banking liberalization and more enforcement against the illicit market.
4. Lack of meaningful differentiation
The inability of most companies to differentiate guarantees their brands remain commodities without pricing power.
5. Stale thinking
Whether its vertical integration, chasing every new markets, retail verticality or doing everything yourself, too many leaders continue to embrace old models, refusing to double down on their core business, outsource or shed underperforming assets.
6. Poor corporate hygiene
Many can’t shake their habit of missing EBITDA estimates, neglecting financial controls, or failing to improve governance. Not only do these missteps increase risk and financial sloppiness but they also turn off investors.
The pain will continue until systemic change happens.
#MichaelPorter #PeterDrucker #MSOS #LPS #strategy #industrydynamics #competition