How Cannabis Companies Are Adapting to the ‘New Normal’
Ryan Allway
March 3rd, 2020
App, Exclusive, News, Top News
The cannabis industry has shifted its focus from expansion to profitability over the past year. Rather than spending a lot of money to expand into every market, multi-state operators, or MSOs, are starting to pare down their assets and restructure their operations to adapt to the ‘new normal’ — mature markets where profits are king.
Let’s take a look at why thinly-spread multi-state operators could have trouble adapting to the ‘new normal’, as well as two strategies that cannabis companies are using to capitalize on the industry’s transformation into a mature market.
Watch our exclusive interview with General Cannabis Inc. (OTCQX:CANN) CEO Steve Gutterman where we discuss these industry dynamics and where investors can find opportunities.
Rapidly Maturing Market
Cannabis stocks may have experienced a correction over the past year, but the shakeout appears to be benefiting the survivors. According to MJBizDaily, Colorado cannabis cultivators reported strong prices for wholesale flower, reflecting healthy demand and fewer grows after competition forced out some of the weaker operators.
The rise of larger vertically-integrated suppliers has helped stabilize demand by providing dispensaries and manufacturers with a reliable long-term supply. While inefficient businesses have struggled to compete, the survivors have become more efficient and the industry has benefited from stabilized profit margins and less volatility.
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Investors are seeking out companies that have built sustainable businesses that aren’t dependent on unrealistic future growth rates to achieve profitability. They prefer management teams that have experience building profitable companies in mature markets and making selective acquisitions designed to build value over time.
Targeting Niche Markets
Some MSOs are targeting limited license states as a pathway to near-term profitability. In addition to early control over the market, early license holders have an opportunity to build brand awareness among consumers before later market entrants. They may also realize certain economies of scale that could provide pricing power and/or improved margins.
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The catch is that picking the right states isn’t always easy. In Massachusetts, several companies snapped up licenses, but the state was slow to roll out legalization. Many companies made big investments into licenses early on, but they weren’t prepared to wait months for revenue and many have ended up in a tough spot.
Other markets have experienced significant growing pains following legalization. For example, the Oregon Liquor Control Commission found that the state was producing twice as much cannabis as people were using last year, leaving more than six year’s worth of supply on store shelves and at cultivation facilities — a big problem for upstarts at the time.
Making Strategic Buys
The focus on profitability has created an opportunity for public companies to make smart acquisitions with their ability to raise capital. While many large companies are being forced to sell off assets at attractive prices to scale down their operations, strategic buyers can find plenty of opportunities to scoop up assets with a high potential return on investment.
General Cannabis Inc. (OTCQX:CANN) aims to capitalize on a “second-mover advantage” by cherry-picking assets in mature markets and efficiently allocating capital to produce outsized returns. Rather than taking execution or regulatory risks, the company applies the expertise of its diverse team to find mature opportunities with a far lesser risk profile.
General Cannabis current footprint
In recent quarters, the company moved to acquire Hälsa Holdings Inc., which has purchase agreements and letters of intent with three retail dispensaries in California. The company also signed a purchase agreement to acquire SevenFive Farms, a cultivation facility in Boulder, Colorado, which could generate $5 million in revenue and $3 million in positive EBITDA.
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Looking Ahead
The cannabis industry is quickly evolving from an expansion story to a profitability story. Investors have a few different options when looking at opportunities in the space, including choosing limited license states and pursuing strategic buyers, and the right option could be a diversified portfolio with exposure to both strategies to mitigate risks.
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About Ryan Allway
Mr. Allway has over a decade of experience in the financial markets as both a private investor and financial journalist. He has been actively involved in the cannabis industry since its inception, covering public and private companies.
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