By James Williams, Vice President, Corporate Development, Flora Growth Corp (FLGC)
As the global cannabis industry approaches commodification, both vertically integrated and niche providers will give way to specialist operators who can own and optimize their piece of the value chain
The cannabis industry is finally ready to move beyond its early childhood into a global business era more similar to that of other industries – regulated or not – where consumers and decision-makers are much more clearly understood and more successfully addressed.
This article examines the current cycle of cannabis maturation and what we call Cannabis 5.0. However, it is important to check what came before; what worked, what didn’t, and why, since many of the players you may be familiar with – from a public market or brand awareness perspective – are in new market forces, working out the winners and losers in a way that industry watchers have yet to work out see.
Bottom line: Many of the strategies to get on the shelf are no longer the strategies that keep you there. There is a tremendous amount of opportunity in the cannabis space, but companies have to adapt to the realities of competition and commodification. Those who are not innovative are sure to die out.
How we got here:
Wave one was the awakening or the beginning of decriminalization. The main focus of this phase was for black market participants to advocate the therapeutic use of cannabis and older participants to take the necessary steps to think about cannabis for health and wellness applications. In this early era, underground groups recognized the changes in attitudes towards cannabis as a medicinal use and urged governments to change their tone on decriminalization and ultimately medical legalization.
The second wave was largely characterized by the early days of medical acceptance, when states and counties established medical programs that allowed small-scale home-grown cannabis and certain medical prescriptions for cannabis. This trend was led by the three C’s – Canada, California, and Colorado.
Wave three was the money rush and the “vertically integrated” rush of 2016-2018. The sudden opportunity of emerging consumer goods and the medical market has taken in investor money and literally poured billions into companies that had only one idea and dream to become globally dominant, vertically integrated cannabis giants that were built without regard to forecast, competition, or capital an ambitious empire inspired allocation.
Finally, that fourth wave You can see the bursting of the “cannabis bubble” from 2019 to the present day with sudden deflations in investor expectations, market saturation and over-competition. Suddenly there was too much money chasing down baseless business strategies with little appreciation for everyone chasing the same opportunities. Access to capital enabled the creation of two groups: 1) focused operators with little understanding of the global supply chain and environment, and 2) globally focused companies with little understanding of how cannabis markets would evolve and what scaling up looked like responsibly. Both would lead to poor capital allocation and an overvaluation of companies, since too few capital market specialists examine companies and hold them accountable for essentially wrong beliefs. Niche players with a “magic bullet theory” who thought they could scale and always have access to free capital were suddenly wrong and so-called “vertically integrated” players were suddenly too stretched, unfocused and / or in debt and overbuilt infrastructure Handcuffed – or infrastructure that quickly became largely obsolete and should not have been massively built from the start.
There are two central camps in the coming wave that we will name Wave 5.0: Most of the companies that seek vertical integration are now publicly traded; and “new” smaller players focused on specific points in the supply chain. The latter is defined by more focused / agile units that think differently with emerging operating models, but are made up of people who have been “around the block” a few times with cannabis. More on this shortly.
The core message for marketers of Cannabis 5.0 is simple: Cannabis is not the same as cannabis. With so many product categories and form factors – tobacco, tinctures, beverages, and topicals – there is no one-size-fits-all approach to successful marketing in this age of segmentation, customer expertise, true branding, and size. In the past, operators won the shelf by being on the shelf – but now that real segmentation and differentiation lies ahead, the industry will begin to resemble other CPGs where real branding and mastery of the supply chain will make the day – not just the ability to create your own mediocre “brands” in the candy store to transport. That has previously won in a primitive legal landscape tainted with the energies and problems of the Wild West of the early days – it will not win now and in the future.
We are now seeing the assets of the former greats being divested or consolidated. The battle is now between existing businesses with overbuilt infrastructure and all of the “baggage” that comes with it – debt, old inventory, and stranded global assets – and displaced cannabis experts who refused, but not necessarily, to fall into the same old traps have equal access to capital. The “old dogs” bleed to death and try to compensate for this through acquisitions. The big names: Canopy Growth and Aurora Cannabis suddenly lose quarterly sales. The new consumer packaged experts who are now leading these companies are also faced with the challenge of correctly dimensioning and correcting the previously bad errors of their predecessors, as opposed to innovations.
There are other groups out there who are now entering the market with two important differentiators; prior experience in dealing with the challenges of cannabis and really new business models that, if approved, are likely to thrive. Many of the management teams and new businesses in this camp have previously worked at other companies in previous waves and understand supply chain problems and are unwilling to repeat the same mistakes made by previous cannabis teams.
in the Wave five, the message for core retail investors is: You need forensic analysis to check exactly what the Wave four Hype group told you so, and call bullshit where appropriate! Refocus on real business fundamentals that you would see in any real global mainstream business supply chain.
As for the institutions, they need to stop looking for companies that only reduce losses. Instead, aim for and check out growing groups! Demonstrated long-term winners in the cannabis industry will not be the entities that care to stop the bleeding just because of bad decisions in the past – the winners of today and tomorrow will be visionary!
The winners of “Cannabis 5.0” will be those who successfully boost the supply chain with individual products and brands in individual markets. The winners will be the measured operators who do not build massive, fluctuating infrastructure that may not be the right framework in the first place.
With cannabis, as with so many other commodities, all of these individual strategies are based on the ability to utilize the world’s cheapest, highest quality inputs.
About the Author: James Williams, VP of Corporate Development at Flora Growth Corp (FLGC)
Mr. Williams is a corporate finance and business development specialist who for the past three years has focused on promoting business mergers and acquisitions and revenue opportunities within the regulated cannabis ecosystem. Most recently, in January 2020, Mr. Williams was the founder of the Cannabis Manufacturers Guild, a trade association for business solutions for the cannabis sector, and has built an extensive network in the global cannabis industry. Before that, he worked at WeedMD Rx from April 2019 to January 2020 as Director of Capital Markets and Business Development with a focus on capital raising and M&A analysis. Prior to joining the Cannabis division, Mr. Williams specialized in cannabis securities at Laurentian Bank and spent 10 years in investment banking, including Barclays Securities (July 2011 – Aug 2014) and UBS Investment Bank (Sept 2014 – Nov 2016). Mr. Williams graduated with a BBA from Wilfrid Laurier University with a minor in Economics in August 2011. In 2013, Mr. Williams completed his CMT Certified Market Technician certification.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.