by Erik Ott
The capital constraints in the cannabis industry have forced most operators into cash preservation mode. MSO valuations are off 60%, causing operators to refocus on vertical integration opportunities rather than high-risk cash intensive initiatives, such as M&A or aggressive wholesale brand marketing. Further, independent brands are struggling to achieve profitable growth as cannabis oversupply in maturing markets drives prices and margins down for all ecosystem participants.
These and other macro-economic factors have prompted independent brands to expand into new markets in search of growth. As five northeastern cannabis markets start to come online, brands are naturally jockeying for early mover advantage. The question becomes, what is the best way to enter a new market?
There are generally three constructs for new market entry: asset light, asset heavy or a hybrid model. Because of today’s capital market constraints, very few companies are capable of executing an asset-heavy strategy. The asset-light model may appear to make more economic sense, but the reality is that a “low-touch” approach can often result in a “low-profit” outcome. For brands that do not have a “cult-like” following, the probability of generating long-term royalties from an asset-light strategy is slim at best.
State expansion in today’s market requires a hybrid model in which each partner contributes value to the relationship. In an industry that is notorious for deals gone awry, state-licensed operators and brands need to go the extra mile to ensure an outcome that creates benefits for all stakeholders. While it is natural to want to focus on the fun stuff, the reality is that the sooner that two prospective partners can create a realistic business plan predicated on product-market fit, price points, expected volumes, and the capital required to achieve their objectives, the more likely they will be to achieve their desired outcomes.
When it comes to executing a go-to-market strategy, partners must recognize that even limited-license states are becoming competitive from a brand perspective. As a result, brands must commit significant partnership resources to sales and marketing – most importantly, an investment in personnel to provide feet-on-the-street sales support, budtender education, and retail engagement. While brands may be accustomed to funding these activities in their home markets, they need to plan for an incremental investment in the low to mid six figures per market. As most cannabis brands don’t have strong balance sheets, the availability of capital resources must be a major factor in market and partner selection.
Of course, cannabis brands are famously scrappy and creative – so one promising trend is out-of-state brands banding together to augment the capabilities of the state-licensed operator through a shared resource model. Combining capital and human resources may also alleviate the long-standing brand pain point of inadequate market representation due to competitive pressures. Clear communications about what success means from each party’s perspective will help partners establish realistic expectations and control their destinies.
Of course, today’s capital constraints make the above strategic analysis meaningless if a relationship goes sour due to an inability to fund market expansion. Many companies feel that market expansion is the only way to achieve success, but entering a market with a balance sheet that is upside down or through an over promising manufacturing partner will negatively impact the entire ecosystem. Most companies talk about their willingness to be “transparent,” but this willingness needs to extend to financial transparency and, more importantly, a demonstrated ability to follow through on partnership commitments. Unfortunately, some companies that don’t have the wherewithal to follow through on their aggressive expansion strategies, causing downstream partners to experience headwinds in their businesses as a result.
In summary, transparency and reverse due diligence are critical elements in forming healthy partnerships. State-licensed operators have every right to fully understand the financial capabilities of their brand partners, just as brands require clarity on an operator’s financial health and supply chain stability. Partnerships work when there is continuous alignment and re-alignment throughout the journey; full transparency and open, honest communication will be essential if a partnership is to succeed through thick and thin.
The post Successful State Brand Expansion Strategies in a Capital Confined Market appeared first on Cannabis Business Executive – Cannabis and Marijuana industry news.
