By Erik Ott
Until recently, MSO focus has been on acquiring licenses to manage cannabis manufacturing and retail distribution. Now the operators are creating their own brands – but that’s a different skill set, and many don’t have the necessary expertise.
In recent years, the largest MSOs have raised over a billion dollars of equity capital to (a) build a national cannabis infrastructure and (b) subsequently create cannabis brands that could ultimately be acquired by leading consumer packaged goods (CPG) companies such as Nestle, Coke or Diageo. The MSO strategy was to target limited license markets that promised strong margins and little in the way of competition, build out a significant retail footprint in those markets, then turn toward product and brand development.
Fast forward to 2022, and we now see the fascinating MSO transition from retail to CPG in full swing. For example, in GTI’s 2021 earnings report they positioned themselves as “a leading national cannabis consumer packaged goods company and owner of Rise dispensaries.” In their most recent earnings release, however, GTI describes the company as “a leading national cannabis consumer packaged goods company and owner of RYTHM, Dogwalkers, incredibles, Beboe, Doctor Solomon’s and Good Green branded cannabis products.” Goodbye Rise – hello CPG.
In fact, many MSOs are now distinguishing between wholesale revenue (brand) vs retail revenue in their reporting. On the most recent Cresco earnings call the company claimed to be #1 position in wholesale revenue in the US (multiple CA brands exceed $100m in revenue so not sure this is accurate). By reporting wholesale revenue, the MSOs are signaling to analysts they want to be valued as CPG brands rather than retail brands. The shift is prompted, in part, by the facts that CPG businesses a) scale better and b) often trade at a higher P/E ratio than retail. The current scorecard for MSOs who break this out is as follows:
MSO
Brand %
Retail %
Cresco
44%
56%
Ascend
27%
73%
Curaleaf
27%
72%
Verano
22%
78%
* likely includes sales from owned stores
Many MSOs like to point out their significant market share in limited license states, but what about competitive markets? In California, Select was a top ten vape brand when it was acquired by Curaleaf, a position they have largely managed to maintain. However, no other MSO brand has achieved a significant brand ranking in legacy markets, due in large part to the fact they have stayed away from those markets in favor of “competing” in limited license markets. Clearly, consumers in legacy markets are quite discerning, and many maintain loyalty to smaller, independent brands. So while MSOs have hired some of the best and brightest talent from leading CPG companies and believe deeply in their ability to manufacture brands…consumers continue to prefer alternatives. Why?
Hiring CPG experts is certainly important. However, one thing that you cannot easily manufacture is culture, which in cannabis is arguably more critical to building a long-term brand in than other CPG industries. Cannabis pure-play brands (e.g. Cookies, Stiiizy, Kiva) have spent years building a loyal following by partnering with influencers who understand and embody their culture. So while brands can indeed be manufactured from scratch, it is not a given that MSO brands will be perceived as authentic and embraced by savvy, experienced consumers.
In their early forays, MSOs invested heavily in the cultivation of indoor flower, which was a steep and often painful learning curve. Today, very few MSOs know much about outdoor cultivation, and many are just starting to get their feet wet in greenhouse cultivation. These biomass input are then applied in a multitude of extraction approaches (solventless, CO2, Butane, among others) to create the live resin and rosin products that currently garner consumer wallet share. Compare that with MSO vapes, concentrate, or edibles that resemble copycat/commodity-type products rather than anything truly innovative. So while it is difficult to disagree with MSOs that their deep pockets allow them to manufacture brands, their limited expertise in cultivation, extraction, and product formulation – along with a limited understanding of the cannabis culture – present significant headwinds.
So what will MSOs need to do to develop national brands that resonate with consumer and become an attractive acquisition target of the large CPG companies? Acquire know-how. Cannabis CPG brands are not created in the Board room or with beautiful packaging – they are created through an entrepreneurial obsession to innovation. Taking a “consumer-oriented” approach sounds good, but formulation, extraction and product launch experience (and failure) are critical to the success of building brands – competencies that MSOs do not currently have. The time has come for the MSOs to compete for shelf space in competitive markets like CA, CO and OR. This bodes well for smaller brands in those states, which have the requisite competitive advantage and may very well be attractive acquisition targets for MSOs due to their deep domain expertise.
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