WORKWEEK

More operators will pull out of the industry than we see now 

It’s been over 10 years since Colorado made the first legal adult-use cannabis sale ever in the United States. It was truly a historic & transformative moment for our industry. 

It also set the clock in motion. 

“Surely, the federal government will take action and support the cannabis industry in some way,” operators are thinking. “Maybe not now, maybe not next year – but soon our state-legal industries will have federal support.” 

And here we sit in 2022 without a lick of federal action. No nationwide expungements, no 280E repeals, no adjusting the list of Scheduled Substances. 

A huge wave of tired, exasperated, debt-ridden operators are coming. It’s already started and it will only become more prevalent as states continue to legalize without federal legislation. California’s had medical cannabis since ‘96. 

There’s only so much operators can do without streamlined financial services, widened access to capital, tax incentives equal to that of other industries, and more. Licensed American cannabis operators are tired. 

There’s also the economy at large. Several cannabis operators have already responded to the economic turmoil with layoffs. Cannabis sales are down as post-COVID life returns. 

Hundreds of small operators around the country will frustratingly throw in the towel & close their doors over the next 3 years, just as many in California are doing now. 

M&A will be even more rampant 

M&A will be even more rampant 

Many operators who don’t throw in the towel will combine or sell to a larger company in the next 3 years. 

Last year was a big year for cannabis M&A. There were 86 M&A transactions in 2020 and 306 in 2021. 

There are a lot of small operators truly feeling the industry’s squeeze and are looking for a way out. Selling to larger operators is a way out for many people. 

Not everyone agrees with selling to a larger company, insinuating they’re sellouts or corporate shills. But let’s not fault someone for selling their business in the current industry’s conditions. 

Grinding yourself to the bone just to say “I didn’t sell” should not be seen as a badge of honor in this space and oftentimes – it is portrayed that way. 

Mergers, in particular, are a great way for small businesses to stay in the game. Capital is simply not accessible in the cannabis industry. The large players are the ones with money and it’s a hellacious fight to survive without money. 

Leveraging other people’s cash isn’t stupid. 

With that being said – vet who you’re partnering with. It’s imperative to work with an acquisitions advisor with a proven cannabis M&A track record, like Sharp Capital Advisors.

Stories abound of small operators accepting crappy deals from large companies because they’re desperate to sell. 

Whether the business is undervalued or there’s operational gaps between the two companies – there’s plenty of chances for a deal to go bad. 

Makes sense why 50-80% of mergers fail. 

Cannabis businesses who make calculated deals within the next three years will likely be incredibly happy with their decision for years to come. 

Brands focusing on one product category will soar 

Consumers are beginning to settle into their preferences. 

What has once been a very experimental market is shifting gears. Consumers wanted to try everything – it’s legal cannabis. Why wouldn’t they? It’s a new life with legal cannabis 🙂 

Buuut a lot of the new appeal has since worn off and consumers are beginning to stick with what works best for them. I know I’m one of those consumers – flower during the day and edibles at night for a great night’s sleep.  

Companies focusing on just flower or just concentrates are able to connect deeper with their customer’s pain points. 

Brands with several SKUs in different categories aren’t able to connect as deeply with each category. I’ve seen cannabis brands with seriously y’all, 100+ SKUs. 

It’s a lot. It’s overwhelming. There are a very small number of cannabis companies who can successfully sell 100+ SKUs. It’s a waste of company resources, to put it plainly. 

When it comes to cannabis products offerings – there’s no strength in numbers. Every cannabis product category almost has an entirely different consumer and it needs to be treated that way. 

Maybe they’re strictly medical consumers or don’t use flower, just organically-produced edibles. But another consumer standing right next to them wants the highest THC flower for the cheapest price. 

Who will your business serve?

There’s no right answer and there’s no wrong answer. But, cannabis consumers aren’t all the same. Cannabis businesses need to identify what product category they’re good at and get in front of those customers. 

Learn their pain points. What they love in your product category. What they hate. What time of day they consume and why they’re consuming. Then – meet their needs with tailored offerings. 

Cannabis brands who aren’t staying in front of their customer and learning their needs will inevitably fail over the next few years. 

Cannabis consumers are raising their standards & booting bad brands to the curb – rightfully so.