Cannabis plant

Cannabis 3.0: Part 2 - A Starter's Guide

June 03, 2020

Cannabis 3.0: Part 2 - A Starter's Guide

Synopsis
5 Minute Read

Cannabis 3.0 | Part 2 New Strategies and

New Strategies and Business Models

The legalization of Cannabis has been a game changer for the Canadian economy. Among its many credits, legalization has spawned thousands of new licensed producers, extractors, retailers and product companies. According to Statistics Canada, it has catalyzed billions of dollars in economic activity and generated thousands of new jobs both directly and indirectly. Like any new industry, the sector’s euphoric boom has been followed by a painful bust in some corners. This should not come as a surprise.

The study of business cycles can teach us a lot about what to expect in the near future and how companies can effectively cope with the changes. In this Cannabis 3.0 paradigm, five evolving forces are defining a new normal for the sector:

  • Consolidation — Overall, the number of players are declining due to M&A activity, divestments and corporate failures
  • Scarcity of capital — Falling valuations make it difficult for firms to attract equity funding, while debt financing continues to be scarce due to difficulties securitizing loans and transferring licenses and inventory in case of default
  • Specialization across the value chain — Companies are beginning (or being forced) to realize they can no longer compete using a vertical integration business model such as growing, processing, productizing and selling products.
  • Knowing your customer — As cannabis firms seek to emulate the business principles of consumer packaged goods (CPG) and pharmaceutical companies, they will become increasingly hungry for data on their consumers, segments, operations and channels.
  • Margin compression —Consistent across legal cannabis jurisdictions, we are seeing retail prices steadily decline across all product categories. At the same time, many companies continue to struggle with high cost structures.

In this white paper, we will discuss two important ways companies are adopting to the new normal.

REDEFINING BUSINESS MODELS

The Canadian cannabis industry began with the Licensed Producer (LP) — and for good reasons. The product of choice for high (forecasted) demand medical and recreational markets was flower. Licenses were scarce and time-consuming to obtain. LPs needed to ensure quality and full compliance when they moved into complementary products like extracted oils and edibles. Unfortunately, this vertical integration strategy came with higher operational complexity, resource allocation challenges and difficulty in building a market-leading value proposition and capabilities across the value chain. As the industry matures and new competitors continue to pour in, leaders will need to change their business models to remain competitive in terms of cost, operational performance and market positioning. Not to mention the development of intellectual property and compelling brands.

We are beginning to see companies pivot or refine business models compared to their first generation executions. Not surprisingly, other emerging industries such as technology have gone through comparable transformations. We expect to see the following strategic changes:

  1. Focusing on one or maybe two parts of the value chain or market Firms can’t do everything right, so they will focus on activities where they have a unique market position and superior capabilities. This specialization will enable companies to better allocate their scarce capital and effort while continuing to build out their unique competencies. For example, we expect to see some companies focus only on the medical or adult-use markets. Alternatively, some companies will choose to double-down on cultivation while others will abandon growing altogether — instead concentrating on developing and marketing brands.
  2. Partner with their peers Recognizing they can’t be all things to all customers in all markets, companies will increasingly look to join with other cannabis firms who share the same challenges but also see the same opportunities. This will enable symbiotic partners to reduce risk, minimize costs and capture go-to-market synergies. For example, an LP could choose to focus their sales and marketing efforts in their home market and leverage the capability of partners in other markets. LPs can also share greenhouse facilities, with each focused on cultivating for their target market segments.
  3. Exploit the benefits of outsourcing During their rapid scale out, many companies chose to build and perform all operations internally. This was driven from the need for rapid execution, the ready availability of capital and the lack of cannabis-savvy outsourcing partners. As leaders begin to focus their businesses, improve operational agility and shed costs, they will naturally look to outsourcers to handle many back office functions such as HR, sales and IT — as well as some key operational activities like flower processing, compliance and customer service.

BECOMING A DATA-DRIVEN ORGANIZATION

Your new and improved business model will likely be powered by the effective and timely exploitation of data — both which you collect and can leverage externally. Many cannabis enterprises are already generating terabytes of data from their operational, financial management and marketing IT systems every day. Analyzing this data for market or operational insights can enable new growing and inventory practices, enhanced cash management policies and better pricing strategies that can significantly add to the bottom line; not to mention better target and serve customers and align capacity to actual demand.

Companies are already on their way to embracing this new paradigm. Typically, the journey begins with analyzing application-specific data to optimize individual functions. As the return on investment becomes apparent, ambition moves toward collecting and analyzing data across multiple platforms (and from external sources) for the benefit of the entire enterprise — not to mention important strategic partners.

Leveraging the full power of data analytics is not new. Some LPs are using advanced data analytics to optimize lighting and humidity levels in individual growing rooms. These tweaks are helping maximize yields, minimize flower variability and reduce growing cost per gram. Another LP is using sales data and voice of the consumer sentiment (collected online) to help marketers and retailers segment their customers, choose the right product mix and optimize store inventories. The opportunities to leverage data are limited only by existing systems, analytics talent and management boldness.

HOW TO CAPITALIZE ON THE OPPORTUNITY… OR AVOID BEING DISRUPTED?

Smart and prudent companies will be proactive in the face of these Cannabis 3.0 developments. The new normal requires that senior leaders:

  • Consider the threatening forces facing your company and your industry….not to mention the business opportunities embedded in this disruption;
  • Look carefully and objectively at your entire business model, and be prepared to make some strategic choices and implement change initiatives;
  • Explore the best practices inside and outside the cannabis industry for your target strategic choices, particularly with regards to leveraging data analytics.

MNP IS HERE TO HELP

MNP professionals have been helping Licensed Producers, entrepreneurs and investors across the cannabis sector establish successful, growing enterprises. Our firm has become an industry leader in addressing the strategic and operational challenges cannabis businesses face, as well as enabling them to capitalize on their growing opportunities. We work with companies to navigate the complex business issues that arise in a highly regulated and unpredictable industry, and establish a foundation of best practices, systems and processes that support bottom-line performance.

Contact

Contact a member of our Cannabis Advisory team to find out how we can help you overcome today’s business challenges and seize tomorrow’s opportunities.

Mitchell Osak, MBA
National Leader, Cannabis Advisory
416.263.6985
[email protected]

ABOUT MNP

MNP is a leading national accounting, tax and business consulting firm in Canada. We proudly serve and respond to the needs of our clients in the public, private and not-for-profit sectors. Through partner-led engagements, we provide a collaborative, cost-effective approach to doing business and personalized strategies to help organizations succeed across the country and around the world.

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