Dear Cannabis Entrepreneurs: Enjoy Ruling Your Small Pond While You Can
By Patrick Hall
Nobody in the cannabis business likes federal prohibition but when it ends they will all find themselves in competition with global corporations that are already preparing to enter the market.
The following is an unpopular opinion, but still true: Federal prohibition of cannabis gives businesses an advantage right now. State-by-state legalization certainly causes problems for business owners — limited access to banking, excessive taxation and risk of criminal prosecution — to name a few. Disjointed cannabis regulation also opens a window of opportunity for brave trailblazing entrepreneurs to establish leadership positions in their market niche before the big guys show up. For a limited time only, cannabis businesses can become big fish in many, many different small ponds. How? Specialize and be great at one thing.
The cannabis product landscape is very diverse. Many people think cannabis is just flower to smoke, but that’s only half of the story. Sure, there are thousands of cannabis strains that can be smoked, vaped or dabbed. However, manufactured products like gummies, brownies, beverages and transdermal patches are half of the market in some states and boast record sales growth. Thousands of software developers, lawyers and compliance consultants support this industry from behind the scenes. Entrepreneurs have countless places to carve out a space for their craft, but also face the temptation to do it all.
Cannabis businesses today are primarily left to grow at their own pace — there is no interstate commerce to bring in serious competition. Consumers, for the most part, shop locally for their cannabis products — and people living in prohibition states travel in droves to free states to give legal cannabis a try. The minute federal legalization allows interstate distribution, things get much harder for incumbent cannabis businesses competing for customers with large multinational corporations. Once all of the current small ponds become one big ocean, the mega fish will arrive. Cannabis businesses should be ready to swim like the big fish too, or find a smaller pond to rule.
Rather than verticalize and own the supply chain, businesses in other industries tend to specialize in one thing and do it well. Grocery stores don’t grow their own vegetables or make their own ketchup but we see cannabis businesses combining cultivation, processing, distribution and retail into one organization. The rationale is that oversupply causes falling prices. Producers can secure higher prices, and steady demand, by merging with retail stores that exclusively carry their products. The merits of such moves are often short-lived. Retailers who pay more for their own flower than what they could otherwise buy on the open market either end up squeezing their own margins or over-charging their consumers. In the instance of the latter, consumers have plenty of other options if one price gets too high. This means vertical retailers must lower their prices and absorb the loss. A few months of this and operators will realize they traded one problem for many problems.
Business owners and aspiring entrepreneurs alike should take a stab at any angle of the cannabis supply chain they feel ready to handle, find what they do well and focus on being the best at that. If some people grow beautiful plants sustainably, manufacture products consumers want and successfully run a retail shop with loyal customers, then they should do it. However, if being great at more than one thing at the same time is hard (it is for me), then I suggest they pick their niche and build a sustainable, differentiated business within it.
Businesses that dominate a niche before big industry gets involved might be valuable enough to be acquired. If they do really well, they might remain independent and do the acquiring. Either way, founders will find great rewards if they stay focused on what they do best. When the time comes to compete nationally, businesses distracted by overly-diverse and complicated operations will struggle to attract acquirers or establish a leadership position among the competition.
Ultimately, consumers want convenient, easy access to good products at the right price — everywhere they go. As long as they have options, they’ll vote with their wallet. The good news is, that there will always be room for big brands and craft brands, but only for the top performers in each category, no matter how narrowly defined. Cannabis incumbents need to grow into the biggest fish in whatever pond they choose — but choose they must.
And if you’re wondering if you’re too late to start that cannabis company you’ve dreamed about, consider starting today. We’re still a few hours before the dawn.