Cannabis Legalization Requires Business Specialization

With the November election cycle completed, you’ll want to understand how the results may impact your cannabis business. While a lawyer can explain compliance particulars, business managers need to design strategic actions to succeed, given the potentially seismic changes. At this point, I have a single conclusion about what we all need to do given the election results. Quite simply, cannabis businesses must specialize and focus to thrive in the future of the industry.

Truth be told, cannabis businesses should have specialized since inception because, generally speaking, a winning business has a laser focus. This truism aside, the results of the election cycle definitively sunset the “age of mediocrity” in cannabis and dawned the age of Cannabis 2.0. On November 9, we woke up in a country where 20 percent of the U.S. population lives in “adult-use” states. (I’m using my best Nostradamus impersonation writing this on October 15.) Overnight, the adult-use market quintupled. Moreover, 65 percent of the country now resides in “medical cannabis” states.

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These facts combine to make the federal government’s “Don’t Ask, Don’t Tell” policy on cannabis unsustainable. Irrespective of who sits as the next President or Congress, the feds cannot afford to pick a fight with 65 percent of the people or to allow a cannabis economy as large as California’s to go unbanked for four more years. Pick your cliché: The world is not flat, the worm has turned, or it’s just a matter of time. They all apply. This election cycle numbered the days the industry will languish unbanked or on Schedule 1.

Post-celebration after cannabis’s rescheduling, we’ll all wake up to a nasty headache. Removal of the Schedule 1 risk from the cannabis industry means the alcohol industry, tobacco companies, big pharma, big agriculture, and a whole host of other players will enter the fray. Sensing this, investors, operators, and entrepreneurial entrants have been growing as quickly as possible for the past twenty-four months. Each step towards legalization has reduced “orange jumpsuit” risk and has increased competition at a swelling rate. Soon, it’ll be exponential.

If you question this, please study how prices in Colorado tumbled 30 percent in the first half of 2016, or consider the implications of California cities permitting more than 5 million square feet of cultivation space in the past eighteen months. It’s going to get hypercompetitive out there, and the days of ridiculously high margins will come to an end over the next five years. In a sea of cannabis that will be easy to find, each business will have to offer a unique value proposition to survive. Businesses will need to specialize and focus on a particular model and a particular audience within that business model.

As examples of what not to do, many dispensaries like the idea of starting a cultivation operation and an equal number of cultivators intend on opening dispensaries. The linear thinking goes, “forward- or backward-integrate, and you’ll increase your margins while controlling distribution.” While this works in a vacuum, we don’t compete in a vacuum. Attempting to scarf down the other guy’s lunch, a business chokes on too big a bite while its real competition digests smaller bites more comfortably and partners with other specialists who do the same.

If I told you a great steakhouse entered the cattle business or vice versa, you’d probably question the decision. The same holds true in cannabis. No doubt, the Bo Jackson of weed exists out there, but unless you’ve got Jackson’s genetics, you’ll need to settle for being the Michael Phelps of cannabis dispensing, the Tom Brady of cultivation, or the Michael Jordan of edibles.

Taking this concept further, industry participants need to specialize within their existing discipline, too. Soon, it won’t be enough to be a cultivator, distributor, dispensary, edibles company or extraction company. Successful companies will choose between the high-end, mid-market, and value segments while also choosing between adult-use and medical markets. Ultimately, there are plenty of customers who drive Hondas and plenty who drive Mercedes. These brands offer different experiences to different segments and earn loyalty by delivering their brand promise.

If you’re playing the cannabis game, pick a box in this chart for which you possess passion and competency, and master your value proposition within that box. As a side note, the chart does not attempt to cover other elements of the supply chain even though the same thinking applies to those arenas.

While it may pain you to cede such large swaths of the market to others, there’s a ton of good news. First, focus adds a strategic North Star for making all future decisions within your business. Since inception, CANNDESCENT has planned to cultivate cannabis for the ultra-premium adult-use segment. This very statement has clarified thousands of operational choices for us, including grow mediums, nutrients, location, price point, points of sale, packaging, hiring practices, facility design, strain selection, and too many others to count. Focus installs an operating philosophy or DNA into a business against which to screen all future decisions. Consistently screening, the business ends up in strategic alignment and avoids growing up as a Frankenmonster of mismatched parts.

With a North Star, you’ll also develop a true brand that’s built to last. If prices plummet and you’re the low-cost producer or dispensary, you’ll survive by having margins when your competition does not. If prices plummet and you’ve adopted a top-shelf strategy as a distributor, you’ll win because people will always pay more for better service. Eventually, after a significant period of specialization, you may even enjoy the luxury of acquiring other businesses or brands in the industry. Volkswagen focused on Volkswagen for a really long time, but now the company also owns Porsche, Bugatti, Bentley, Audi, and Lamborghini. The point is this: Build your Volkswagen before branching out.

It’s business 101, folks. The recent elections have accelerated the game. As in the National Football League, the players will be bigger, stronger, and faster than in the leather helmet days. In those days, players played offense and defense, but not anymore. In Cannabis 2.0, each business must develop an exceptional product or service and deliver it with myopic focus to a defined target audience. If we all do that, the only thing we’ll need to worry about when the industry goes professional is whether “Bo Knows Weed.” I’m betting he doesn’t, but I’m sure some suit will license his name and slap it on packaging without taking the time to be good at anything.

Adrian Sedlin is the chief executive officer for CANNDESCENT, the first municipally permitted cultivator in Southern California. Visit CANNDESCENT.com for more information.

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