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Bootstrapping the Global Supply Chain with Strong Specialty Operators: Welcome to Cannabis 5.0

As the global cannabis industry moves nearer to commoditization, both vertically integrated and niche players will give way to specialized operators that can own and optimize their piece of the value chain

The cannabis industry is finally poised to move beyond its early days of infancy, into a global business epoch that more closely resembles that of other industries -- regulated or otherwise -- where consumers and decision makers are understood much more clearly and targeted more successfully.

This piece will examine the current cycle of cannabis’ road to maturation and what we like to call Cannabis 5.0. However, it's important to review what's come before; what's worked, what hasn't and why, since many of the players you might be familiar with -- from a public markets or brand awareness perspective -- are in the throes of new market forces that are carving out winners and losers in ways that industry watchers have yet to see.

Bottom line: a lot of the strategies to “get on the shelf” are no longer the strategies that keep one there. There is a monumental amount of opportunity in the cannabis space, but companies must adapt to the realities of competition and commoditization. Those who fail to innovate will certainly go extinct.

How we got here:

Wave One was the awakening or beginning of decriminalization. Above all, this phase was about black-market participants advocating for the therapeutic uses of cannabis, and legacy participants making necessary steps to think of cannabis for health and wellness applications. This early era saw underground groups recognizing the changes in attitude toward cannabis as a medical application and pushing governments to revise their tone on decriminalization and eventually medical legalization.

The second wave was characterized by the early days of medical adoption above all else, with states and counties creating medical programs allowing for small personal grows and designated medical prescriptions for cannabis. This trend was led by the three C’s - Canada, California and Colorado.

Wave Three was the money rush, and the “vertically integrated” rush of 2016-2018. The sudden opportunity of new consumer packaged goods and the medical market captured investor dollars and saw literally billions injected into companies with only an idea and dream of becoming globally dominant, vertically integrated cannabis behemoths that inspired aspirational empire building without consideration for forecasts, competition or capital allocation.

Finally, the fourth wave can be recognized by the “cannabis bubble burst” from 2019 to present, with sudden deflations in investor expectations, market saturation and over-competition. Suddenly there was too much money chasing unfounded business strategies with little appreciation for everyone chasing the same opportunities. Access to capital allowed two groups to be created: 1) focused operators with little understanding of the global supply chain and environment, and 2) globally focused companies with little understanding of how cannabis markets would develop and what responsible scaling looked like. Both of these would result in poor capital allocation and over-valuation of businesses with too few capital markets specialists scrutinizing and holding companies accountable for essentially false beliefs. Niche players with a “magic bullet theory” that thought they could scale and always have access to free capital were suddenly sadly mistaken and so-called “vertically integrated” players were suddenly too stretched, unfocused and/or handcuffed by debt and overbuilt infrastructure – or infrastructure that quickly became largely obsolete and shouldn’t have been massively constructed to begin with.

Cannabis 5.0

There are two central camps in the upcoming wave that we call Wave 5.0: Those companies striving for vertical integration, largely now publicly traded; and "new" smaller players focused on specific points of the supply chain. The latter is defined by more focused/agile entities thinking differently with nascent operating models but composed of people who have “been around the block” in cannabis a few times. More on that shortly.

The core message for marketers in cannabis 5.0 is simple: Not all cannabis is created equal. With so many product categories and form factors — smokables, tinctures, beverages, and topicals — there is no one-size-fits-all approach to successful marketing in this age of segmentation, customer sophistication, real branding, and scale. Operators used to win the shelf just by being ON the shelf — but now that real segmentation and differentiation is upon us, the industry will start to resemble other CPG, where true branding and supply chain mastery will carry the day — not just the ability to truck your own mediocre “brands” to the candy shop. That won before in a primitive legal landscape fraught with the early days’ Wild West energy and issues — it will not win now and going forward.

We’re now seeing the former big guys’ assets being divested or consolidated. The battle is now between existing companies with overbuilt infrastructure and all of the “baggage” that came with it — debt, old inventory and stranded global assets — and displaced cannabis experts who refused to fall into the same old traps but who don’t necessarily have the same access to capital. The “old dogs” are hemorrhaging revenue and trying to account for it through acquisitions. The big names: Canopy Growth and Aurora Cannabis, are suddenly losing revenue quarterly. The new consumer packaged experts who are now leading these companies are also facing the challenge to right size and fix previously poor mistakes of their predecessors, as opposed to innovation.

In Wave Five, the message for core retail investors has become: You must closely reexamine with forensic analysis exactly what the Wave Four hype group told you, and call bullshit where appropriate! Focus back on real business fundamentals that you would see in any real mainstream business global supply chain.

As for Institutions, they need to stop looking at companies that are just reducing losses. Instead, target and look at groups that are growing! Demonstrated long-term winners in the cannabis industry won’t be the entities only concerned with stopping the bleeding because of bad past decisions -- today and tomorrow’s winners will be visionary!

The players that will win “Cannabis 5.0” will be those successful at bootstrapping the supply chain with individual products and brands in individual markets. Winners will be those measured operators that don’t build a massive, teetering infrastructure that might not be the correct framework in the first place.

For cannabis, like so many other commodities, all of these individual strategies are powered by the ability to leverage the lowest-cost, highest-quality inputs in the world.

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