How to navigate consolidation in the cannabis industry

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Virtually all industries follow a predictable evolutionary path, from introduction to growth to maturity to decline.

As the cannabis industry evolves from growth to maturity, it’s no surprise the market is experiencing one of the most common developments – consolidation.

On the one hand, the cannabis industry might be flashing yellow – declining stock prices, saturated retail markets, squeezed revenues.

On the other, longer-term growth projections are uniformly positive, with industry revenue projected to approach $130 billion by 2031. And a highly fragmented industry such as cannabis is red meat for investors.

At the top end, large firms are merging to grow revenue and ease entry into new markets – Columbia Care by Cresco Labs in a $2 billion deal, Etain Health by RIV Capital ($247 million). TerraFarma by Aurora Cannabis ($38 million).

At the highly fragmented lower end, with some markets facing profit and regulatory headwinds, consolidation is driving efforts to gain market share, larger customer bases and access to attractive markets.

Verano Holdings recently concluded acquisitions in Nevada to gain “comprehensive retail and distribution opportunities in Northern Nevada that complement our current operations in the Las Vegas area” CEO George Archos said in a statement.

While passage from introduction to growth might be exuberant if not euphoric, the transition from growth to maturity through consolidation can be stressful.

Transitioning from “boom” to “bust” might be uncomfortable, and not all boomers survive the bust. Understanding the nature of this transition can help smooth the process.

Here are some considerations as this cycle comes to cannabis:

Competency

During a boom, an unsustainable number of competitors enter the market at a rate that overshoots the long-term capacity, and a shake-out begins.

Operational effectiveness becomes more important.

Applying the skills of entrepreneurship that drove early-stage success, evolution to competency entrepreneur (or competency predator, if you prefer) can help mitigate the unpredictable nature of consolidation.

Competency entrepreneurship can help discover new business models that enable or mirror the desirability of the economies of scale that drive consolidation.

They leverage competency in one market to expand in others.

Innovative competitive models might help grab new markets, larger shares of existing markets or operational changes that benefit the organization.

Ultimately, these moves might help sustain your organization or, at the least, enhance its value as the shake-out evolves.

Anticipation

While a Ouija board isn’t a recommended boardroom tool, developing sensitive antennae tuned to the pace and direction of consolidation can be valuable.

To move from a wild guess to informed forecast, a forecasting model might be useful.

Your model can be developed to suit specific circumstances, from macro industry to micro market.

You might include capacity, pressure on margins, pricing trends, consolidation trends in your segment/market, customer survey responses and other variables of choice to help form a better understanding of the direction your niche is going.

You might include your assessment of how many competitors your market can sustain in the long term, which competitors have staying power, which are vulnerable and why and what your best course of action might be at this time or in the future.

Adaptation

The best route to navigating consolidation might be adaptation.

The market might be growing, but at this time, more demands are placed on operations, sensitivity to customer needs and a nimble response to competitive threats.

Founders and leaders, accustomed to the informality and spirit of growth, now discover that spontaneous management can lead to communication breakdowns and untimely decision-making, so a new way of working might be in order.

Management ranks might find new, more seasoned incumbents with more experiential depth.

Strains on financial resources because of investment in facilities, recruiting and training combined with possibly longer workdays can strain morale and, at worst, result in turnover.

As management stresses begin to spawn slower decisions, quality issues might arise and production and service logjams might become more frequent.

Systems and processes suited to smaller firms might risk failure and might have to be updated on the fly to help control costs, inventory and customer-facing issues.

Aggressive, seasoned managers might be quicker to address redundancy and exploit economies of scale as well as cost reductions supported by better systems, reporting and early-warning protocols.

Consolidation often drives more aggressive development of value-added services as a means of boosting profit, cementing customer relationships and attracting new customers.

When it comes to larger competitors, initiatives aimed at the edge of a product or service where innovation yields benefit  – rather than at the middle, where costs might be high – are a good strategy.

The benefit of a strong organizational culture can be pivotal in the consolidation phase, particularly if competitors are suffering from culture growing pains.

It’s a maxim of business acquisition that more than 60% of business acquisitions fail, mostly because of culture clashes.

Competitors can copy your products, your marketing, your sales strategy or your market positioning, but they can’t copy the power of a strong culture.

In addition to internal strength, culture can be communicated in clever ways outside the organization.

For example, your website might include a short video featuring an employee telling their own story of why they think your company is the best among many.

And when the music stops …

The reality is, during an industry consolidation or shake-out, many companies are acquired, merge or fail.

Most are smaller firms when compared to leaders, with resulting higher costs and lower margins. They are vulnerable when people, sales or available capital shrink.

In this scenario, it’s better to adopt a viable strategy than let circumstances dictate fate.

John Stearns can be reached at editorial@mjbizdaily.com.