3 Essential Tips For West Coast Brands Expanding East
New cannabis markets in the east mean plenty of opportunities-but also risks.
Since the cannabis industry’s start, enterprising cannabis brands have typically operated under two growth strategies: multistate operations (MSOs), which required raising substantial capital to expand their footprint regionally or nationally; and single state operations (SSOs), intended to embed within a single state as a dominating force.
Each offered its pros and cons. On the one hand, MSOs paved the way early on in many new markets, but building a cohesive infrastructure across state lines required significant capital and broad administrative reach. Meanwhile, SSOs could more easily make operations within one state and cultivate local brand awareness, but only had access to a fraction of the potential market size of MSOs.
The recent maturation of the cannabis market across the country has created a new inflection point for West Coast SSOs.
Big brands that have become dominant in California, Oregon, Colorado, and Washington are leveraging operational and brand success to generate meaningful cash flow and to position themselves for expansion East.
Competition is fierce
Amidst this new landscape, a unique competitive clash is emerging between these two strategies. SSOs look to expand into eastern markets against existing MSOs, and MSOs move into Western states via acquisitions and organic growth. As consumers start developing brand recognition and loyalty, markets like Nevada, Michigan, Colorado, and Arizona are already experiencing these effects as geographically distinct players now meet head-on. This is a relatively new phenomenon, but one expected to playout for the next several years. It is the quintessential expression of board games such as Risk and Monopoly that thrive on diplomacy, competition, and strategic planning.
Armed with capital and experience, high-quality West Coast brands aim to replicate their operations in the East. The tri-state area between New York, New Jersey, and Pennsylvania represents a market opportunity of over 40 million residents alone. The adult-use markets in Michigan and Massachusetts are quickly ramping up sales.
Of course, in the coastal turf war, the East is very different from the West. Most East Coast states are limited license states, meaning there’s a cap on the number of licenses available. Comparatively, the West Coast has fewer restrictions. In California, it usually only takes securing a local permit in order to receive a state operating license.
But a free market means the West Coast has been much more competitive — more players and innovative thinkers rapidly churning out R&D, resulting in a higher-quality product than most limited license states. However, East coast license holders have a first-mover advantage in their home states and have raised the stakes for licensing in many markets, such as Florida and Pennsylvania.
Then there are challenges on the East coast for both types of players: the area tends to have a more rigid culture towards cannabis, the weather is less hospitable toward growing, and the talent pool for cultivators is narrow.
Regardless, companies are eyeing the East Coast and weighing their options on how to best enter these new markets.
These are the three models of expansion for West Coast brands. While each has its own pitfalls, they all hold promise, depending on a company’s appetite for the time and resources it takes to set up shop in a new state.
1. License your brand
The licensing model appeals to many cannabis companies because it allows the owner of a brand to expand by sharing their proprietary know-how and intellectual property with a limited capital expense. For instance, cannabis brands share their formulations and train their partner’s staff on manufacturing protocols to maintain brand consistency and quality. This model works well when licensing costs are high or the geographical location is far from corporate headquarters. Brands also benefit by tapping into the licensing partner’s local knowledge and marketing know-how. Cookies, the widely popular California brand, expanded its famous flower strains into Illinois and Massachusetts last year through a licensing deal with Ascend Illinois. Companies that go this route will need to protect themselves with iron-clad agreements. Partnerships have been known to sour and result in fees going unpaid or, worse, having IP stolen. While this route requires very little CAPEX, it has plenty of risks that the brand owner has limited control.
2. Obtain an operating license
Ultimately, obtaining a license in the state you want to expand into provides the most control over your destiny. But the process of securing a license is not for the faint of heart. It requires a lot of planning, patience, and capital. Companies have to work with both local and state governments to secure local permits and state licenses, and they have to fund equipment and tenant improvements. Often they leverage the existing infrastructure of local partners for sales and distribution.
Although the regulatory and logistical hurdles are exhausting, and the capital hurdle is steep, the ultimate freedom one earns from owning their own license and manufacturing hubs is often worth it. Time to market remains the most significant risk in going down this path.
3. Plug and play
Brands can partner with a local operator who already holds a license and has built a compliant space. Brands that go this route essentially operate under another company’s license, paying to use their manufacturing facilities and help with compliance. Like obtaining a license, the operator needs to fund the equipment and occasionally the tenant improvements. Often there are other synergies like sharing sales, fulfillment, and brand ambassador staff.
Our company is using this model to bring Kanha gummies to a few new states. We are partnering with license holders that are already strong players in their respective markets, which will enable the rapid development and widespread delivery of Kanha edibles to medical and recreational dispensaries.
It won't be easy. Subleasing commercial space and signing a definitive agreement to share resources has all the complexities of commercial leasing. In addition, there are the challenges of striking a fair business partnership combined with all the unique state and local regulations tied to cannabis. Lawyers will need to be hired on both sides to make sure contracts address the federal illegality that overhangs the industry and explicitly exclude landlords from using the Controlled Substances Act (CSA) to start an eviction process.
But having significant brand loyalty in very large and more mature consumer markets and Best of Breed products gives these companies a big advantage. Clearly, they are intent on translating their board game experience to new territories, and more importantly, are driven by a fervent need to spread the healing gospel of cannabis.