There Are Still Plenty of Untapped Opportunities in Cannabis
Whether you live in a limited license state or a fully legal state, there is a lane for you to enter.
Despite a crowded cannabis space, several markets and sectors are still underserved.
The opportunities in newer limited-license states, like New Jersey and Maryland, are in cultivation and supply. In contrast, the opportunities for brand-building lie in more established markets with no license caps, like California.
If you're looking to enter the market, here are some business possibilities to consider.
Opportunities in branding
Successful cannabis brands in mature markets offer high-quality products at a reasonable price. For these brands, the next step is to hyper-focus on the consumer by modernizing product labels and descriptions and creating a frictionless buying experience.
Many companies still label their products as indica, hybrid, or sativa, but brands that want to differentiate themselves from the competition will go further. They label their products by their associated effects or recommended uses, such as anxiety relief, increased creativity, or sleep.
The second step is to embrace the industry's highly specialized retail tech offerings. Dispensaries that use integrated POS systems facilitate seamless purchasing experiences through online ordering, delivery, and inventory tracking. In this new era of digital retail, companies that invest in inventory management and legal compliance solutions will be better positioned for success. For these reasons, there is still room in the cannabis tech space for new companies to provide solutions for advertising and compliance.
Additionally, newer companies should look at market data to see where they can make an impact. Headset is a portfolio company of ours that provides real-time cannabis market data. This information helps new companies understand where they stand within the broader industry and allows more established companies to maintain their competitive edge.
Opportunities in product categories
As legalization expands across the U.S., consumers will have access to more types of products. Flower is still king in the U.S. and Canadian markets, with 40 to 50 percent of the total market share, followed by pre-rolls and vapor pens. Edibles and concentrates currently have the lowest market share, but we can expect edibles—especially "drinkables"—to become increasingly popular over the next few years. As more consistent dosing and extraction methods are created and adopted, expect the quality of cannabis-infused beverages to improve. With younger adults drinking less alcohol, cannabis beverages could provide a good alternative in the future.
Right now, we are seeing the most product innovation coming out of California, the most mature U.S. cannabis market. California companies are innovating to meet consumer demand, leading to the rise of cannabis delivery services and the direct-to-consumer market and newer types of products including dissolvables, pills, and liquid cannabis.
Opportunities in supply
Multi-state operators (MSOs) with a clear focus have the upper hand right now. For this reason, smaller operators need to focus on product quality and perfect their standard operating procedures before expanding to set themselves up for long-term success.
The biggest challenge for single-state operators (SSOs) is a lack of cash flow, inhibiting their expansion ability. Many of these companies are encumbered by high taxes and credit card rates which stymie top-line growth. Other companies are tempted to stockpile their cash reserves until they are ready to scale, but they may miss out on timely opportunities by doing so. Ultimately, SSOs need to have a targeted business strategy and stick to it. Is the goal to sell to an MSO or merge with another SSO for a large ROIC? Or is the goal to stay small and become a lifestyle company? Without a clear end goal and strategy to get there, emerging SSOs will struggle to compete.
A great example of a successful SSO that has focused on quality and processes from the beginning is Trulieve. They were the first vertically integrated operator to open in Florida and now control nearly half of the state's market share. Their initial focus on fine-tuning their supply chains in Florida has set them up for success in other markets they've entered into, including currently California, Massachusetts, Pennsylvania, Connecticut, and West Virginia.
Opportunities in cultivation
The global cannabis cultivation market was valued at $129.3 billion dollars in 2019 and is estimated to witness a year-over-year growth of approximately 17 to 19% over the next five years. Industry experts agree that the first wave of businesses in any new cannabis market is in cultivation. There is inherent value in cultivation because there are a limited number of licenses available in most markets. While growing can be lucrative, new businesses looking to get into cultivation face many barriers, including expensive business application and licensing fees, strict regulations, and stringent financial reporting and management requirements.
While substantial cultivation operations are critical to the foundation of a new market, as markets mature and become fully supplied with open licensing, cultivation becomes commoditized and standardized.
More and more, we are seeing robotics and automation entering the cultivation space, especially in the drying and packaging steps. Automation reduces the amount of manual labor required to produce a product; however, more premium brands need to be careful as automation can potentially reduce the quality of the product. Companies need to know whether they want to be a mass-market brand or a craft brand before launching. This focus will drive the cultivation process.
The formula for success
As we've seen, untapped opportunities exist in both unlimited-license and limited-license cannabis markets. Although the opportunities lie in different industry sectors, the companies that succeed in all of them will be the most focused. These companies will be primed for success when cannabis is legalized on a federal level.