Winds of Change: Planning to Survive Cannabis Market Turbulence

There’s a phrase many of us have heard and used in the cannabis industry: “We’re building the plane while we’re flying it”. The sentiment of that phrase, that we are figuring things out as we go, has been the central truth of the entire cannabis industry since its inception. It’s like a mantra, that we are going where others haven’t dared (legally) go, building a glistening new industry with our bare hands.

Working this way has also been out of necessity at times. From the moment Washington and Colorado passed  adult use in 2012 to today's reality of 21 adult use states and a sea of burgeoning medical markets approaching the flip – it has been a breakneck decade for the industry. To survive and proliferate in that environment, many have felt they didn’t have time to settle into their seats before takeoff.  

There’s one major problem: the sky is now full of half-built planes, and the supply chain for parts has dried up. Major national players are pulling the parachute in markets where their model doesn’t have any lift. Ancillaries that Frankensteined nonsensical parts together never got off the ground and are selling out of the market entirely. Turns out Bernoulli’s principle is still science and planes come back down if you never get the wings right.  

So, what’s next? I’d be considerably wealthier if I knew that answer, but I can tell you what cannot be next – more of the same. We have come too far and have too much experience to build upon to continue building the plane as we fly. Those that can begin to mature their organizations and move into a more structured, strategic place will win the next rounds. There are three major areas cannabis operations should focus on if we want to see our planes flying. 

Meaningful Metrics

The “grow-by-any-means” phase is largely over and capital partners are getting wise. Management teams need to be refining their focus and drawing a cohesive through-line from their organizations mission, values, and vision to the things they are measuring and reacting to in the field. It’s no longer sufficient to simply have KPI’s – they need to be meaningful, and you need to be able to explain how they translate into your strategy. If you’ve publicly announced you are laser focused on COGS and EBITDA, why are you measuring and reacting to market share? You’ve got shiny object syndrome – you aren’t looking in the right places.

Instead, work backwards from your goal. What does a successful outcome look like? What factors contribute to that outcome? What are the risk factors that could derail success? What are the leading indicators of those risk factors? It seems overly simplistic, but drill down to the things you need to do right to win, and the things you need to limit to avoid losing. Track and manage those factors. The topline goal will take care of itself, and you have a cohesive story as to how you got there. 

Managed Regulatory Expectations

When I was a Financial Advisor, I often found myself going to great lengths to try and explain the time value of money to my clients. On the simplest level – money today is worth more than money tomorrow because it can be used, invested, or grown. Cannabis companies do themselves a massive, compounding disservice when they misallocate funds based on inaccurate regulatory assumptions. Too often, this is an unforced error where management is attempting to generate investor confidence or interest.

To oversimplify, let’s say your company is buying a string of dispensaries, and you will owe a multi-million dollar down payment at the date of transaction closing. Your leadership team confidently announces to the market they expect regulatory approval and closing on March 1^st.  The CFO and finance team have the funds segregated and ready to go February 25^th. Then, the transaction doesn’t close until May 1^st. What happened to those millions in the 9 weeks you were waiting for close? Nothing. The money did nothing for the business.  

Imagine the possibilities of a more efficient plan. Additional inventory, new equipment, expanded headcount to support a new initiative. That money could have been working for you instead of sitting still. Now consider how many times this happens in a calendar year. Missed timelines for M&A, new product formulations, packaging approvals, facility modifications… the amount of stalled capital in simply not understanding and accepting timelines is staggering.

The above is an oversimplification of corporate finance, sure, and I recognize that regulatory timelines can still be complicated but there is a better way. You have people in your organization, or in your network who have the experience, relationships, and communication channels to give you a fairly realistic expectation of, and management towards approval timelines. Properly assessing timing and planning your allocations accordingly empowers you to make the most of every dollar in your organization. Over time, those dollars will compound and become considerably more impressive to investors than a string of missed deadlines and meaningless declarations.

Improved Controls

Stated plainly, most of us need to figure out how to close the back door. Loss prevention and internal controls aren’t sexy. They don’t light up a press release like an expansion. However, I argue they are more important.  

Growth comes with risk. A new facility or processing line adds an entirely new layer to your quality management system. A new operating state comes with new regulation, regulators, and expectations. A new product line opens the door to new consumer safety and reputational concerns. Ultimately, nothing comes easy.

The risk doesn’t mean you shouldn’t grow, but growth without guardrails creates the potential to overextend the organization and cause more harm than good in the long term. Instead, I would like to see the industry mature its internal controls and standards. Operators should gain a true understanding of their significant risks and build the structures and systems to control those risks. The industry needs to ideate, test, prove, and then expand. Expansion becomes substantially easier and more predictable when the controls can be lifted and shifted from a successful platform, with limited adjustment.  

Imagine the difference in investor, employee, and partner confidence if more often than not, your growth went to plan. That would mean you met timelines, revenue projections, and generally looked like you had control over your enterprise. It's rare to see that in cannabis right now, but it is absolutely possible.  

Above All: Planning

The days of building the plane as we fly it are at an end. The industry is experiencing the fruits of those labors today and it isn’t pretty. There is a theme in the strategies I point out above – planning.  As an industry we have the data, we have the talent, we have the maturity to properly assess our market, plan accordingly, and manage growth responsibly. Those that figure it out sooner rather than later will be at the table in 2033.