This is a copy of the September 15th edition of our weekly Newsletter, which we have been publishing since October 2015.
We were speaking this week with the Chief Strategy Officer at a cannabis operator to learn more about the company’s plans and were quite intrigued to hear about its approach. In essence, the company wants to focus specifically on agriculture, serving as a white-label product provider to brands. This is certainly at odds with what we hear from most of the American operators, who want to focus on either brands and/or retail and who predict the cultivation and production side will become commoditized relatively soon. Our takeaway is that there are lots of ways to potentially create value in the industry, but the key will be for companies to explicitly define and refine their strengths and then execute.
Last week, we discussed how the American multi-state operators (MSOs) are beginning to differentiate in several different ways, and we touched upon the different types of value creation as one of those aspects. Today, we want to extend upon that theme. If the majority of operators do follow through by de-emphasizing cultivation and even manufacturing, then perhaps there will be tremendous value creation by those who simply excel at large-scale cultivation and manufacturing. A cannabis industry supported by substantial contract manufacturing to create the products of CPG companies would make it similar to most other industries. This business model is becoming increasingly feasible, as previously many of the states were forcing vertical integration, although some still do. Additionally, given the costs of replicating cultivation and manufacturing facilities state-by-state given the current inability to ship product across state lines, the MSOs that want to focus on creating brands might be best served to save the capital required to do build facilities and embrace contract manufacturing.
In Canada as well, we are seeing companies pick different paths to value creation. We have discussed in the past that most Canadian provinces essentially locked out the licensed producers (LPs) from retail, which we still see as an area that continues to be underappreciated by the market thus far. Retailers in Canada will take a big share of the total revenue, in our view, as they end up potentially owning the customer. Among the LPs, we are also seeing companies take different approaches. One recent example is the new class of extraction companies, which include several that have scaled up quickly with strong revenue and much better levels of profitability than the cultivators. Among the LPs that are focused on cultivation and production, some have pursued the export market or participation in markets outside of Canada, including a few that are CSE-listed and pursuing opportunities in the U.S. The focus beyond Canada is a potential way to create additional value. Further, several LPs are purposefully minimizing their cultivation footprint to focus more on branded products that will soon be permissible. So, just like in the U.S., there are several different ways to create value in Canada.
We will likely see even more differentiation among the cannabis operators, many of whom tell essentially the same story today. We think it’s early to confidently project which models will win over time. For investors, it’s very important to understand in which part of the supply chain companies intend to excel and to better appreciate differences that will emerge. We will be publishing a thought leader guest post tomorrow that suggests the need for investors to understand the key performance indicators for the different sectors, which we think is a timely discussion given the focus on differentiation we anticipate.
Based in Sonoma County, California, GABY is a U.S. focused consumer packaged goods (CPG) company with a manufacturing and distribution license in the state of California. With these licenses, and with relationships in over 3,400 retailers in the mainstream grocery sales channel, GABY is taking a unique approach to cannabis and hemp-infused products by bridges the gap between the licensed dispensary and mainstream markets.
To learn more, visit GABY’s Investor Dashboard that we maintain on their behalf as a client of New Cannabis Ventures. Click the blue Follow Company button in order to stay up to date with their progress.
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Alan & Joel
Written by Alan Brochstein, CFA
New Cannabis Ventures