Multi-state cannabis operations have a lot of buzz around them. Their ability to raise capital, their continual acquisitions, and their increasing reach across the US, are all the hallmarks of success.
At least they would be in a more established industry, but is that true within the emergent cannabis industry?
MSO is multiple State Operations, not multistate
The first thing to understand about MSOs is that multi-state operator is a misnomer. Multiple state operators would be a more fitting name for the types of operations these companies undertake. Multi-state gives the impression of a company that’s shipping product from state to state, going where it’s needed, but this isn’t the case.
Federal law forbids the transport of any federally controlled substance across state lines. While cannabis remains in this class of substance, the multi-state entities really are just an association of single state operations and are denied the benefits of true multi-state operations.
This multiple state operation model also leads to a tremendous duplication of work. Most jurisdictions prefer or require vertical integration from cannabis companies. This means that if you set up in a state that has high consumer demand you have to buy potentially expensive cultivation and production facilities that create overheads and chip away at your profit. A true multi-state operator could benefit from cheaper cultivation costs in one state to supply high demand in another.
Vertical integration is expensive, and the expense only increases when additional geographic and transport restrictions are brought into play.
But will this always be the case?
Think About The Future
One day cannabis is going to be legalized at the federal level. It’s inevitable. There will ultimately come a point where the majority of states have legalized medicinal and recreational cannabis that the political capital in national decriminalization will become irresistible. Whether that happens within the next presidential term or beyond, is harder to predict.
What is clear though is that federally approved cannabis will be unlikely to insist upon a vertical integration model for cannabis operatives. This will mean that smaller operators will find lower barriers to entry than there are now, without the need to own every part of a supply chain, supply chains will form. Farmers in one area can focus on cultivation while another company can focus on transportation. From a retail perspective, cannabis will be in most stores. Whether it’s moisturizer in one shop, edibles in another or a fridge full of cannabis six packs right next to the beers.
Investors that are looking at the long term potential of the cannabis industry need to consider this carefully before investing in an MSO now. What will happen to the individual state operations of this MSO when it has to compete with companies that maximize profit and reduce consumer cost by creating an efficient multi-state supply chain?
If those companies create a cheaper end product, that appeals to consumers, the MSOs will suddenly find fierce competition for shelf space and consumer dollars.
National legalization then would open up a new level of cannabis entrepreneurship. The already diverse number of uses for cannabis and its derivatives would increase. While there will always be a price scale for cannabis as there is for other commodities (compare the cost of beef in a fast-food burger to a Wagyu steak) overall, the cost of cannabis will come down.
Revealing another long term problem with investing in MSOs.
When an MSO today makes predictions about their sales they are inherently based on today’s expensive cost of cannabis. The high level of investment they solicit is based upon the expectation that cannabis will remain expensive. Even if the market stayed exactly where it is for five years in terms of legal jurisdictions, the price of cannabis to end users would still drop.
Improvements in cultivation and production will lead to reduced costs and part of competition will inevitably be price reduction. As more markets open and more entities get involved in the cannabis industry, this will happen at an accelerated pace.
The industry will remain healthy with more consumers choosing cannabis, in all its forms, at a lower price, but the large MSO entities today that rely on the price of cannabis remaining high, will not fare so well.
So What’s The Alternative?
There are vertically integrated single state players that make sound investment sense. When it comes to looking at the issues with MSOs, Single State Operators are far more future proofed.
Companies like Harborside Inc in California have a single market to work in. They can get to know the needs of their customers and respond accordingly. Overseeing one set of operations within a state means more revenue can go into developing the business and it’s offering. Gaining knowledge and refining practice and process.
States like California are also particularly good for end-to-end cannabis investment. At one end, cultivation is eminently possible throughout the state and at the other, there’s tremendous consumer demand, approximately one-third of all cannabis sales are done in the state of California.
The State of Your Cannabis Investment
It’s easy to see where the MSO appeal comes from. These are big operators in the industry, regularly acquiring other outfits, raising tremendous amounts of finance, and receiving extensive press coverage within the industry and the wider world. There are certainly some short term gains to be made if you can get the timing right when investing in MSOs. If, however, investors are looking at a more long-term investment the picture becomes less appealing.
As the industry develops and the legal landscape changes, MSOs will suffer most from these changes and the smaller supply chain companies that would emerge from a decriminalized national market aren’t available for investment yet.
Therefore, single state operators like Harborside Inc present the best long-term investment option. They are doing the necessary operational development and preparation for a broader cannabis future, without overextending themselves into multiple markets, taking on multiple burdens. They will be well placed to expand when the market becomes a national one having accrued knowledge, experience, and revenue, rather than just finance and facilities.