The New Year marks a noteworthy turning point in our country, economically, politically, and culturally. The decade ahead will likely include transformation and accelerate innovation within the cannabis industry, in continuation of previous years’ trends and with continued advancement towards legalization in some states and adoption of new rules in others.
From where I sit at the start of 2020, I predict that operators will continue to face limited capital availability and there could be a resurgence of investment interest in ancillary services and products. Drivers of sales will shift more heavily to location, product availability and quality, as well as customer experience. However, as the ghost of the commodity market continues to show its face a bit more every year, business success will be closely tied to a better understanding of cost structures for all operators as investors are looking for their returns after years of promises. Now that access to legal cannabis is becoming more certain, the market is seeking out higher quality products at lower prices.
Reconciling product quality with competitive costing will continue to be a challenge for operators and investors. New product innovation, technology, and science, as well as new talent entering the industry may be key pieces of this puzzle. However, it is likely that some operators will not produce their expected returns, which will result in greater demand for business and turnaround services across all levels of the industry. As we enter 2020, we are still limited in this arena by the lack of bankruptcy proceedings available to cannabis businesses and operators due to federal restrictions.
Because of this, investors and operators will have to turn to alternative solutions and providers to realize their respective targets and generate value. Overall – let’s face it -the biggest threat for the cannabis industry is still the illicit market and overcoming it will require all stakeholders, business and government, working together to educate consumers, increase safe access and quality, and create industry standards covering all business segments, from product nomenclature, packaging, testing, to cost structure, logistics, taxation, etc.
Now let’s review some of these initial predictions and how we anticipate the coming months to unfold.
More States and Better Licensing
We have noticed that state governments are learning from the experience of others and are listening to the feedback and advice coming from the industry and its constituents. The licensing processes have evolved to become more logical from a business and economic standpoint, and have moved away from the non-profit, vertically integrated, competitive application process to a more locally driven, entrepreneurial and trade driven process. This will help the historic cannabis players to convert to the structured and compliant market (hopefully) while simultaneously allowing newcomers and capital to join in the new license opportunities.
Cannabis legalization is continuing to sweep over North America. In the USA, medical use is legalized in 33 states, and 12 states have legalized recreational marijuana. Canada has experienced full legalization for one year and Mexico should join in early 2020.
In the USA specifically, 2020 could be the big year for adult-use cannabis legalization; Michigan and Illinois just joined the list of legalized states and additional states are expected to follow this year.
On the east coast, recent activity shows promise in multiple states: Vermont with potential legislation; New Jersey through a November vote; New York with Governor Cuomo’s support; and Pennsylvania with likely confirmation pending New York and New Jersey’s legalization. Connecticut is also coordinating with New York in an effort to develop a regional approach, (a likely result of pressure from the Massachusetts market) and Florida is poised to potentially place adult-use on their ballot, although it might end up being delayed.
Moving west, South Dakota will vote on medical and adult-use legalization this year, with good chances of passing and activity in Arizona indicates it could join the legalization movement in 2020. Other states like New Mexico and Montana are also climbing up the adult-use watch list.
As for medical marijuana legalization, Alabama has a strong chance to pass a program through the Legislature and Mississippi is likely to pass via vote on their upcoming ballot. Industry chatter predicts that Nebraska may legalize medical as well, and that activity is also picking up in Kentucky, but with less likelihood of success in the near term.
If all of these states adopt cannabis reform by end of 2020, the percentage of our US population having access to some sort of legal cannabis could reach nearly 90% and access to legal adult-use cannabis could double, reaching over half the population.
And while I don’t think federal legalization will happen in 2020 (or even in the following few years), this wide sweeping access would definitely incentivize the last few holdout states to join the cannabis legal market and most likely incentivize federal legislators to finally tackled resolve the industry’s restrictive tax and banking issues.
And the industry’s biggest threat remains…
The negative stigma surrounding cannabis itself no longer poses the greatest threat to operators and investors – the illicit market does.
Many states have had to battle large illicit production markets that were well established prior to legalization. In others, like in the cases of California or Maine, producers were operating in uncleary defined legal contexts until very recent legalization, but were still able to offer quality products at affordable prices to consumers, without real state compliance requirements or enforcement.
The anticipated consumer shift from illicit to legal markets is not as fast as many industry figures predicted. One reason for this is the level of taxation required in many states creates too large a gap between legal operators’ prices and those still available on the illicit market. My hope is that states and regulators start to think in longer terms to secure future tax revenues, assure better economic development opportunities, education opportunity and expand job creation. Reducing taxes to an acceptable level, in order to allow the legal market to compete and thrive, will allow safer production and distribution and an overall easier acceptance of compliance requirements.
What about the single operators, the regional leaders and the MSOs?
The transition from illicit to legal is also a pervading concern for newly publicly traded companies who were expecting to conquer and convert these markets. Although some of these companies have had rough beginnings as far as sales and stock market valuations, 2020 is still poised to be the year of revenue growth for many of the multi-state operators (MSO) and independent regional companies.
The corporate structures have been changing dramatically over the past few years. The historic ‘activist’ operators have been replaced by opportunistic entrepreneurs who are starting to morph into multi-state groups, coinciding with the addition of new pools of talents transitioning from other industries. Where states are promoting local ownership, operators tend to be smaller local business people, joining forces with industry veterans who are looking for a shifting wind in the legal economy, and either expecting to attract larger companies or are already backed by them. At a regional level, we are starting to see independent regional companies creating brands and networks of stores, particularly in New England and the Southwest. These companies are attracting capital and subsequently investing in newer and larger facilities, hiring new talent and skill sets (if they can find them), while hoping to differentiate themselves within their market.
The MSOs and public companies are expanding across multiple legalized states and have many significant advantages over single-state and regional operators. They control manufacturing and processing facilities, operate retail outlets in some of the most highly populated areas and can afford to invest heavily in location, infrastructure and quality products.
Leading MSOs like Curaleaf, Acreage Holdings, Harvest Health, and Cresco Labs will experience strong growth on their existing footprint, and will add new stores through new licenses or acquisitions – demonstrating the path to sustainability for other market players.
Although most of these companies have had a difficult year realizing their sales potential and achieving positive bottom lines, they will continue to drive the market going forward, setting trends and standards and taking the industry to new levels. This path will inevitably be met with considerable challenge from some in the industry, but at the start of 2020 we must accept it as our new reality and the likely path to greater opportunity and resource availability within the greater market. Investors will likely be pleased by performance of publicly traded stocks and larger MSOs in the months ahead, but it might not be the case for smaller companies that don’t grasp the complexity of the growing market and its new rules for playing.
Shift from revenue to profit
Many companies will struggle to open their stores or run their manufacturing operations, or to raise capital, resulting in necessary scale back of growth plans. Service companies – such as delivery or client acquisition companies – that have based their business models on the illicit market, may have to shift and adapt quickly if they don’t want to run out of cash. On the other side of the spectrum, larger outfits will likely benefit and expand as they face less competition and greater government support.
Most importantly, 2020 will need to be the year of strong revenue growth and improved profitability for all companies hoping to expand. To achieve this, operators will need to improve the management of their cost structures, reduce their cost of goods and improve the quality and competitiveness of their products while providing greater accessibility and unique customer experiences. Just being ‘open’ and selling cannabis will not be enough anymore – you now have to stand out.
Our responsibility within the industry
Regulators will also have an important role in the coming months by continuing to enable legal access (of course), and also by remaining consistent in enforcing compliance. This will help new and existing consumers understand what cannabis products are, further improving education around the market and facilitating safer expansion. With this we can expect better standards, on all fronts, particularly around research, packaging and product development. This represents a long-term approach for the industry and for the government stakeholders and will ultimately be beneficial for all legal players. It may seem burdensome to some, but it’s clear that stringent regulation and compliance is the path to sustainable market growth in the U.S.
As evidenced by the vaping crisis in 2019, the sooner these regulations are put in place by the industry itself, the sooner consumers will feel safe and will trust the products, producers, and retailers. I would not be surprised if 2020 brings more of these necessary regulations. All industry stakeholders need to assume responsibility and work together towards better enforcement, improved regulations, creation of commonly accepted standards, safer distribution, smarter taxation, and an overall improved industry that drives confidence from the consumers and investor markets.