By Chris Woods, CEO, Terrapin Care Station
In January, Motley Fool asked whether 2020 would be the year of cannabis stock bankruptcies. And if business leaders aren’t careful about their growth, the answer will undoubtedly be “yes.” While the impact of the coronavirus crisis clearly shines a light on mistakes made by cannabis companies that are “built to flip,” the financial woes these large companies are currently experiencing have long predated COVID-19.
Cannabis stocks on major U.S. exchanges have progressively flatlined, with cannabis stocks stuck in a precipitousthe right mix of cash, cannabis and sales channels to succeed. Unfortunately, far too many of these companies appear to have ignored the warning signs of an overextended business and find themselves in a difficult situation., and the initial surge in sales some cannabis companies experienced during the early stages of the recent U.S. shutdown has dissipated. With cash and financing opportunities drying up even before the pandemic, industry analysts predict a tough stretch ahead for cannabis because companies require
Regardless of the pandemic, we’re now seeing some of the bigger players in the space laying off employees, reducing the value of their assets, experiencing executive exits and even filing for bankruptcy. Why? The green rush. Too many cannabis companies were built to flip rather than built to last. By focusing on organic revenue growth as the means for expansion, smaller companies are now setting themselves up for the long-term success that eludes the massive companies hoping to become the largest company in the space.
Overexpansion in Cannabis
Over the past few years, the cannabis space has witnessed a significant number of organizations opening new storefronts or expanding their facilities without conducting proper research on market trends and geographical needs. The desire to be “the biggest and best” set many of these businesses up for failure.
Consider Acreage Holdings as an example. In May, the New York-based multistate operator announced the sale of additional noncore assets in North Dakota and Massachusetts on its quest for profitability. As part of the restructuring, Acreage divested undeveloped real estate on the island of Nantucket, off the coast of Massachusetts, and sold a medical marijuana dispensary in North Dakota. Simultaneously, the company furloughed 122 employees and closed operations in Maryland, Iowa, California, Oregon and Washington. The company also canceled a $120 million deal to acquire a Nevada-based dispensary, as well as terminated an agreement to purchase a medical marijuana dispensary in Rhode Island.
Acreage’s efforts aimed to aid the company on the path toward getting out of the red and into the black this year, something other multistate cannabis operators are also working toward.
Overexpansion often occurs when MSOs like these jump in right away in an attempt to open numerous stores at once and stake claim on a new market. This approach often leads to increased pressure on business leaders to hire and adequately train new employees, which can result in issues surrounding customer service and company culture. Witnessing a complete disregard for customer service, company culture, the market trends and supply and demand, the industry is seeing a significant number of companies that are solely focused on growing their geographic footprint — apparently at any cost.
Ignoring Warning Signs
A vast number of organizations have shown that they don’t care about the tell-tale signs of a business in trouble. Many of these companies are simply not in it for the financial stability of the company, they’re just looking to flip it and cash out for millions of dollars. As such, the traditional markers or warning signs companies should be aware of are being ignored due to the allure of rapid growth. While the massive, exponential growth of the “green rush” may sound tempting, it ignores the three aforementioned things cannabis companies absolutely must have to succeed — cash, cannabis and sales channels.
Uncontrolled expansion often results in lost money and other resources. By growing too quickly, any business can make cash flow mistakes and lose track of finances, resulting in significant challenges. In an effort to become the biggest and best company in cannabis, too many organizations scale at a dangerous rate and fail to followpromoting long-term growth. At the end of the day, a cannabis business is still a business.
When companies are unable to produce flower, edibles, topicals, tinctures and other products at a rate that outstrips demand, that’s a problem. While you want your product to be in demand, not enough product on hand can impact product quality and customer satisfaction. Without quality cannabis products to sell, cannabis companies will inevitably fail.
Additionally, rapid expansion frequently pressures cannabis businesses to hire more employees sooner than anticipated, sacrificing company culture and putting customer service on the proverbial back-burner. On the flip side, companies that overexpand might overwork their current staff in an attempt to save on hiring enough people to meet the growing demand. Either way, challenges arise.
At the end of the day, the truth is that many cannabis companies struggled to raise funds well before the coronavirus crisis halted potential investments. The market upheaval that has accompanied the crisis only makes a bad problem worse, underscoring the shortcomings of the built-to-flip model.
Built to Last
Knowing if you’re growing too fast starts with strategic planning. In our experience, if you’re losing revenue each quarter, that’s probably a good sign you should not be expanding, but companies do it anyway. Businesses that care about responsible, sustainable growth must focus on organic revenue growth as the biggest indicator for fueling expansion.
Today, forward-thinking organizations are at least a little bit anxious about the lull in cannabis investments, not necessarily as a result of coronavirus but due to the fears around the economy, regional and national economic uncertainties, social unrest and significant changes in capital markets.
So, how can cannabusinesses avoid over expansion and ultimately set themselves up for success? First, by understanding it’s a marathon, not a sprint — remember “”? If a company is really looking to show prudent growth, it has to be in it for the long haul — slow and steady wins the race. The cannabis landscape today will undoubtedly look completely different in 10 years. Focus on growing your revenue before exploring expansion. Don’t rush, you don’t need to “beat” anyone or be the first store in a new market. Expanding for the sake of expansion or to fulfill the fantasy of becoming the “Starbucks of marijuana” is not practical — and has proven to be unsustainable.
While it seems that smaller companies may operate at a disadvantage when compared to larger conglomerates, coronavirus has shown a spotlight on the financial woes of many of these massive cannabis companies. This provides an opportunity for smaller companies to gradually take over portions of the space as those bigger companies continue to lay off workers and scale back operations. When push comes to shove, being built to last clearly offers significant advantages over expansion centered around being built to flip.