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Viridian Capital Chart Highlights “Fragmented” National Cannabis Industry

A just-released chart entitled “The Fragmented Cannabis Industry” by Viridian Capital Advisors presents a cannabis industry in which six of the largest multistate operators (MSOs) accounted for 20 percent of revenue for 2021. A far greater percentage of revenue – approximately 64 – was generated by around 9,900 small companies, with large private offices and midsize companies making up the rest of the pie, according to the chart.

Adding context to the numbers, Viridian contrasted those results with “the 9,100 U.S. craft beer companies in 2021 [that] represented only 27 percent of beer revenues,” concluding that consolidation in cannabis is inevitable. “As cannabis approaches legalization, the necessary scale of businesses will increase,” read notes accompanying the chart. “The industry is capital-intensive, and tremendous sums will need to be spent to establish national brands, distribution systems, and centralized production facilities.”

The analysis further posited what most observers already anticipate, namely, “The size of likely new entrants to the industry dwarfs current competitors.” Whether referring to Big Alcohol or Big Tobacco, the “dwarf” assessment is no exaggeration. As Viridian also noted, The smallest of the big three tobacco companies has an enterprise value of more than twice as large as all cannabis companies combined.”

The escalating cost of capital was cited as another driver of consolidation, but one that gives larger cannabis companies a decided advantage over smaller ones. According to Viridian, “The average valuation multiple for the largest MSOs is more than twice that of the tier 3 competitors, implying an enormous cost of capital advantage that makes it nearly impossible for the smaller companies to maintain growth.”

The chart analysis also forecasts a “wave of consolidation” prior to federal legalization by cannabis companies looking to achieve economies of scale that the industry is yet to realize, but anticipates an industry that, like the beer industry, will always have “thousands of craft cannabis companies.”

That said, the analysis also predicts that “the share of revenues earned by the largest competitors is likely to double over the next five years.”

While the point of the chart is partly to provide counterpoint to the oft-cited claim that large MSOs dominate the cannabis landscape to the detriment of small businesses, and certainly craft businesses, it should be noted that the chart presents a national perspective on the industry, and that individual markets (i.e., states) present varying degrees of fragmentation and big company domination within their borders.

The ability of small cannabis businesses to survive is also not always a question of large versus small, of course, but is often the result of regulatory and/or tax structures that place far greater – and often existential – burdens on small cannabis businesses that large, well-capitalized companies can frequently navigate and survive.

Another question is the extent to which the referenced craft beer companies are actually independent, many having been acquired by Big Beer over the past several years, and whether the craft component of cannabis will be authentically craft or quickly co-opted by much larger companies looking to dominate every sector. Is that scenario not as inevitable as the rest?

This data can certainly act as a conversation-starter of high order, presenting a presumably unbiased context from which to assess the future of an industry whose destiny seems set-in-stone one minute, and open to interpretation the next, depending on where you are sitting. In that sense, then, it’s value is not just as a conversation-starter but a call-to-action for cannabis companies of all sizes and ambitions.

Viridian Capital Chart of the Week is put together by Frank Colombo, Director of Data Analytics for Viridian Capital Advisors. It is based on the company’s Cannabis Deal Tracker, a proprietary data service launched in 2015 “that monitors and analyzes capital raise and M&A activity in the legal cannabis, CBD, and psychedelics industries.”

Tom Hymes

Tom Hymes

Tom Hymes, CBE Contributing Writer, is a Connecticut-based writer and editor with over 20 years’ experience covering highly regulated industries. He was born and raised in New York City. He can be reached at [email protected].

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