Consolidation Is Inevitable. Or is it?
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Business is filled with buzzwords and catch-phrases. Statements that intend to define a business situation or condition. Perhaps to enforce an action item….or sometimes to summarize feelings….the ‘zeitgeist’ as it were. Perhaps simply put out there as a way to phrase a problem for common understanding.
While not always original, they can be catchy for awhile. They enter our lexicon and loiter for awhile, only to get either used until they become stale, or eventually become meaningless.
‘Traditional thinking yields traditional results’. ‘It is what it is’. ‘We’ll pivot to lever our synergies’ <snort>.
Speaking of traditional thinking, here’s an often used Commandment about cannabis: ‘Consolidation Is Inevitable’.
You know: that in no time flat, we’ll be reduced to a Coke/Pepsi or InBev/Diageo or Apple/Microsoft paradigm….and…. game over. Done and dusted. Everyone else might as well close shop, turn off the lights, and sell out. Better sooner than later. After all, if you’re a small guy or independent, you’re screwed. Might as well amputate and cauterize and count your cash and move on before BIG.CO.LTD bleeds off your sales until you’re forced to close.
But in cannabis, other jurisdictions with cannabis sales (legal or tolerated) so far haven’t demonstrated this. Can they inform us about what the North American industry landscape will look like in a year or two? How about 5 or 10? Getting ahead of that curve would allow an investor or trader to make superior returns if they could divine a future operating state of the sector in certain timeframes.
In the Netherlands, there’s a few ‘big’ players (Barney’s, Greenhouse, Boerejongens). Those ‘big’ players that exist all established relatively early, but many other independent outfits exist and thrive. Even ‘big’ there is relative, and severely constrained. Because there’s another ‘but’.
Market design there has prevented additional sector consolidation. Caps on the amount of storefronts that can be held, a limit on total licenses, and that some existing independents do extremely well on their own, and have no inducement to walk away from their cash cow. As well, production is atomized. Since no large scale is tolerated (nor permitted), it serves to dent attempts to consolidate. The seam between illicit and less-illicit production follows the price signal and diverts readily too, so competition is active and engaged among producers. Good growers have no inducement to tie their boat to a particular dock.
Ultimately, that’s not very helpful to us.
How about America?
Colorado and Washington and Oregon markets are maturing at a good clip. Yet there’s no real dominant players or consolidation emerging. And if you haven’t noticed yet, MSO’s are largely avoiding those states. All of the current build-outs – the iANs and CURAs and TRUs and Heritage’s of the world – are focusing efforts in Nevada and Mass. and Conn. and Mich. and Fla. and such.
One that did go went into Oregon. And their entry is a case study of how buying crappy money losing assets (which were probably the only ones that were for sale) leads to owning crappy money losing assets.
California? A total cluster. Regulators there are trying to dial some elements back, and enforcement is currently being begged for by some. Others are happy with how it is right now, thank you very much.
And America probably isn’t a good collolory either. Federal banking laws and the ban on inter-state export will make a hash <snicker> of anyone currently trying to scale production. Grow modalities there also work to limit scale. Some states are and will remain hostile to the devil’s lettuce. Perhaps for generations. In many places in the south, dry counties abound. You’ll have to drive 30 miles to cross a county line to go get a Budweiser, where there are 5 liquor stores set up inches away from that very line.
Ultimately, that’s not very helpful to us either.
Then we have the plant itself. And it does consolidation no favours.
It’s relatively easy to get a broad array of seeds (they are tiny little buggers after all) and grow your own. A wide variety of genetics exist: no single entity will be able to capture a large part of the array of plants out there. Retail rollouts have only seen one outfit gain traction in storefronts (META). Ontario’s lottery and entrepreneurs in Alberta have (indirectly) ensured there’s a wide variety of players, at least initially. That early start may work to limit additional stores coming in (due to proximity and aura of ‘sin’). If they establish and become extremely profitable, we could see a similar condition as in Amsterdam, where there’s many owners across existing outlets. And the black market will *always* be present…no matter what.
I believe at this point – and for the foreseeable future – heavy consolidation ain’t gonna happen. I can see it in perhaps regions – a ‘region here’ or a region ‘there’. But not across a province. And certainly not across the country. Nor where there are State Monopolies. Provinces will likely interfere via competition laws (yeah, I’m optimistic).
A potential exception exist in the new platforms – especially in molecular recombinations. Vape cartridges with unique or custom formulations – especially with IP tied to them – is of particular note.
But in the large, I don’t see consolidation happening – at least in the ‘Coke/Pepsi’ sense – happening anytime soon. While this is great for traders and investors, it’ll frustrate the commercial money and those without active portfolio management to no end.
I’ll be working hard over the next few weeks to build a topology around this, and bring a view to investing in companies around the very notion of the plant resisting large scale oligopolistic consolidation.
I suspect we’ll eventually get there ultimately. The money will win. It usually does.
But it’s gonna take a good long while to get there. But by then, we’ll all be retired.