The cannabis industry has gone from an abundance of capital to an absence of capital in an absurdly short period of time. A change of that magnitude created tremendous challenges for every company and shed a bright light on the necessity for focused execution.
As Michael Porter famously writes in Competitive Advantage “Being ‘all things to all people’ is a recipe for strategic mediocrity and below-average performance because it often means that a firm has no competitive advantage at all”. Ask Rob McPherson, he’s vocal on the topic. The rush for cannabis companies to build cultivation, manufacturing, distribution, retail, brands and an international presence is a case study for the perils of vertical integration in a new industry.
In tech, where I spent the last 7 years, it’s not a secret that 90% of all tech startups fail. But at eCompliance, we were successful because we focused on the customer, built a sustainable competitive advantage and allocated what little capital we had to investing only in projects with the highest rate of return. Companies in the cannabis industry that do this consistently will delight their customers and build lasting shareholder value.
It was certainly feasible to anticipate the early cannabis industry failures. The industry structure forced people into poor capital allocation decisions. The combination of licensing, valuation methodologies and massive capital inflows promoted a vertical integration strategy to own and operate every part of the cannabis supply chain. On the surface, it seemed like a viable business model, but peering even slightly below would have exposed the obvious cracks that ultimately have come to fruition.
Still, there’s a light at the end of the tunnel. We’re now seeing a radical but necessary shift, where cannabis companies are starting to ditch vertical integration and begin to specialize in the activities that are core to their success. They’re starting to ask themselves what they’re best in the world at (or at least best in Canada). They’re being critical about their weaknesses and choosing to outsource those activities. They’re shedding unnecessary expenses and focusing on their core business.
But the changing industry structure requires the support of B2B cannabis companies in the middle of the supply chain. Without it, no one can specialize because they'll be forced to operate parts of the supply chain at which they're not best in class.
The introduction of B2B cannabis companies is vital to the success of the industry and those who operate within it. B2B extractors like Valens and Motif were first to arrive, providing toll services to cultivators and brands. The dry flower supply chain, however, is still frustratingly immature.
B2B cannabis companies are service providers to the industry. They’re not cultivators, or retailers, or brands. They’re not a competitor, they’re a partner. An LP with a branded rec product may agree to produce your pre-rolls, but when push comes to shove, will they produce your product or their own? If it’s the latter, they’re a competitor, not a partner.
In contrast, Detonate is focused on being best in class at B2B labels and packaging. AHLOT is focused on being best in class B2B cannabis marketers. And at Cannabis Co-Pack we are, as the name suggests, focused on being best in class B2B cannabis co-packers.
There’s a growing ecosystem of companies that are hyper focused on being service providers to the industry and not competing with our clients.
The cannabis industry in Canada has had a rocky 18 months. But the demand is real and has proven recession resistant, if not counter cyclical, so we can agree the industry is here to stay. The most successful companies will be focused on what makes them great, and will invest heavily in that activity. Critically, B2B service companies will fill a vital gap in the supply chain, resulting in increases to both margin and cash flow.
The industry is nothing if not exciting. The ups and downs will continue for these initial years, but one thing is for certain, whether you’re a cultivator or a brand, you’ll beat the odds if you focus on what you’re good at, and leave the middle of the supply chain to us.
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