PwC Canada's cannabis series
Chapter 2 - Cannabis strategy: high hopes are not enough
Cannabis startups require sophisticated strategies in an intensive marketplace
A new reality
Although the markets have fallen since legalization, overall strong performance means early investors have been handsomely rewarded for taking the leap into the cannabis industry. However, the landscape is changing and so too must cannabis companies. With full legalization of the adult-use cannabis industry, licensed producers (LPs) need sophisticated strategies to meet emerging consumer demands, ongoing investor expectations and successfully compete against the black market–in short, real strategy is required to survive.
LPs have raised billions of dollars since the Canadian government first eased regulations for medicinal cannabis and signaled that a new adult-use market was coming. Investors have been enthralled by the prospect of a new industry that some believe could surpass some alcohol segments in sales at maturity. Collectively, in the 12-months leading up to legalization, the value of publicly listed Canadian cannabis companies soared by 600% to over $40 billion CAD. Since legalization, the market capitalization of this group of companies has decreased by approximately 10%.
During this market frenzy, it has been sufficient for LPs to offer aspirational strategies without employing the discipline necessary to create focus. As a result, we have seen LPs move in many directions at once. These initiatives, outlined in chapter 1 of our cannabis series, have included:
- Building a stake in the medicinal market while simultaneously positioning to become an adult-use brand;
- Investing heavily in international markets with ambiguous regulatory futures;
- Boosting domestic production capacity with no guaranteed route to market or consideration of competitive, low-cost alternatives;
- Securing provincial supply agreements without the requisite operations and logistics capabilities to provide ongoing service; and,
- Developing new cannabis products and brands without sufficient consideration of consumer demands and expectations.
This diffuse strategy has satisfied investor demands during the land-grab phase of the market’s early development–when the primary concern was not to lose out on potential opportunities–but market maturation is bringing a new reality.
Market power
From investors to consumers, every group essential to the LPs success has grown more sophisticated in its understanding of the emerging market and the options it presents.
The public equity markets have already shown some investor fatigue toward cannabis now that the quick money has largely been made.
More importantly, consumers are becoming more discerning, recognizing the abundance of choice that came from legalization. Unlike the medicinal market, the legalized adult-use market allows them to choose selectively between products and producers. These discerning consumers pay attention to brand and quality and are quick to use online reviews and pricing comparisons to guide their purchases.
With revenue from the adult-use market beginning to flow, investors will begin to lose patience in companies that cannot differentiate themselves to win in a crowded market.
Savvy investors are turning a more critical eye to the operations of LPs, looking closely at cash burn, profitability and valuations.
Seeding strategy
A very small number of players will be able to operate effectively across the value chain. Most cannabis companies are going to find they lack a position of relevance and will be forced to redefine their business models. The majority will have to abandon the idea of operating as a vertically-integrated enterprise and instead find portions of the value chain where it can create a sustainable competitive advantage. Inevitably, the need to focus on core segments is also going to require some companies to divest non-essential assets.
Before any cannabis company can accurately identify the parts of the market it should target and any pieces of its operations that it should consider divesting, it will need to create a growth strategy that has owners and managers aligned and focused on the business initiatives that will deliver the greatest value.
This strategic approach involves asking several difficult, yet straightforward questions:
- What do we want to be known for?
- What are our financial and non-financial aspirations for the next three to five years?
- Where do we want to compete and win across products, services, geographies, customer segments, channels and value chain segments?
- What are our core capabilities and how can we differentiate ourselves from rivals to create a competitive advantage?
- Where must we excel to deliver our value proposition?
The answers to these five critical questions will form the basis of a coherent and executable strategy.
Cultivating value
The strategic plan should chart a course to sustainable, profitable growth over a three-to-five year period. Any blueprint that sets a shorter time frame is likely targeting opportunistic events that promise a quick financial boost but fail to deliver lasting value for stakeholders.
Driven largely by the evolution of the regulatory framework, the current market is predicated on cultivating cannabis with limited value-add activities to bring to market. As additional production capacity is brought online and cannabis quickly becomes a commodity product, companies should isolate and focus on areas of the value chain where they can differentiate and entice consumers into new behaviour patterns.
Participating in the successful diffusion of business models across the value chain will separate the winners from the losers.
Adapt and grow
To be successful, executives are going to have to quickly accept that the market they entered is rapidly maturing. In response, they will need to broaden their thinking to carve out favourable opportunities; or put another way, they must identify market gaps and adapt their business to capitalize on them.
Aspirational strategies will no longer be sufficient for winning in the rapidly evolving cannabis industry. Significant investment has been made in cannabis companies and in order to turn aspirations into reality, companies must now combine a coherent strategy built upon conscious, well-articulated decisions with flawless execution.
In chapter 3 of our cannabis series, we will discuss the challenges of identifying and securing all the core capabilities necessary to build value.
This publication is made available by PricewaterhouseCoopers LLP (PwC) for educational purposes only as well as to give you general information and a general understanding of the cannabis landscape, not to provide specific financial, investment or other advice. By using this publication you understand and agree that there is no client relationship between you and PwC, or any of its member firms. The publication should not be used as a substitute for competent financial, investment or other advice from a professional services firm.
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