High Spirits

#001 - The New Titans of Cannabis: Understanding Market Consolidation

June 01, 2023 AnnaRae Grabstein and Ben Larson Episode 1
High Spirits
#001 - The New Titans of Cannabis: Understanding Market Consolidation
Show Notes Transcript Chapter Markers

Imagine a world where the top five companies are seizing control of the increasingly lucrative cannabis market. Intrigued? We, your hosts Anna Rae and Ben, take a hard look at the rapid consolidation of the cannabis industry. Using compelling BDSA data, we break down the dynamics of the industry, highlighting how five vertically integrated cannabis behemoths now hold 19% of the US market. As we delve into the pros and cons of this development, we'll also take a trip down memory lane to compare this trend with the history of consolidation in traditional CPG industries. 

Venture with us into the fascinating world of cannabis brand consolidation and integration, where we'll uncover what lies beneath the surface of Cresco and Green Thumb's acquisition strategies. We discuss how these companies are fast-tracking their reach into diverse consumer segments, a daunting task for any startup. But is all this consolidation good or bad for the industry? We explore this and much more, including the potential benefits and downsides, the impact on smaller companies, and the opportunities this trend may bring about for producers and consumers alike. Brace yourself for a thrilling ride through the highs and lows of the rapidly evolving cannabis market.

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Speaker 1:

All right and we are live. Okay, hey everybody, welcome to High Spirits. Live, I'm Ben.

Speaker 2:

And I'm Anna Rae.

Speaker 1:

Hello, and that was a lot smoother than the last time. You're all our guinea pigs for our second round of this live broadcast, so bear with us. But I mean Anna Rae. I think we have incrementally improved.

Speaker 2:

Yay, so glad to be doing this and hopefully everyone is going to enjoy our conversation today.

Speaker 1:

Excellent, All right. Well, since it's our second time and I don't even know if anyone got to see the first time why are we here? What are we doing? Why are we here? Live on LinkedIn.

Speaker 2:

Yeah, so Ben and I have been having weekly conversations to make sense of the cannabis industry, the landscape, the news, the players, everyone that is all up in our shit. And we've been having these private conversations for almost a year and we keep thinking, wow, there's such great content here. We should be bringing people in and letting people into this conversation and sharing it out into the world. So that's what we're doing we're building some content for all of you guys to hopefully create something that's relevant and interesting and useful.

Speaker 1:

Yeah, that sounds about right. So if you want to get involved and you can leave comments, you can reach out to us directly. In future, earrings will bring other people on and talk about certain topics, but before we jump in today, we have a nice juicy topic to sink our teeth into Ann Rae, how's your week?

Speaker 2:

It's been good. It has been good. Memorial Day weekend was fun. I got out on Lake Sonoma with my son and my husband and just really enjoying Northern California season changing.

Speaker 1:

Yeah, yeah, we're a little behind in California this year. The sun's now coming out and it's warming up a little bit. It took a little bit. The snow was still falling in the mountains a few weeks back.

Speaker 2:

I know it's wild. The ski resorts are still open, but we've got green hillsides in Northern California, which is where I am. How about you? How was your Memorial?

Speaker 1:

Day. It was good. It was good we kicked off the weekend. The team and I at Vertosa did a little bit of a community service event when Wynton cleaned up the waterfront in Berkeley. That was just a nice way to first realize how dirty we can be as human beings and that we need to do our part. Just a nice way to kick off Memorial Day. I know it's not service in the grand aspect, that what we're celebrating with Memorial Day, but it's a little piece of what we can do to sacrifice our time and help improve the community a little bit. Other than that, try to relax. My version of relaxing is doing an insane amount of yard work and getting into the week more store Getting into the weeds, like what we're going to do today. Exactly, exactly. Let's get into the weeds. Absolutely.

Speaker 2:

A couple of weeks ago, green Market Report put out an article and the headline was MSO's Bogart Market Share. The article was highlighting data that BDSA had just put out that the top five vertically integrated companies in the US own 19% of the market across the regions that BDSA tracks. I should know which isn't all of them, but most. That's a lot for five brands, five companies, considering that they track 2,740 brands. What that's saying is that less than 1% of the brands control close to 20% of the market.

Speaker 1:

Interesting.

Speaker 2:

Yeah right.

Speaker 1:

Is this a good thing? Is this a bad thing? I know MSOs have earned this reputation of being the big bad wolf in the industry. In some instances that's correct. Hopefully I'm not always true. I don't know if I'm talking about anyone in particular, but I know for a lot of licensed local companies they're perceived as being, yeah, like I said, the big bad wolf, coming in and undercutting on prices, selling terrible mids or whatever it is and muscling people out of the industry, or even lobbying against the interests of the local community and protecting limited licensure and all that kind of stuff. So for starters, I guess baseline yeah, a lot of that's true, but on the other hand, maybe all this consolidation isn't all that bad.

Speaker 2:

Yeah, I mean, I think, backing up a little bit, trying to, instead of saying is it good or bad. I think what it points to is that there is actual market concentration going on in cannabis, which is something that is normal in most industries. I think it also points to the fact that vertical integration, which all of these top five companies have, does provide real benefit and access to retail shelves and, ultimately, access to consumers. So I think that those are important things just to put on the table as part of this, and I think also it just helps us to start to predict the future and to see the maturation of cannabis, maturing as an industry in similar ways that other consumer industries have. And I think it makes sense for cannabis companies to be acknowledging the reality of the consolidation that is happening in front of us and also starting to think about how we play into that. But, why don't we talk about some of these other traditional industries and the history of consolidation and what it looks like, sure?

Speaker 1:

Sure, should we start really broadly. Yeah, like CPG in general, consumer package goods here let me bring up this slide. So consolidation is a thing and, whether you know it or not, it's like there are 10 brands that very much rule the world, that we consume, and this is largely known for anyone in the space. But it's like, yes, your favorite brands are but a very small subset of these much larger CPG companies and while we might not think of GTI or Cresco as one of like Danone yet, or Unilever, they may someday grow into that and this seems to be the very beginning. We still very much think of those as cannabis companies, as single entities, but they are starting to bring together these brands that you'll see on store shelves, where you might not know if they're a part of this larger umbrella or not when you're first interacting with them. We can drill down into kind of what this means. For pie chart, I picked this one because constellation brands, especially in the cannabis beverage world, holds a very significant resonance, because back in 2017, they invested $4 billion into canopy growth and that fueled a lot of canopies, future endeavors and now has a transition and a new executive board. But I mean constellation brands on this chart is one of the smallest pie wedges. It's less than 2% in comparison to Nestle, procter and Gamble, abmbev, and so if we think about how intimidating it was for constellation to come into the industry, I mean, just imagine what it's going to do when all these other major conglomerates start coming in. So it's almost as if we need this maturation of the market to happen, so we have various tiers to create buffers in between us and the extremely large companies.

Speaker 2:

Yeah, that's a really good point and I think it's interesting too, as when we were prepping for this conversation, we were talking about natural foods and organic, and many of these large CPG companies have, over the years, invested in natural food brands and, instead of the large umbrella company being fully dedicated to natural foods, the CPG companies are seeing natural foods as a certain segment within their portfolio, just like they're also seeing something like energy drinks and energy products as a different segment. And these companies, as they grow, they have to segment so deep in order to find different, unique consumer bases in all these different categories. And as cannabis is becoming more mature, we're starting to see companies understand the need to lean into these special, unique audiences and segments. So I'm excited to see those niche products and niche marketing techniques unfold in our space. Whether or not it means that consolidation is inevitable, I think, is a different question. Well, so there's a there's good.

Speaker 1:

I feel that consolidation is often used in a negative connotation, right Like right now, because of the terrible economic conditions that the market has been under, like we've all been under a consolidation phase, right Like. I've heard that a lot. But another word for consolidation is acquisition, and for someone that runs a venture backed company and has worked with many other venture backed companies, like, acquisition is a is a end goal, sometimes, many times right. And so it's like yeah yeah, it's like an exit strategy, like it's okay, like we don't all have to be running our companies in perpetuity forever, like sometimes someday we want to retire and acquisition to a larger company where you've created value. That that they see like is a really strong opportunity. And and we had prepared a slide actually for for highlighting some of the brands under Cresco and Green thumb and I'm just looking a couple. There's actually, I mean Bebo right, that was a that was a California like pastils brand that got acquired by Green thumb.

Speaker 2:

Same with Flora Cal in the Cresco portfolio as a California brand that was acquired.

Speaker 1:

Yeah. So it's like interesting strategy here, like I look at these and there's some recognizable brands I don't even know if I you know, for instance, dog walkers. I didn't know that was a GTI company, right? And so they're already entering into the space where they're creating a house of brands, where you might not know that they're associated with these, these larger companies, but for for GTI, it's giving them access to a consumer segment that a startup company otherwise, you know went and built and figured out how to market to.

Speaker 2:

Well, I believe that some of the fear and negativity around consolidation in cannabis has a lot to do with the roots of where we all came from and that, with the exception of a few large companies, almost every company in cannabis could be considered a startup. And when you're a startup, it's it's easy to have a chip on your shoulders of feeling like you're the little guy and that you've got a lot to prove. And also, with with a startup atmosphere, you also are playing into a sort of craft independent legacy perspective that a lot of companies that's how they started. Maybe they came from the legacy market or or there, or they came from a really deep passion that they wanted to change the world with their love of cannabis. And and there's this undercurrent that that selling, even being acquired or rolling up with a larger company, is selling out or is losing your soul. And it certainly could be. But I think that there's also lots of examples of when being acquired meaning consolidation really like a partnership. Sometimes it's a coming together of equals and sometimes it's it's a larger company bringing in a smaller company into their portfolio can create operational efficiencies, can make it so that people can actually continue to succeed and exist in this market. I mean, we are in a place in cannabis right now, where there are a lot of distressed companies and a lot of companies that have been losing money for quarter after quarter after quarter. And if there's a way for groups to come together so that they can continue to do the good work that they're doing. I think that it's something that's important for companies to consider and to think about, and how that fits into their strategy.

Speaker 1:

Yeah, absolutely. I mean, you know I, being born out of the California industry here it's like the industry necessitates that you find ways to quote unquote improve your business, you know, and whether that means growing your customer base or building more efficiency into your business. And you know, in normal capitalism, and especially venture-backed companies like, there's this phrase that it's like you're either growing or you're dying, and I don't know if we have to be so draconian about that phrase and apply it to everything. But you know, knowing that in 2015, that distillate costs for us as a company was somewhere between the nine and $12,000 a liter, and you know that, dropping below $1,000 a liter by the beginning of this year and all of a sudden rebounding to, like you know, 2,500 or 3,000. I mean just that volatility of the market, independent of competition and big players coming in, really requires this like perpetual refinement of the business and sometimes the only way to do that. If you built like a hyper local brand and that's where your strength is like being able to go out and market that and take it to the next level with a quote unquote you know, big brother or sister, right. Also, like, on the flip side of the coin, you have the acquiring entity, where they start to build their brand and reputation around, how they acquire, like, how much autonomy they give companies like, will you be able to keep your management team and operate that you want the way you want, and just leverage the efficiencies of having a consolidated back office or, you know, procurement team so that they're buying in bulk and driving down those input costs? So there's a lot of reasons that small companies will eventually want to drive to that because, yeah, it becomes really hard to compete, but it's not just the MSOs, so to speak, that are going to be driving that direction.

Speaker 2:

Yeah, I'm working on a potential deal right now with a company that is potentially in the midst of thinking about becoming acquired by another company and and it really is a coming together because there's something to benefit on both sides the the acquire wants to be able to move into a new category and doesn't want to have to build it from the ground up, wants to immediately be able to bring revenue into their business. They also are interested in acquiring talent to be able to create this new category of products. And similarly, the company that would be acquired in this scenario is just tired of going on it alone and realizes that by having a more mature management team and other players at the table with them, they are going to have a better chance of being able to compete, being able to negotiate larger supply agreements, all types of things that make it for for the, for the soul of the brand, to actually be able to continue on, as opposed to not being able to compete in a really complicated marketplace. So, yeah, yeah, it's really. It kind of goes into this concept of of what you were talking about, ben, of how these, how these massive houses of brands form, and there's two paths. They can be built internally by the company that is deciding and acknowledging that there's a new category that they want to be in or a new audience that they want to serve, and that they build a new brand and a new product line. But then what we're talking about with consolidation is buying, and what buying is is acquisition, that's M&A, and, and when a company is being acquired, you know they're acquiring not only revenue, but they're acquiring IP, they're acquiring talent, they could be acquiring operational efficiencies, scale, all these types of things. But with that I will just put a note, because I've been a part of lots of integration processes is that when you do do a consolidation and an acquisition, the integration is really where where it gets important to see these operational efficiencies come to reality, because if integration isn't done well, lots of things can get lost in the process and you can also see inefficiency be created. And I do want to note that while these, these titans, as we called them in our headline that own the 20% of the market, many of them still, while being large, are not profitable, and so part of the consolidation strategy there has been to grow their top line by bringing in more brands that could bring in revenue, in hopes of bringing inefficiency. And what we've seen with some of these MSOs is that it actually hasn't created the efficiency that they had anticipated that it would. I think a good example of that is what happened with the true leave harvest acquisition and how it actually really changed the financial performance of true leave in a negative way because of inefficiencies that were created when they did that acquisition.

Speaker 1:

Yeah well, integration is such a critical component of these acquisitions, right Like I've seen even the most experienced companies in the mainstream market you know McCormick acquiring FONO, which is a company I'm relatively close with in the greedy in space like that process taking a very in depth, year long process to kind of align teams, integrate, build culture and all that kind of stuff. So there's a lot of work that goes in on the front end to make sure that's all all aligned and even then it's still a crapshoot when you get to the finish line and you really have to make sure that it's worth it for you and like maybe the financial driver is the biggest piece of it and you're, you've decided that you're okay with your dream dying a little bit and living on with someone else. Not saying that's always the case. But I will say that I don't think any of these large MSOs yet have gotten to the place where you can say that they've done a really great job at integrating various brands and cultures. It's been kind of like a bowl on a China cabinet.

Speaker 2:

Yeah, there's not an example that I can point to that I'm like, oh yeah, that company is killer at brand consolidation and rolling up in the perfect way. I think that we have a lot of work to do, but it's happening. I'm aware of a dozen different conversations that are going on that are non-public, about different types of acquisitions that people are looking at. As I'm talking with investors. People are talking about doing distressed asset plays, of going out and purchasing a lot of different brands that are distressed and rolling them up into a brand new house of brands. There's all kinds of things that people are thinking about of how we can maintain a lively environment with many brands that serve consumers, but in a way that creates efficiency for those brands to exist. Having some type of consolidation mechanism is certainly one way to do it. This 20% of the cannabis market owned by five companies as we look at CPG, that might sound like a lot to us, but at the same time, we were looking at beer as we were leading this conversation. In beer, it actually looks a lot more like it is 80% of the market that is owned by the top companies. It's more like the top nine to 10 companies own 80% of the market. On the screen is the US market share of brewers, but the global environment looks similar as well. Then you've got an independent group of thousands of other companies that make it just 20%.

Speaker 1:

I think I saw a number somewhere there are 19,000 to 20,000 brewers around the world. What is that? Eight or seven?

Speaker 2:

Yeah.

Speaker 1:

Controlling more than 80%, that's.00. It's less than 1%. Maybe we have a long ways to go. Just kind of tangential to brewers is distributors. People have generally heard of Southern Glacier Unless you're in the biz, probably no one else when it comes to alcohol distribution. That's because they're four or five times larger than even the number two. Then it's just the power curve from there. Very common Same in retail. Walmart is twice the size of Amazon. I don't know if that number is still accurate.

Speaker 2:

In our research we also saw that Walmart is larger than all independent grocers combined in the US by a third. There is consolidation in industry. As a young, immature and still growing and shifting and changing industry, I think that there is a hypothesis that's worth considering, that there's an element of consolidation that is inevitable. That's what we're staring down at in cannabis. Interestingly, states like New York have certainly done a lot, as they've created their regulatory and legal environments to try to get in the way of it. I don't think that they're going to be able to stop it. I think that they still could be successful at creating an ecosystem of many independent companies. But in the long run, when we see federal policy change and we see true large-scale industry data, we're still going to see this consolidation at the top of a few companies even if. New York tries to stop it.

Speaker 1:

Absolutely. You see that motion graphic someone created at one point where it shows web browsers. Over time, you had AltaVista and Netscape, and they're all surging ahead. All of a sudden, google pops on the map. Is that how people say it? I don't know. The map is fluctuating over time and all of a sudden Google fires up from behind and takes over Maybe the MSO, so to speak, or the large brand that rules the cannabis markets. Maybe it doesn't even exist yet, or maybe it's not even on this top five map. I think there's a lot to change. In summary, I just think it's not something that for us to be totally afraid of. I think it provides a dynamic to the market that does provide exit opportunities. There's a definite need, especially right now, in some resilience to the fluctuations in the supply chain. The ability to have consistent cogs is a really important piece of being a brand. If you're flying solo, you're certainly left up to the devices of the industry, I guess. So yeah, I don't know.

Speaker 2:

I think you're right, and I think that what that means, then, for leaders who are running cannabis companies is that you need to decide if you want to be a consolidator yourself, or if you want to be a target for acquisition, or if you're dead set on your own independence which is something you certainly could decide but if you aren't dead set on independence, then it's important to build expertise in M&A and in partnerships, and what that means is keeping good track of your business, understanding your fundamentals, having good infrastructure that makes it so that you can be nimble when opportunities arise. Because, yeah, I'm really excited to see some exciting house of brands formed that are strategic and interesting in terms of the product portfolio that they offer and how they can touch on many different audiences and create portfolios that can be really impactful across broad swaths of people, and I think it can give us the ability to be more innovative as well. Product innovation is something that's really expensive, and, when companies are able to reach certain levels of scale, it's something that can become a little bit more easily metabolizable into their financial mechanisms, and so innovation is going to serve all consumers, and also not just in product categories, but also in price, and make cannabis more accessible. So all these things will just be able to create more opportunities in the industry, I think.

Speaker 1:

Yeah, totally All right. Well, that was a fun topic. I appreciate you joining me this afternoon and anyone that's watching. Let us know what you think. Drop a comment below and it'll help guide us in episodes to come. So let us know who you want to come on. If you want to come on yourself, just raise your hand and we'll come up with the topic to discuss. Anne-rae. Any parting thoughts for our audience?

Speaker 2:

Yeah, this has been fun and we want to keep having more impactful conversations, so hit both of us up here on LinkedIn and let's keep having conversations. If there's something that you really want to learn about, let us know.

Speaker 1:

All right. Oh, and we got Claudia shouting us out on the comments, so thanks for being our audience member, claudia. All right, we'll catch you all next week. Bye.

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