Mid-size MSOs & LPs: Is Being Good, Good Enough? First, a crude definition. A midsize player (MSP) is a business that occupies (give or take a couple of places) spots 5 to 10 on a market share list. Being in the ‘middle’ is a strategic construct, independent of volume or revenue. The positive signs in the North American cannabis industry are unmistakable. Companies are turning the profit corner, becoming more professional and financially healthier. The overall industry continues to grow, both from new markets coming on stream and organic growth in older markets. Adding lighter fluid to the sector - fingers crossed - will be regulatory and tax reform. A rising tide raises all boats, right? Yes, but not all boats rise the same amount. The highest risers will have strong market shares (spots 1-4) with decent balance sheets, access to capital and improving operating results. Smaller, niche-focused firms (11 and lower) who can differentiate and control costs should also flourish. (Low or non-risers are businesses losing buckets of money or who are strategically challenged. They could turn things around, but the odds are long.) The final group, the MSP, can go up or down. They may be profitable and competitive right now, but their prospects will be challenged for reasons that may not be apparent to them today. The strategic challenge If external industry learning matters, cannabis MSPs will not be ideally positioned to deal with emerging threats and opportunities. They don’t have the revenue, capital or scale of their larger rivals to compete everywhere at the lowest cost. Their market & product footprint spreads their focus and resources across too many battlefields. Finally, MSP often struggle to generate real scale economies or find the capabilities excellence of their smaller, niche-focused rivals. MSPs have a lot to think about in 2024/25 > Institutional capital and the best partnership deals tend to flow to the largest, most profitable firms; > Equity markets typically value bigger companies over smaller ones; > The lowest cost operators (often the larger firms) can best cope with margin compression and pricey capital; > Growth requires difficult choices around which markets to play in: good but increasingly competitive (eg New Jersey, Michigan) large but ailing (eg California, New York) or emerging (eg Florida, Texas); > Interstate Commerce will transform a state-based sector into a regional or national industry. There is an important distinction between Canada and the US. Midsize LPs could flourish for a while due to market structures (e.g., role of govt wholesalers) and federal regulations. Longer term, oligopolies tend to emerge in Canada. America’s lighter regulatory touch (assuming SIII and SAFER passes) plus an expected capital influx will expedite the MSP squeeze, most likely through M&A. 🔔 Hit that follow button on my profile to always get my unique, impactful content

Posted by Mitchell Osak at 2024-04-16 00:20:32 UTC