You’re reading a copy of this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015. The newsletter includes unique insight to help our readers stay ahead of the curve as well as links to the week’s most important news.
Five weeks ago, we discussed how several cannabis companies lacked focus in the industry and were dooming themselves to mediocrity by trying to be in too many markets without adequate capital. We cited MedMen as a great example, and this week’s news of Acreage Holdings retrenching across multiple markets adds further evidence that empire-building is a risky endeavor.
Several weeks into the COVID-19 crisis, though, we are reminded that those companies with too narrow of a geographic focus may be taking too much risk as well. Take Planet 13, for example. Though the company, which has done a fabulous job in Las Vegas with its 10% market share through a single dispensary, is moving to diversify its current business, that single store is extremely vulnerable to a lengthy hiatus in Las Vegas tourism. Several other companies depend greatly on the Nevada market as well.
Companies that are overly reliant upon the Massachusetts adult-use market are also taking a hit, as the state moved to shut down all non-medical sales. This isn’t the first time the governor there has taken an aggressive move that is harmful to cannabis operators, as the state banned all cannabis vape sales for three months in September.
This week’s sudden and disturbing news that Ontario had changed its prior view and had removed cannabis retail from its list of “essential services” will hurt Canadian LPs if it persists too long, as that is a big market, even if it is under-served, and it reminds us that companies shouldn’t depend excessively on any single channel of distribution.
While the current crisis is leading to these near-term operating risks in certain geographies, we are reminded of the challenges the pioneers in the Colorado market faced following legalization, with constant packaging rule changes causing them substantial financial burden. Market disruptions can happen for all sorts of reasons.
When the dust settles and these interruptions are behind us, investors, who are already beginning to better appreciate balance sheet and cash flow risks, may also pay more attention to geographic risk. There is a happy medium between empire-building and putting all of one’s eggs in a single basket. Fortunately, several companies are well positioned from both of these perspectives.
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Alan & Joel