Cut Through the Chaos: Thriving in the Volatility Facing Cannabis Companies
There’s no doubt about a feeling of chaos in the cannabis industry. Things are changing rapidly, from the regulatory rules that shape what we can do, to the rules that have yet to be written. And the marketplace is full of new entrants. Supply and demand flux is causing pricing instability. How are companies to deal with these huge swings? I recently addressed this topic in a new podcast with the National Cannabis Industry Association (NCIA), and gave some ideas on how to deal with them.
Keep in mind chaos and volatility are not necessarily a bad thing. It’s actually a chance to create opportunity if you are prepared. Here are some of the big issues today facing cannabis companies of all sizes and in all segments of the industry:
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It’s not just about the uncertainty over the federal government’s stance on cannabis. Companies are having to navigate a tangled web of regulations wherever they do business, as the rules differ between states and even between cities and towns. Rules can change from one town to the next, putting companies in the tough position of dealing with complicated logistical issues when moving products. So, this category includes licensing requirements and inconsistencies across jurisdictions; tax and banking issues; and the challenges of delivering across borders.
Competitive Volatility
Talk about a marketplace poised for fierceness. An influx of companies are entering the market, armed with capital to take advantage of what’s been called the “green rush.” These upstarts may not have the legacy knowledge but are trying new things and shaking things up for those that have already made their stakes in the cannabis industry and are moving at their own fast pace. Looking to other industries, like tech, can help companies predict how they may fare as competition heats up.
Supply and Demand Volatility
California has a glut of marijuana coming out of farms that does not match current consumption levels. Prices drop when this balance is off, with supply outweighing demand at the moment.
Product Commoditization
Similar to what has been seen in the tech industry as products that once seemed special and new become repeated elsewhere, many companies may find themselves trying to compete against each other solely on price or volume in the next three to five years. This can hurt current business models if companies aren’t prepared to evolve. Distinguishing a product or service from the rest of the pack through branding and features will be of utmost importance.
How to Compete With These Volatile Factors?
When up against a lot of unknowns, a smart strategy involves getting to know what you don’t know. CEOs, CFOs and controllers can start by putting the financial house in order. Properly set-up financial systems and processes will result in one clear, simple version of the truth. Without it, the company loses the understanding of its balance sheet, profitability, inventory, the true cost of producing its products, and has no sense of its burn rate. Is spending per month fixed or variable? What’s the cash flow? If you do have cash today, do you know how much you’ll have a month from now? If your company is looking to buy a dispensary, do you have factual accounting information to know whether that’s a sensible move at this time?
Seasoned executive and finance leaders will proceed with thoughtful business and scenario planning. Will investing in your own dispensary result in a better outcome, or is it wiser to purchase one that already exists? If pricing suddenly drops, how could that affect the business? Then consider what will likely happen if pricing goes up or demand changes. Valuable perspective from experts who know the challenges of companies like yours can help you think through these necessary questions so that the right decisions are made.
CEO Dave Roberson leads the charge at Kukuza Associates to help cannabis companies of all sizes reach their full potential by having expert finance at their fingertips. He enjoys working with fast-moving companies in all segments (growers, extractors, manufacturers, distributors, retailers) across the Western U.S. He previously was senior vice president for Hewlett-Packard Co. and president and CEO at Hitachi Data Systems, where he also held the titles of COO, CFO, CIO and general counsel.
Hear for yourself what cannabis companies need to go further, faster. Dave’s wide-ranging interview for the NCIA’s Cannabis Industry Voice, presented by CannabisRadio.com, can be replayed here. Kukuza is a member of NCIA, which recently selected Dave to serve on their Banking & Financial Services Committee, which advocates for the industry’s equity in banking and financial services access and fair treatment under state and local laws.