The Measuring Stick
Guest post by Adam Bierman, CEO of MedMen
Offered the breadth of the cannabis sector, far as well frequently, I see investors comparing firms in entirely distinctive industries with unrelated business enterprise models since they are loosely affiliated with “ cannabis.” When Kroger, Basic Mills, and Cargill all operate inside the meals sector, they are hardly ever compared to each and every other from an investment viewpoint with respect to valuation multiples, development drivers and margin profile.
There are 5 principal cannabis-associated industries investors can invest in at this point: Agriculture, Customer Packaged Goods, Ancillary/Computer software, Genuine Estate and Retail.
Just about every “ cannabis” business can and ought to be grouped into one particular of these verticals so they can be improved compared and analyzed primarily based on the metrics that are relevant for their respective business enterprise model exact same-retailer sales development for retailers, price per pound for growers, sales velocity for CPG firms and ARR for software program firms.
Agriculture: This is the most upstream market inside the cannabis sector and consists mainly of Canadian Licensed Producers. Offered outsized demand and restricted provide of the solution, agriculture firms are taking benefit of enhanced margin profiles. What is but to be determined is regardless of whether these margins are sustainable, offered the anticipated sharp boost in provide and regardless of whether we will see value compression and commoditization as we’ve observed in Oregon, Colorado and Washington. When market place fundamentals may perhaps shift on pure growers when the market place normalizes, the top growers in Canada have an investability head start out offered their capability to list on Nasdaq and NYSE. Mainly because of their compliance with federal law in Canada, they have been capable to access big sums of capital to fund their expansion plans.
Customer Packaged Goods: The firms in this market largely come from California and are now attempting to expand into more regions. When there are many CPG firms that report powerful income numbers, lengthy-term distribution and provide agreements are essential at this stage, just like they have been for the alcohol firms that at some point became national leaders. It is no longer impressive for a business to be creating substantial final results out of restricted retail doors with no lengthy-term provide agreements. The winners from this market will lock down national agreements with retailers guaranteeing shelf space more than a period of time. Following that, this market will start out to appear and really feel extra like conventional CPG. Most of the future winners from this market are nevertheless private and may perhaps include the most chance for venture-form returns.
Ancillary/Computer software: The initial outperformers in this market, which involve non-plant-touching business enterprise focused on technologies, distribution, payments and other solutions, have been laying the groundwork for pretty some time offered their compliance with federal law. Offered their capability to list on the U.S. exchanges, firms that do not “touch the plant” have been afforded a considerable head start out to raise capital and capture market place share. When it is as well early to inform, one particular thesis is that the initial movers will develop substantial niche firms focused on cannabis and could be M&A targets for non- cannabis firms who want their books of business enterprise. It will be pretty exciting to see if the current firms will compete with the multi-nationals, be acquired by them or turn out to be obsolete since of them.
Genuine Estate: Cannabis true estate is one particular of the most intriguing emerging true-estate verticals. Offered the capital-intensive nature of the cannabis sector, and as legalization continues to expand state by state, the size of the market place will only develop more than time. There is only one particular cannabis REIT that is presently publicly traded whilst a handful have not too long ago raised capital and are set to go public more than the subsequent year. Outsized returns on true estate are becoming increasingly tough to obtain for generalist REITs, but these with an market concentrate are continuing to attract investors. Cannabis REITs are not only hyper-focused on a higher-development market, but also offer you considerable money flow and superior returns more than each the quick- and mid-term. The essential nuance for investors to take into consideration is regardless of whether the cannabis REIT is focused on cannabis retail true estate or cannabis agriculture true estate. The verdict is out as to which of the two will execute improved more than time as each have their merits. Retail true estate gives slightly reduced returns, but there is far extra downside protection offered the option use for the retail space, the defensibility and margin profile of cannabis retail. Agriculture true estate gives slightly greater returns in the close to-term, but a deteriorating competitive dynamic and prospective lengthy-term margin compression.
Retail: This market has the most defensibility and protection to its lengthy-term economics as a outcome of geographic zoning restrictions placed on cannabis retail firms, the restricted quantity of total licenses that a state/city enables and the capability for initial mover retailers to establish customer loyalty. Cannabis retail will also be considerably extra consolidated than other cannabis-associated industries and will play out with one particular ultimate winner. The winner will be the retailer that is capable to establish the most trust with customers, has places in the most strategic markets across the U.S. and is viewed as the curator of the highest high-quality cannabis merchandise. This is not a new idea – we’ve observed other retailers such as Property Depot, Target and Complete Foods all turn out to be the ultimate winners in their respective verticals.
Make no error about it – these firms are all early stage in a sector that is nevertheless nascent. As Reid Hoffman writes in his book Blitzscaling, “We do not know of a single start out-up that succeeded without having beginning out as single-threaded. That concentrate is the essential to beating the bigger competitors in the early stages of a company’s existence.” This is a pretty essential reality. The likelihood of a business in any of these industries winning begins with a commitment to concentrate.
Ironically, the public markets have really been rewarding lack of concentrate. This has encouraged sub-optimal choice creating at numerous of the leading firms inside each and every market. There are agriculture firms getting distribution firms and coffee shops, investment firms that are taking on operations of their investments and retailers obtaining CPG firms to distribute hemp CBD into mainstream retail. These moves are getting rewarded with stock value development, regardless of the lack of synergy or lengthy-term ROI. Development for the sake of development is fatal. The home of cards will at some point fall as it has for numerous initial-movers in other industries. The lack of concentrate was at some point disrupted by second-movers witness to the blunders and extra mindful of strategic execution.
With separation of the 5 principal industries above, competent evaluation with relevant metrics can be executed. An investor will not discover something helpful by comparing 4-wall margins of a retailer to the margins of a CPG business. To start out, right here is how we measure ourselves as a cannabis retailer.
Investors will be properly served as other firms in the cannabis market commence to share their essential overall performance indicators.
About the author:
Adam Bierman, CEO of MedMen, co-founded the California-primarily based business practically a decade ago. Currently, MedMen has operations in a dozen states with 37 retail shops in operation.