The days of the green rush and growth at all costs are officially behind us. Capital markets are in the dumps, and retail investors are fatigued.
Many like to push back on the idea that cannabis is in the infancy stage, given its long-time underground position, but the truth is that we are still so early in its legalized and regulated existence. Cannabis continues to be a state-led story, and states continue to lead the headlines. Some mature markets are begging for relief (California), and others are chomping to open their doors (New York). Industry consolidation is unfortunate as operating in a highly regulatory capital-intensive industry with extensive macro factors builds nauseating operating conditions.
The unfortunate reality is that we are about to set forth on a path where many will not be with us in 12-24 months. The consolidation in the cannabis industry is experiencing similar challenges to those faced by other emerging markets, such as the dot-com boom and bust, the renewable energy sector, and the biotech industry.
Dot-com boom and bust: During the dot-com boom in the late 1990s and early 2000s, many internet companies experienced rapid growth and valuations that were not supported by earnings or a clear path to profitability. Similarly, the cannabis industry has experienced a rush of investment and speculation, with many companies receiving high valuations without demonstrating profitability or a clear path to sustained growth.
Renewable energy sector: The renewable energy sector has struggled to compete with traditional energy sources due to high costs, inconsistent government policies, and market volatility. Similarly, the cannabis industry faces challenges such as varying government regulations, high taxes, and market volatility due to changing consumer preferences and other factors.
Biotech industry: The biotech industry faces challenges such as lengthy and expensive drug development processes, strict regulations, and high costs. Similarly, the cannabis industry faces strict rules related to the cultivation, processing, and sale of cannabis as well as challenges associated with developing and testing new products and treatments.
When an emerging market is first established, many small players may compete for market share with varying degrees of expertise and resources. This can result in a more cohesive marketplace, with consistent quality and reliability of products or services. That’s precisely what many of us across the U.S. are experiencing to varying degrees.
Consolidation, on the other hand, allows stronger companies to acquire weaker ones or smaller players to merge and form larger, more stable entities. This leads to a more concentrated market, where the remaining players are likely to be more experienced, well-funded, and capable of delivering high-quality products or services. While this may frustrate many, this is a natural part of industry evolution. Consolidation can also create strong operators, which leads to greater efficiency, lower costs, and higher profits for the survivors.
All of this is to come eventually.
The cannabis industry is experiencing similar challenges to other emerging markets. While these challenges can be daunting, history has shown that emerging markets can ultimately thrive if they overcome these obstacles and consolidate into solid and sustainable industries. This consolidation process can lead to a more mature and sophisticated industry where the remaining players better understand the market and how to operate within it. This can benefit consumers by providing greater consistency, quality, and reliability while providing a more stable and predictable environment for investors. Ultimately, consolidation is a natural part of the business cycle, and those companies that survive and thrive will be better equipped to weather future storms and capitalize on new opportunities.
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