Another month in the books and progress continues on all fronts. It wouldn’t be possible to summarize the current state of the industry without mentioning the Schumer draft of a mega bill which was recently introduced. While many have dissected the draft and discussed ad nauseum the positives and negatives, we’ll take a reoccurring theme for this monthly piece forward. The introduction of the bill shows the magnitude of the numerous issues Congress must address but these are necessary steps to unleash the industry.
While I’m optimistic, I’ve recently found myself becoming impatient. Is it possible, given the speed of the industry, that we’ve normalized this fast-paced train? Is it possible for any reduction in speed of the freight train that is cannabis that will not make me and others like myself feel frustrated or impatient? Recently, we found ourselves in a conversation with a well-known company that does NOT have any immediate channels into the cannabis industry.
We’ve been helping them identify opportunities and entry point strategies so they can position themselves for success. What caught me off guard was their collective negativity of the bill and the hesitation to proceed into the space. Opportunities such as the cannabis industry require a strong mental fortitude to continue to paddle against the flow time and time again. These steps, as hard as they are now, will allow many to reap tremendous rewards if they can continue paddling.
Lack of Progress
It’s easy to get impatient and discouraged at the lack of progress. As we analyze the space month to month, the various uphill battles, and the need for banking, social justice, etc., it’s easy to say maybe we should wait this out. Remember, we’re still in the infancy of a billion-dollar industry, and you have to be in it to win it!
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When we discuss the challenges and hurdles facing the cannabinoid industry, we’re often discussing obstacles that are unique to the space given its ongoing state of infancy. While concerns like client acquisition and sustainable scaling are matters that even mature industries brush up against, there’s one problem in particular that exclusively exists as a thorn in the cannabinoid industry’s side: banking.
Despite being legal, cannabis businesses are unable to use the services provided by secure banking institutions. The denial of such basic assistance has created unnecessary difficulties, ones that have proved detrimental to those looking to grow with the space as it expands.
Exclusions like these only perpetuate the negative stigma surrounding the plant, and since lobbyists recognize that such ostracism from financial institutions will continue to hinder the industry’s progress, they have been campaigning to pass the SAFE Banking Act.
CEO of Cresco Labs, Charlie Bachtell, put it best when he spoke with CNBC’s team over at Fast Money, claiming that “access to capital has been so difficult in this industry. And again, this is an industry that is the fastest growing industry in America. [It] increased to 320,000+ full-time employees in the industry last year – that’s up 32%, so this is an incredibly fast-moving, dynamic industry that we have, you know, a hand tied behind our back without access to traditional banking.
What is the SAFE Banking Act?
You may ask. The SAFE Banking Act is a piece of proposed legislation that would allow financial institutions to take on clients within the cannabis sector without the risk of facing federal penalties or a DEA raid.
If this doesn’t sound like a monumental game changer, consider that the head of the IRS, Commissioner Charles Rettig, told Congress that “the federal agency would “prefer” for state-legal cannabis firms to be able to pay taxes electronically, as the current cash-based system under prohibition is onerous and presents risks to workers.”3 Forced to operate as cash-based businesses, the most well-known and successful MSOs have had to pay taxes with duffel bags of cash. This ridiculous mental visual only highlights the absurdity of excluding multi-million dollar companies from the accessibility of banking.
With such obvious reasons demonstrating why financial institutions should start allowing cannabinoid businesses to work with them, you may be wondering what’s been holding them back. The main issue comes in the form of compliance risk. Though many states have fully legalized cannabis, the plant is still illegal at the federal level, meaning the issue of sanctions is a very real and very serious threat that hangs over the heads of banks and credit unions thinking about expanding into the cannabis industry. Unfortunately, their fear of facing the potential ramifications of working within the space further endangers the ones operating in it, placing cannabinoid workers at a higher risk for targeted robberies.
While not the massive reform that many people hoped to see, the SAFE Banking Act is a critical piece of legislation and a crucial step towards creating a compliant industry that’s adding thousands of jobs, bringing in millions of dollars in tax revenue, and ensuring that Uncle Sam continues to get his piece of the pie.
As more adult-use states come online, the more we see an expansion in the infrastructure necessary for federal legalization. The increasing speed at which this groundwork is being developed has sparked a sense of urgency.
Urgency, by definition, refers to “a psychological trigger that is deeply rooted inside our brain: it relates to the human loss aversion or the so-called Fear-of missing-Out (FOMO). Scientifically speaking, urgency is a time-based concept that prompts us to act quickly.”2 As key states quickly dole out their finite number of licenses, urgency becomes less about the fear associated with missing out and more about the actuality of it.
Businesses are battling to capitalize on the unique, singular opportunities offered by friendly municipalities in key battleground states, and those that miss out on the action may face repercussions from their lack of proactivity. Jon Sandelman, CEO of AYR Wellness, explained it best as he discussed AYR’s acquisition of Liberty Health on Rena Sherbill’s podcast, The Cannabis Investing Podcast: “The reason why I felt I had to move on Liberty at the time I moved on Liberty is because I thought there was a land grab that was going to end. I feared if I didn’t move now for our shareholders, that we’d be locked out of most municipalities, because right now, I just can’t see certain municipalities having 10 cannabis stores in their towns, and if I waited, I would be locked out.
Speed to Move in Cannabis
While the previously outlined scenario is a prime example of FOMO, a sense of urgency can also be sparked by the desire to protect yourself from outside threats. When we describe the large MSOs, we’re really just talking about big fish in a small pond. As regulations change and the pond becomes an ocean, the environment will completely change.
Bruce Eckfeldt, host of podcast Thinking Outside the Bud, echoed these sentiments in Eighth Revolution’s podcast, The Dime. “You’ve got the really small fish and these medium fish, which are the large fish right now, but the megalodons still haven’t come into the waters yet. And when the laws change and federal stance changes, you’re going to see big shifts in the market. That said, it’s going to be a going to be a dynamic, growing market, and there’s still going to be lots of opportunities. If you can find a niche strategy, you can create a very nice business out of it,” said Eckfeldt.
The best way to leverage urgency to your advantage is by understanding the finer details of the industry as a whole. Understanding your exposure to risk, working to fortify current approaches, and recognizing future areas of growth are crucial to preparing yourself for future changes.
Join the 1,512 others who are receiving high-signal, data-driven analysis to be in front of their peers in the cannabinoid space! If you have found value in our insights, please share this with another canna-curious individual to grow the revolution!
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The article below is an excerpt from the Monthly Playbook.
Letter From The Team – June 2021 Monthly Playbook
In the past, this piece has been used to discuss current events and how they’ll influence the future of the cannabinoid space. By cross-referencing conversations with industry leaders with both new and ongoing monthly trends in the market, we identify the important nuggets of wisdom that are crucial to finding success.
This month, the Eighth team thinks it’s crucial to take a slightly different approach and focus solely on the announcement of Trulieve’s acquisition of Harvest Health. This Florida kingpin has made waves by taking over the largest operator in Arizona in an all-stock deal, bumping its national presence from six states up to 11. Now, analysts speculate that the combined revenue of Harvest Health and Trulieve “will surpass $1.2 billion by the end of the year.”2 In other words, it will become one of the biggest operators in the game.
Trulieve’s business model
For those who are unfamiliar with Trulieve’s business model, they operate according to something called the ‘hub-and spoke’ model. Simple in concept and perfect for reaching such segmented markets with unique, state-determined obstacles, this approach leverages several regional offices, as opposed to operating in one headquartered location. Companies like Trulieve are using this approach to strategically build large-scale operational functionality right out of the gate, and while this isn’t the best approach for the companies looking to pinch pennies in the short term, the long-term benefits of immediately building solid structures in each key state are vital to continued growth.
The upfront cost involved might deter some operators, specifically those with a short-term mindset. When long-term possibilities are neglected, assets that were once built on a solid foundation begin to shatter. This is especially true when taking federal legalization into account. Trulieve CEO Kim Rivers explains it best, stating that the company “think[s] about it more as a distribution play,” and that this is the first step toward creating “national distribution models” that will “help drive efficiencies in each region.”2
Now, it’s clear that Trulieve has made a move that strategically, financially, and geographically benefits them, but the next big question revolves around the execution. How will Trulieve integrate Harvest Health into their operations?
Though the acquisition is a massive win by Rivers and her team, it isn’t a home run until all the bases are cleared. Before they can dominate, Trulieve needs to figure out how to combine the different SOPs, tech stacks, and employees, all while striving to improve upon efficiencies, as Rivers previously stated.
As the space continues to shift and consolidate, it’s important to monitor situations like these so that they may provide a model for you and your own business. This type of cannibalistic expansion will continue to occur as the industry works through its growing pains, but as always, we’ll keep you updated along the way so you can feel armed with actionable knowledge.