The Measuring Stick
Guest post by Adam Bierman, CEO of MedMen
Provided the breadth of the cannabis sector, far also normally, I see investors comparing organizations in fully distinct industries with unrelated business enterprise models simply because they are loosely affiliated with “cannabis.” Whilst Kroger, Basic Mills, and Cargill all operate inside the meals sector, they are seldom compared to every other from an investment viewpoint with respect to valuation multiples, development drivers and margin profile.
There are 5 key cannabis-connected industries investors can invest in at this point: Agriculture, Customer Packaged Goods, Ancillary/Computer software, Genuine Estate and Retail.
Each and every “cannabis” business can and must be grouped into one particular of these verticals so they can be greater compared and analyzed primarily based on the metrics that are relevant for their respective business enterprise model very same-shop sales development for retailers, expense per pound for growers, sales velocity for CPG organizations and ARR for computer software organizations.
Agriculture: This is the most upstream sector inside the cannabis sector and consists mainly of Canadian Licensed Producers. Provided outsized demand and restricted provide of the solution, agriculture firms are taking benefit of enhanced margin profiles. What is however to be determined is regardless of whether these margins are sustainable, offered the anticipated sharp enhance in provide and regardless of whether we will see cost compression and commoditization as we’ve noticed in Oregon, Colorado and Washington. Whilst market place fundamentals may well shift on pure growers when the market place normalizes, the top growers in Canada have an investability head start out offered their potential to list on Nasdaq and NYSE. Simply because of their compliance with federal law in Canada, they have been in a position to access large sums of capital to fund their expansion plans.
Customer Packaged Goods: The organizations in this sector largely come from California and are now attempting to expand into more regions. Whilst there are many CPG organizations that report sturdy income numbers, extended-term distribution and provide agreements are important at this stage, just like they had been for the alcohol organizations that sooner or later became national leaders. It is no longer impressive for a business to be making substantial final results out of restricted retail doors with no extended-term provide agreements. The winners from this sector will lock down national agreements with retailers guaranteeing shelf space more than a period of time. Following that, this sector will start out to appear and really feel far more like classic CPG. Most of the future winners from this sector are nevertheless private and may well include the most chance for venture-form returns.
Ancillary/Computer software: The initial outperformers in this sector, which consist of non-plant-touching business enterprise focused on technologies, distribution, payments and other solutions, have been laying the groundwork for really some time offered their compliance with federal law. Provided their potential to list on the U.S. exchanges, organizations that do not “touch the plant” have been afforded a substantial head start out to raise capital and capture market place share. Whilst it is also early to inform, one particular thesis is that the 1st movers will develop substantial niche firms focused on cannabis and could be M&A targets for non-cannabis organizations who want their books of business enterprise. It will be extremely intriguing to see if the current organizations will compete with the multi-nationals, be acquired by them or turn out to be obsolete simply because of them.
Genuine Estate: Cannabis genuine estate is one particular of the most intriguing emerging genuine-estate verticals. Provided 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 at present 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 genuine estate are becoming increasingly complicated to realize for generalist REITs, however these with an sector concentrate are continuing to attract investors. Cannabis REITs are not only hyper-focused on a higher-development sector, but also offer you substantial money flow and superior returns more than each the quick- and mid-term. The important nuance for investors to contemplate is regardless of whether the cannabis REIT is focused on cannabis retail genuine estate or cannabis agriculture genuine estate. The verdict is out as to which of the two will execute greater more than time as each have their merits. Retail genuine estate gives slightly reduced returns, however there is far far more downside protection offered the option use for the retail space, the defensibility and margin profile of cannabis retail. Agriculture genuine estate delivers slightly larger returns in the close to-term, but a deteriorating competitive dynamic and possible extended-term margin compression.
Retail: This sector has the most defensibility and protection to its extended-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 potential for 1st mover retailers to establish customer loyalty. Cannabis retail will also be drastically far more consolidated than other cannabis-connected industries and will play out with one particular ultimate winner. The winner will be the retailer that is in a position to establish the most trust with shoppers, has areas in the most strategic markets across the U.S. and is viewed as the curator of the highest excellent cannabis solutions. This is not a new notion – we’ve noticed other retailers such as Household 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 devoid of beginning out as single-threaded. That concentrate is the important to beating the bigger competitors in the early stages of a company’s existence.” This is a extremely critical reality. The likelihood of a business in any of these industries winning begins with a commitment to concentrate.
Ironically, the public markets have in fact been rewarding lack of concentrate. This has encouraged sub-optimal choice creating at quite a few of the leading organizations inside every sector. There are agriculture firms acquiring distribution organizations and coffee shops, investment firms that are taking on operations of their investments and retailers acquiring CPG organizations to distribute hemp CBD into mainstream retail. These moves are getting rewarded with stock cost development, regardless of the lack of synergy or extended-term ROI. Development for the sake of development is fatal. The home of cards will sooner or later fall as it has for quite a few 1st-movers in other industries. The lack of concentrate was sooner or later disrupted by second-movers witness to the blunders and far more mindful of strategic execution.
With separation of the 5 key industries above, competent evaluation with relevant metrics can be executed. An investor will not study something valuable 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 organizations in the cannabis sector start to share their important overall performance indicators.
About the author:
Adam Bierman, CEO of MedMen, co-founded the California-primarily based business practically a decade ago. Right now, MedMen has operations in a dozen states with 37 retail shops in operation.