A Look Ahead

Industry as a whole cannot rest on its recent victories

by Omar Sacirbey

Biggest Issues Facing MJ Businesses in 2017

Marijuana businesses must successfully navigate a slew of challenges in 2017 if the industry is to continue its economic, financial and legalization inroads of 2016.

Marijuana Business Daily checked in with some industry experts about what the cannabis market as a whole should anticipate this year:

Expansion

With eight states having approved marijuana measures in November and major markets such as Ohio and Pennsylvania coming online soon, the cannabis landscape lends itself to expansion.

“Everybody’s going to be looking for expansion opportunities, and there’s going to be a lot of them,” said Avis Bulbulyan, president of Siva Enterprises, a cannabis-focused consulting firm in Southern California. “Across the different categories, everyone is going to try and get a piece of it.”

But expansion could have its pitfalls as well, particularly for companies that may not have the resources to make the investments that go into an expansion – real estate, building construction, hiring employees and so on.

“It’s going to spread out the competition,” Bulbulyan said. “If you’re a small manufacturer who wants to operate in multiple markets across the state, you could get cash-strapped pretty quickly.”

Indeed, expansion into California or other new recreational or medical states could prove the undoing of companies that might not be prepared to handle the rigors of expansion, especially the costs.

“There are companies that are going to try to expand, but they’re going to find out that they’re overstretched,” said Kayvan Khaltabari, founding partner at Denver Relief Consulting.

Consolidation

As the cannabis industry matures, consolidation and merger and acquisition activity will become more commonplace.

“You’ve seen a lot of consolidation in retail partly because individual dispensary owners have found that it’s a difficult business, and they find it’s easier if you have a larger company that can scale some of the needs that you have,” said Taylor West, deputy director of the National Cannabis Industry Association.

A big issue facing dispensaries and rec retailers is whether they should try to remain small and independent, find partners with whom they can merge or even let themselves be gobbled up.

“A big question is individual operators versus consolidation and which direction works best for an individual business owner,” West said.

Bulbulyan said a shakeout is coming.

“You’re going to see a lot of consolidation, and not everyone is going to be able to survive by the end of the year. Bigger operators have already been doing this for the last 18 months – they’re consolidating a lot of smaller operators,” Bulbuyan said. “You’re about to see some of the bigger operators – those that have operations in three, four, five states – turn into even bigger businesses.”

Branding Maturation

Whether businesses try to stay small or aim to expand or merge, branding will be a key part of any successful strategy.

“This market still has lots of room for boutique operators, but if you want to try that you have to be very savvy about how you brand yourself and what niche you’re filling in the market,” West said.

Establishing an identity is crucial.

“You need to set yourself apart,” Khalatbari said.

One way to do that, Khalatbari believes, is to produce product in a sustainable or environmentally friendly way: “That will make a difference in where people shop, not just who has the cheapest product.”

West agrees.

“Cultivation techniques will become a way for cultivation companies to differentiate themselves,” she said. “If you’re trying to build a brand and reach customers, one of the ways to do that is to be very transparent about your cultivation. And tell people about your efforts and quality. If you don’t use pesticides or grow in a greenhouse, say so.”

Bulbulyan observed that retailers are becoming “picky” about what they carry on their store shelves.

“Branding will be a big part of what determines (which) products get on the shelf and which ones don’t,” he said. “If you don’t have a well-branded, consistent product, you’re just not going to get that shelf space anymore.”

Increased Focus on Standards, Regs and Compliance

Because of its growth and maturation, the cannabis industry will draw a lot more attention from the federal government, mainly in the realms of regulations and consistency.

“With the testing issues we’ve had, businesses are going to have to make sure they are producing a quality, safe and consistent product,” said Lezli Engelking, CEO of the Arizona-based Foundation of Cannabis Unified Standards (FOCUS). “That’s not something we’ve been able to guarantee thus far in the industry.”

It’s time that changed, said Engelking, who believes the way to achieve that is with guidelines.

“The companies that are operating without guidelines and internal checks and balances in place, that will become a very big problem. It already is,” she said. “The best thing the industry can do for itself is legitimize itself. Showing the non-cannabis-consuming public that we can do this in a safe manner will move the industry forward.”

For existing operators in California, one of the biggest challenges will be to understand what it’s going to take to get licensed and then to survive the regulatory system.

“A lot of people don’t have the mentality to operate in a regulated environment. In California, many smaller operators will also get pushed out,” Khalatbari said.

Compliance will also become more important if banking laws for cannabis companies become more favorable, as expected. If laws do improve, marijuana businesses will have to dramatically improve their record-keeping and compliance systems.

“If you have a legitimate bank account, there’s a lot that goes into it,” Bulbulyan said. “Your compliance and record-keeping have to be up, and a lot of dispensaries and operators are not prepared with a banking or compliance plan.”

Whether they like it or not, business owners must embrace compliance if the industry is ever to reach its global potential.

“For cannabis to become a true global, sustainable industry, these things – standards – have to happen,” Engel-king said.

Growers, retailers & edibles manufacturers all face distinct issues

CULTIVATION

Price Drops Are on the Horizon

When there is oversaturation, prices drop. Cultivators in Colorado and Washington state learned that lesson quickly.

“(Prices will) definitely drop in
California,” said Avis Bulbulyan, president of SIVA Enterprises.

Cannabis prices in California are now about $2,000-$2,200 per pound wholesale. When the state completes the licensing process, there will be an initial drop in supply because some cultivators won’t pass testing requirements, so prices may rise to $3,000 to $3,500 per pound.

“But once there are enough licensed cultivators online, and the facilities grow, you’ll see a sharp drop in prices,” Bulbulyan said. “That’s going to force a lot of operators to pivot, but many will sell out or close up. So, there will be a pretty high failure rate.”

Growers Will Need to Cut Costs

Electricity and other costs will continue to zap the profit margins of cultivators, especially those with indoor sites. Many growers will look for cost-cutting measures this year, including growing in greenhouses.

“Efficiency of resource use overall is going to be critical for cultivators, not only because they are going to be subject to regulations that require it, but also because it’s a competitive world out there, and if you are able to be more efficient and sustainable, you’re also able to grow more cost effectively,” said Taylor West, deputy director of the National Cannabis Industry Association. “If you can lower your power bills, your water usage, then you’re going to be able to produce your product at a lower cost.”

The trade-off is that such efficiency requires a substantial amount of up-front investment in equipment such as climate control systems, irrigation systems and energy-efficient lights.

“That can be a challenge in a market where there isn’t a ton of investment capital floating around for anyone to grab,” West said.

RETAIL

Rec Customers Aren’t Medical Customers

Retailers moving from a medical to recreational market must understand they’ll be serving a different set of customers. Many of their new recreational customers may not be regular consumers and likely haven’t spent a lot of time figuring out the products they want or the effects they’re looking for.

While patients seeking long-term medication may prefer a stronger-dosed product, a recreational customer may want a more casual experience.

“They don’t want to have to take a cookie and break it up into 15 pieces or so,” West said.

It took Colorado about a year to understand that, West said. She explained that many retailers simply made medical products available to new adult-use customers, but rec customers found those too strong.

Businesses then rolled out smaller-dosed products that were individually wrapped, like a 10-milligram cookie. “It’s been really good for the market overall,” West said.

In such a scenario, West advised, business owners should make sure they have a knowledgeable and charismatic staff.

“We hear a lot about consumers being loyal to a dispensary because a particular budtender or staff is really well educated about the product and are really able to help a customer figure out what works for them,” West said. “That will be really important when trying to cultivate a customer base.”

Will a Third Consumer Group Emerge?

At the simplest level, cannabis consumers have been divided into medical customers and recreational customers.

West sees the possible emergence of a third category of customer who doesn’t carry a medical card but still buys cannabis for certain therapeutic purposes, such as insomnia, pain or an acidic stomach.

“That says something about what cannabis businesses should be considering when they’re developing products, educational materials, employee training,” West said. “Just because these customers are not in the medical market does not mean that they just want a recreational high.”

Kayvan Khaltabari, founding partner at Denver Relief Consulting, sees a similar future.

“The recreational folks are going to try to create lifestyle products,” he said. “I think we’ll see cannabis implemented into many more types of herbal regimens.”

INFUSED PRODUCTS

Consistency in Dosing a Must

The biggest issue for edibles companies will continue to be consistency in dosing. Great strides have been made in the infused products sector, but many companies still don’t do it well.

“You’re starting to see the divide between the good companies and the bad companies,” Bulbulyan said, “and a lot of it comes down to the consistency of dosage.”

And that could be key to attracting, and keeping, consumers new to the marijuana market.

“When you’re talking about a large competitive market and you’re trying to reach out to new customers who have not consumed cannabis for years, that consistent quality is going to be really important,” West said.

California will present a special problem in that there will be state-level requirements and local-level requirements around dosing standards and labeling and packaging.

Finding the Right Talent Is Key

To achieve dosing consistency, infused products companies will have to hire the proper scientific minds to pull it off.

“Companies are getting increasingly sophisticated about how they figure these formulations,” West said. “They’re bringing in extremely experienced chemists and people who have walked in other industries dealing with infusions.”

If edibles companies are to be competitive, they’ll need to be able to bring scientific expertise to their firms.