The Coming Evolution of Cannabis Brands
As the cannabis industry matures, many companies are facing challenges in differentiating themselves and their products from competitors. Among these challenges is commoditization: as cannabis cultivation and extraction mature, standardization is expected to drive prices down. When price variations across products are tight, it’s a sign of commoditization. We’re already seeing some of that — Headset data, for example, shows the price per gram of the top 5 THC gummies in California, to be between 18 and 21 cents.
Successful companies will likely be those that are hyper-focused on building out a defensible competitive advantage.
To analyze where cannabis companies are today, and how they might achieve competitive advantage tomorrow, I’ve used Boston Consulting Group’s Advantage Matrix. From the previous paragraph, you might guess that I see many cannabis companies as existing in the “Stalemate” quadrant. They have a few ways to build a small competitive advantage, but there is little difference between competitors in terms of technology and expertise. Large players that have material market share are often sacrificing profit due to the cost of scaling, and smaller companies cannot generally afford to scale competitively. Many of these companies are being forced to make decisions on how they will separate themselves from the pack in the coming months and years.
Big brands can build advantage through volume
Many larger industry players such as Canadian licensed producers and scaled extractors are banking on economies of scale, economies of scope, and the crowding out of smaller companies to help them succeed. They will likely either own or have access to assets to cultivate, process, and manufacture mass market products to create a competitive advantage compared to smaller players in the industry. Companies with this competitive advantage generally win by pushing the most product, at competitive prices, and maximizing distribution. As the cost of production is driven downwards by volume, this advantage may only exist for a few large players, while the remainder of the industry will need to look for other ways to win.
Proliferation of niche brands
For smaller cannabis companies which don’t have the scale to create a volume advantage, there are a number of ways they might dig a moat around their business through fragmentation. In my view, this is especially true for brands who can dominate smaller consumer segments by marketing their products towards niches. These niches might include discount/premium, demographically-focused, or use case-specific (sleeping, for example) products. In a fragmented market, small, specialized companies may be able to take on large industry players by remaining hyper-focused on connecting with their customers.
Reaching equilibrium state
Over time, these strategies begin to converge into a mature cannabis market where “specialization” is the competitive advantage enjoyed by many companies. We see this in many mature traditional CPG product segments, such as tobacco and spirits.
Some brands may focus on developing high-volume, low-priced, mass market products. In traditional sectors, this might be Coke or Pepsi. In cannabis, I expect it will be a handful of Canadian licensed producers and U.S. multi-state operators.
Others will likely move from fragmented advantages and focus on niche specialization; think Perrier or Lacroix in sparkling water, and premium products like kief-covered pre-rolls in cannabis.
Over time, I think a small number of large players will dominate the mass market through consolidation. These players will likely have access to large-scale, low-cost production. However, as the market matures, I expect to see the proliferation of focused, specialized companies as the innovators of the cannabis industry. These companies might market niche brands or offer specialized products. As more companies solidify their competitive advantages, I believe we’ll see maturation in the cannabis market as companies achieve the specialization seen in many other industries.
If you’re an operator, I’d love to hear where you think your business will fall in BCG’s matrix. And if you’re in the industry, or even just an observer, let me know in the comments if you see cannabis developing similar to more mature CPG sectors.
Original Article Published May 29th, 2020 by Narbe Alexandrian President & CEO of Canopy RiversPublished •
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