The process of transitioning a medical cannabis market to adult-use is not without steep learning curves. But Midwestern states don’t necessarily have to fly blind. Unlike established markets that have been charting unfamiliar territory since legalization began, new markets can draw from nearly a decade’s worth of measurable data. What can budding adult-use enterprises learn from the more developed side of the industry?
At last week’s MJ Unpacked Virtual Summit, market veterans met with cannabis entrepreneurs in Oklahoma and the Midwest to discuss the types of obstacles new medical and adult-use markets might initially face and how to navigate future challenges. The panel was moderated by Sparky Rose, co-founder and managing partner at Supercritical, a Chicago based full-spectrum cannabis consulting agency. Covering a variety of topics, from fluctuating price points to supply chain management, the conversation centered three foundational rules for establishing long-term business growth:
Stay true to your business model.
As cannabis markets transition into adult-use, significant price drops in wholesale flower are an expected challenge. Ryan Brown, CEO of Native Roots and Garden Variety, encouraged retailers to keep their company’s core values in mind when adapting price points to fit the market. “More competition in these new markets will drive the need to focus, understand, and hone your business model,” he said. “In 2018, we saw a glut of product enter the flower market, the branded products market…all of it was pushing prices down and the customer became a little bit more fungible. They were a little bit more willing to go to various locations.”
“There can be an intoxicating urgency to maintain customer traffic you’ve had at that lower price point.”
Ryan warned that if aggressively competitive pricing structures don’t fit into a business model, maintaining them could prove detrimental in the long term.“There can become an intoxicating urgency to maintain customer traffic you’ve had at that [lower] price point,” he noted. “With that pressure, you feel the need to go chase customers often.” Had Native Roots followed that initial impulse to offer the best deal in town, they would’ve sacrificed the type of premium customer experience they provide, he said. Ryan concluded that a company that remains intentional about the market they serve is most often successful at retaining customers.
Build a strong brand.
When asked about the significance of branding in the face of downward pricing pressure, Nancy Whiteman, co-founder and CEO of Wana Brands, cited product differentiation as a key factor in maintaining a price point. “That’s why we pay more at the supermarket for Tylenol versus whatever the store brand is,” she explained. “We know that they’re the same thing but Tylenol has spent a gazillion dollars over the years, building a brand.” Nancy stressed that branding should be established long before the market matures and prices begin to drop.
“That’s my uber answer.” Nancy joked. “More specifically, you do have to be aware of that inevitability as a market matures: that pricing is going to change. One of the key things that you need to be doing in addition to working on your brand constantly is to make sure that you’re always also working on the financial components of your model… that you have secured your supply chain, that you’re constantly evaluating your procurement processes and looking at how to be the most competitive you can be on all the cost components of your product,” she said. “That’s just prudence because when the inevitable day comes when you’re going to have to lower your price, you’re going to want to have built in as much flexibility as possible.”
“When you’re manufacturing and building a brand, that’s your value-add and that’s what actually allows you to stabilize your prices beyond the commodity.”
Guy Rocourt, co-founder and chief product officer at Papa & Barkley weighed in, “When you’re manufacturing and building a brand, that’s your value-add and that’s what actually allows you to stabilize your prices beyond the commodity.” Guy went on to explain that brands are a means by which to educate customers about differentiators. “If I’m a flower company and the price of my commodity is tanking, I should still be able to articulate my practices,” he said. “Here in Humboldt, we pride ourselves, for instance, on sun-grown and small-farm. People resonate with that,” he continued. “We have a select product that is essentially farm-to-table. It’s twice as expensive as everything else on the marketplace. But it’s solventless, it’s culturally six-star hash, and we have to educate folks about why they’re paying [so much for] it.”
Maintain solid relationships within the industry.
The panelists agreed that partnerships are the cornerstone of a healthy cannabis economy. Ryan Brown illustrated how establishing mutually beneficial scenarios with suppliers keeps products on the shelves. “There’s a tendency, especially in the early days, for retailers to leverage the power that they have over a brand by holding them over a barrel for discounted pricing.” He explained that relationships quickly deteriorate when they’re built around a retailer’s position as the sole point of customer access . “There are ways, especially as pricing decreases, to create win-wins…locking in supply style agreements, forward purchasing agreements, creating unique and collaborative marketing opportunities,” he said. “You need those partnerships to survive in order for your company to thrive.”
“We don’t want to lose the culture of cannabis farming.”
Guy Rocourt stressed that fostering healthy partnerships with growers and farmers helps manufacturers maintain variety in the face of supply shortages. “We have a cultural impetus to make sure that we empower cannabis farmers,” he said. “One of the things that happens in the beginning…money comes in, you have folks who want to aggregate farms, and control the supply chain because the best way to make money as a farmer is to own [the farm] so that you’re influencing the prices. You’re protecting the commodity.” Guy acknowledged that putting small farmers at the top of the supply chain isn’t always the easiest thing to do. “But we thought that especially, as a nascent industry, it’s super important to empower small farmers because we don’t want to lose the varietals,” he added. “We don’t want to lose the culture of cannabis farming.”
“A key part of keeping your supply chain is treating people with respect instead of seeing price as the only point of negotiation that exists in the world.”
Nancy Whiteman followed up with the importance of partnerships between brands and vendors. “We really try to approach all of our relationships as partnerships,” she said. “We work on annual supply agreements with many of our key vendors, wherein we forecast where we think we’re going to be and then work with them on a quarterly basis to do refinements of those agreements to adjust for growth or changes in volumes.” Nancy stressed that a key part of keeping your supply chain is treating people with respect instead of seeing price as the only point of negotiation that exists in the world. “You can’t always be the 800 pound gorilla in the room,” she said. “Sometimes it really does come down to the relationships and the trust that you’ve built with people.”