Growing The Pie Vs. Scrabbling For Crumbs

If you have been halfway paying attention to what’s been going on in the cannabis industry over the past year or so, you know that the industry is, shall we say, in a bit of a slump.  From 48% growth in 2020 to 42% growth in 2021 to a comparatively sluggish 7% growth in 2022, it’s fair to say that things have slowed down. Granted, there still is growth, but it’s certainly a far cry from the robust numbers the industry has enjoyed in the past. Further, most of the growth is being driven by new markets, while several mature markets are reporting double-digit declines in sales.  

Countless articles have already been written on the “whys” of the slowdown, so I’ll quickly summarize some of the key issues: sales coming back down to earth after a year or so of inflated growth during COVID, oversupply in a number of markets usually driven by the issuance of more licenses, taxation and other high costs of doing business in the legal market leading to a huge cost advantage for the illicit market (and let’s not forget lack of enforcement in a few key states), and the general economic malaise.  These are some major headwinds to overcome.  

And beyond these headwinds, with no strong prospects for federal legalization, capital has dried up, leaving companies that focused exclusively on top-line revenue with the assumption that they could eventually grow their way out of lack of profitability, in rough shape. Many are either shutting their doors, laying off employees, or looking for a quick exit through consolidation or acquisition. As equity has dried up, companies have pivoted to debt financing, which has already begun to lead to defaults on debts for some companies.   

The most common response for most brands finding themselves in this crunch has been to engage in a race to the bottom in terms of pricing and promotions. For most, this will be, at best, a short-term strategy to keep a little money coming in the door.  For those who operate solely in the legal market, most brands don’t have the scale or the margins to successfully execute a low-cost provider strategy.  And as weaker brands begin to circle the drain, even strong brands have had to respond to ensure that the delta between their pricing and their competitors’ pricing does not get too far out of alignment. 

So, we know the problem and we see the results. But what is the solution? Many people say that this is all part of an expected correction for an over-heated and over-hyped industry and therefore, is predominantly a point in time issue that will work itself out organically as cannabis markets stabilize and the economy strengthens.  

While I believe this is true to a point (specifically that there are too many weak competitors chasing the same dollars), I also think that there is a belief system that is hastening the race to the bottom and weakening the industry--that is, that the industry is a zero-sum game where the market size is a fixed equation and everyone must scrabble for their little piece of the pie.  But why is this the belief?  I think it stems from the assumption that cannabis = THC = intoxication. In other words, anyone who uses cannabis does so with the intent to get high, and the higher they can get at the cheapest price, the better.   

For me, this is a depressing and limited vision of the plant and the cannabis industry.  In reality, we are still in early innings of what I believe will be a robust industry that creates a wide range of products that offer effective alternatives to common health and wellness issues. In fact, the potential of the plant to offer so much more than intoxication is apparent to anyone who is looking.  Consumer research has found that 83% of respondents cite health and wellness reasons such as unwinding (relation, stress or anxiety) for using the plant. Within that set, 61% of respondents cited using cannabis for sleep (improving quality or falling asleep). And, in many key markets, products that are formulated for sleep are the top-selling SKUs. At Wana, for example, our Optimals line offers products that feature low levels of THC but meet very specific needs, such as the ability to fall asleep quickly or rapid relief from anxiety.  We have many other products in the works that are similarly targeted to address particular needs but with low THC.  The feedback from these products tells us that we are on the right track by developing products that grow the universe of cannabis users rather than squabbling over the “ideal” customer who is a heavy user already and is focused on potency and low cost. 

Growing the pie through innovation is, admittedly, a lot harder to do than lowering prices or offering a Buy One, Get One Free promotion.  It requires actual research and development, time-consuming and expensive sensory evaluation and clinical trials, education of the public and of budtenders, and above all, a commitment to the power of the plant and the belief that it has a much larger role to play in our health than an intoxication-first mindset would suggest. It’s also a lot more interesting and soul-satisfying than joining the industry in its depressing race to the bottom.  We’re not settling for crumbs.