To say 2020 could be a defining year for vertically integrated cannabis companies is an understatement.
It will be. And those driving execution in this complex, regulated industry with an enterprise-level solution will prove to be the leaders.
This year, the cannabis industry has been thrust into yet another transitional period. Legalization legislation is potentially off the table for the foreseeable future, and many are dealing with a shrinking economy for the first time.
The industry has tackled license loading, product innovation, and market share grabbing in the past — now it’s time to execute on the business plans in place. Companies are rebranding and pulling out of markets in which they have previously invested. They’re beginning to look at ways to operate more strategically. For most executives, evaluating these systems and processes is fundamental to understanding what is next and how to get there.
Amidst shifting industry trends, many vertically integrated cannabis companies are operating under the “hairball effect.” For those not familiar, the “hairball effect” is what happens when companies build a compilation of point solutions and custom-built solutions . This stems from the need to quickly adapt during the license loading phase and to deal with customer demand. This approach, though, can create disparate and inaccurate data, create manual work, increase headcount and open organizations to risk.
Many companies, in varying industries, find themselves in this position. And time and time again, it is proven to be an unsustainable option.
The need for stronger execution on business plans has resulted in cannabis companies moving increasingly toward enterprise solutions. There are four main reasons why, which we’ll detail below.
Remember: The ability to perform and to exceed expectations can be dramatically affected by how an enterprise software solution is leveraged. Those that do it well will stand out above the rest.
Compliance standards in the cannabis industry are evolving, and, as the legal status continues to change, they’re only expected to increase in complexity. The requirements for each company vary from state to state, whether medical or recreational, from cultivation to sale. The consistent point is that maintaining compliance is essential to protecting operating licenses and companies’ reputations. This protection (and the risk associated with missing something) is creating a need for strategy and trust in the data driving business decisions.
It’s important for any cannabis company to understand how they are addressing compliance requirements and how they will adapt efficiently to any future changes. The media can play a role in discrediting organizations and their leaders when a misstep is made in this area.
Compliance requirements can span the entire organization, from people to operations. Throughout the entire process of cultivation and selling, traceability, quality management tracking, and, in some states, validation through a third party are important requirements. Regulations around the cannabis product as well as the safety, packaging and labeling of each item — along with the prevention of customer looping and corporate-level visibility across states — can also become sore spots if proper compliance isn’t maintained.
Vertically integrated cannabis companies are moving to an enterprise solution to help manage these compliance issues. Enterprise solutions are used in many other highly regulated industries, and they allow for help establishing a strategy as well as a level of automation between the data pulled and the data reported, which in turn reduces risk for the business — and for the customers.
The acquisition and license grabbing phase of the industry’s growth may have slowed, but the potential within the industry is still expansive. When considering the effect of growth on the market, there are many facets to be explored.
Merger and acquisition activity will certainly continue, as this is one of the most strategic ways an organization can grab additional market share. With M&A activity, the complexity of varying licenses and state regulations comes into play. To avoid the continued “hairball effect,” system adaptability and deployment must play a part in the strategy. The same can be said for organizations looking to be acquired. Making the transition and roll-up more efficient can make a company more desirable to those looking to buy.
Organic growth is also prevalent, as the recent industry transition toward focusing on business execution drives an increased need for insight into the customer base, industry trends and essential partnerships. In the past, as customer demand increased and many companies in the space worked on getting established, customers were lucky if the store did not run out of product. With the normalization and legalization of products on the rise, customers are looking for more from the companies they buy from.
Vertically integrated cannabis companies are moving to an enterprise solution to help manage and encourage growth. Enterprise solutions are used to create standardization and should be leveraged to drive efficiency and automation. In other words, the system should work for you, not the other way around.
Yes, margin management deserves its very own section. Thinking from the perspective of our fellow finance friends, margin management is an approach for managing the net profit of operations. For this, we look at the risks of variability in both input costs as well as output prices.
While the industry transitions to the execution phase, the “grab all, sell all” approach will exit, replaced by the longer-term strategy of focusing on the bottom line. This focus can span from HVAC units and electrical to the implementation of technology and software. Execution of cash and margin management is instrumental in ensuring company longevity, as well as a return on the investments being made. Doing this successfully could be a determining factor in who receives more funding and who does not.
Vertically integrated cannabis companies are moving to an enterprise solution to help manage margins and act on real-time insight to make smarter business decisions. Enterprise solutions are used to track COGS, support simulations of profit margins, and provide accurate data to better understand customer and patient lifetime value.
Defining Leading Standards in the Industry
Operating a vertically integrated cannabis structure is a choice for some and a mandate for others. It is dependent, like most things in the industry, on location — and weighing the risk versus reward of doing so.
Being vertically integrated comes with its own complexities. Managing a product from seed to sale encompasses many different industries in one. Finding a single solution to do that can seem daunting. This can be telling when looking to solutions that are built to be cannabis specific, which is why many executives are looking toward other industries for guidance.
When following the processes of a vertically integrated cannabis company from start to finish, there are a multitude of industries compiled together: agriculture, life sciences, process manufacturing, wholesale distribution and retail. Each step often requires a level of tracking and reporting. To begin defining an industry standard — much like when looking at software solutions — there are two main schools of thought: Build, or buy. With the recent drive to focus on business execution the leaders in cannabis are looking toward industries that make up their business and what makes them different than their competition.
Vertically integrated cannabis companies are moving to an enterprise solution to define the leading standards. With established industry knowledge and processes for separate business units, the opportunity to create a holistic view of the organization and focus on what makes a company unique arises. This will allow for a noticeable difference in execution of business strategy and success.
The year 2020 will help define a new future for vertically integrated cannabis companies. Those striving for the execution of plans they put in place by leveraging technology and enterprise solutions will stand out amongst the crowd. Others may be lost in the crowd, struggling to deal with the “hairball” they’ve created. The potential to influence what becomes standard in this industry is huge.
The time to stand out as a leader starts now.
Morgan Fletcher in Cannabis and Tech Today