The Cannabis Industry And Its Enterprise Future: An Insider View

By Jessica Billingsley, CEO of Akerna Corp KERN.

I believe the cannabis industry is in a uniquely liminal moment as it grows from its roots as a loose collection of cottage businesses and boutique operators into a full-fledged enterprise-driven industry. 

The path leading to this moment is dominated by the intersection of three important elements: 

• The contraction in value of many smaller cannabis businesses in what was once a financially overheated land grab;
• The consolidation of these smaller operations under a few well-capitalized, technologically savvy, and fully integrated multi-state operators (MSOs) and multi-country operators (MCOs) that bring new enterprise practices to the industry;
• The Covid-19 pandemic that overnight brought into full focus the immediate need to further digitize the retail experience and optimize the industry supply chain through software technology.

On the Horizon - The Potential Impact of 2020 Ballot Initiatives

While we may currently be in the midst of the stormy and often painful part of the journey of industry change (or metamorphosis), that is not the end of the story.

The political process is once again poised to play an important role, as 12 state initiatives around cannabis legalization are on the November 2020 ballots. This is more than the 8 (of the original 9) initiatives that passed in the last presidential election year and ignited the first wave of change for the cannabis industry. The potential passage of these new measures later this year will be a contributing factor in the upcoming second wave. 

What will be different this time, is that the vote is occurring in an environment in which cannabis operations have already been declared “essential” for medical and/or recreational use in over 20 states during the ongoing COVID-19 pandemic. Many states and counties that are wrestling with substantial budgetary deficits and tax losses as a result of Covid-related shutdowns are also looking at the legalization of cannabis as a partial economic solution.

The Relationship Between Value Contraction and Industry Consolidation

At first glance it may appear counterintuitive that while cannabis industry sales grew 78% in the prior year over year period, big names like Aurora ACB and Tilray TLRY have overall lost 60%-70% of their total financial value.

Naturally, smaller operations have disproportionately experienced this loss as a result of operating inefficiencies and the inability to continue to raise capital to expand.

On the other end of the spectrum, MSOs and MCOs that are emerging as enterprise-style leaders have seen their valuations grow by leaps and bound Companies such as Green Thumb Industries GTBIF and Curaleaf Holdings CURLF – with growing operations of millions as opposed to thousands of plants, and a retail presence of dozens of stores spanning across the United States. Given the current need for scale and capital in the cannabis industry – the dominance of these large operators will continue to grow.

It’s important to note that consolidation is not an experience unique to the world of cannabis - although other past consolidations were not impacted by the extreme economic and social pressures of a major pandemic. A diverse collection of industry consolidations in the U.S. dates back more than 120 years with some as recent as the current year (or even last week) - including food delivery and restaurants, semiconductors, airlines and automobiles, farm equipment, healthcare, manufacturing, media, and even athletic shoes. This is merely the first significant – and clearly disruptive - experience for the cannabis industry.

Technology and Enterprise Evolution – Operations Move from Guesswork to Analytics

Because they often come from more mature industries, large-scale cannabis operators bring their expectations for more advanced technology and financial management infrastructure. What they face as a result of the ongoing rollup of multiple smaller businesses is a patchwork of cultures and hacked together systems with varying levels of technical sophistication – ranging from literal back of the envelope calculations to hand-crafted Excel spreadsheets to the attempted adoption of ERP platforms designed for other industries.

For those starting with a blank slate, they face the challenge of establishing systems that not only help them operate a newly formed cannabis business, but also take into account the complex set of requirements around the ever-changing world of compliance and regulation.

The scaled cannabis operator is in need of enterprise platform and performance standards, as well as API integration across multiple systems from accounting to compliance and vertical-specific workflows. Data and analytics are now required by an emerging group of data scientists in MSOs, as well as professional managers looking for operational efficiencies and supply chain transparency. Increasing pressure for robust and secure technology is drawing the interest of established enterprise technology heavyweights not previously associated with the cannabis industry – including Sage, SAP, and Oracle ORCL.

As cannabis businesses continue to scale and grow in sophistication, technology must do the same.  As physical operations merge for economies of scale, technologies must integrate to offer more seamless performance. That is the natural evolution of the enterprise.

Science Accompanies Software Technology in the New Enterprise Cannabis Operation

In addition to greater technology integration, scientific-driven methodology, research, and product development are becoming important parts of the scaled enterprise-grade cannabis operation – particularly in the areas of cultivation and manufacturing. 

In cultivation, the ability to develop faster growing strains as well as those with particular beneficial characteristics will be significant brand differentiators in a more mature and competitive marketplace.  Operators are already looking beyond THC and CBD to the more than 100 other cannabinoids and terpenes to create the unique benefits of the ‘the entourage effect’ for targeted customers. Tracking and analyzing the associated data of these scientific explorations will be critical in developing competitive and value-driving IP.

Manufacturers’ need for unique offerings, consistent product quality, and customer experience has placed significant attention on making THC and other compounds as bio-available as possible. This has led to the development of important extraction and process IP that needs to be integrated into larger and more secure operating systems in order to guard its value.

The Enterprise Future and the Second Wave of Cannabis Industry Growth

Despite the challenges of the financial value contraction of smaller operators, accelerated industry consolidation, and the unprecedented economic pressures of COVID-19 – the cannabis industry is proving its economic resilience through its transformation into a new economic structure – the large-scale enterprise.

Enterprise organizations have a need for greater resiliency in operations, transparency into all stages of the supply chain, accountability to consumers and government agencies, and increasingly sophisticated and data-driven management practices and systems. Operator size, legislative change, and technology will drive the upcoming second wave of industry growth.  That wave is on the near horizon as the cannabis industry moves through its most challenging, important, and liminal moment of transformation.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Lead image by Ilona Szentivanyi. Copyright: Benzinga.

LEGAL DISCLAIMER

The views expressed in this article are the author’s personal views and should not be taken to reflect the views of, or to be statements of Akerna Corp.  Certain statements made in this article are “forward-looking statements” within the meaning of the “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995, as amended. When used in this article, the words “estimates,” “projected,” “expects,” “anticipates,” “forecasts,” “plans,” “intends,” “believes,” “seeks,” “may,” “will,” “should,” “future,” “propose” and variations of these words or similar expressions (or the negative versions of such words or expressions) are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance, conditions or results, and involve a number of significant known and unknown risks, uncertainties, assumptions, and other important factors, many of which are outside the control of the author or Akerna, that could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements. Important factors, among others that may affect actual results or outcomes, include the results of cannabis related ballot initiatives in November 2020, the continued consolidation of the cannabis industry, changes in applicable laws or regulations, changes in the market place due to the coronavirus pandemic or other market factors, and other risks and uncertainties disclosed from time to time in Akerna Corp.’s filings with the U.S. Securities and Exchange Commission, including those under “Risk Factors” therein.  You are cautioned not to place undue reliance on forward-looking statements.