Vertical Integration: Blessing or Curse?

When California regulations came out late last year the opportunity presented itself for cannabis companies to acquire multiple licenses, thereby enabling a strategy of vertical integration. As cannabis entrepreneurs went through the licensing process they had to decide how many licenses to apply for and determine how their corporate strategy would evolve with these new opportunities. As they evaluated the prospects many were keen to pursue vertical integration as it provided increased revenue, improved profit margins and the ability to control one’s destiny.

On the face of it this seems logical. But here we are nine months later and what was thought to be a blessing is turning out to be a curse. Vertical integration is a complex and costly business strategy and entrepreneurs have consistently underestimated the requirements to succeed, particularly in an industry built on the shifting sands of regulation. At the center of this predicament lie two interrelated concepts: Domain Expertise and Scale.

Domain Expertise: Most cannabis entrepreneurs can quickly tell you what they are really good at. But vertical integration has resulted in management teams operating well outside of their core competency. Brands are now self-distributing, manufactures and cultivators are launching brands, dispensaries are getting in to cultivation, and distributors – well they’re just struggling to be distributors. Net-net, these vertical “extensions” are far more complicated than they appear and KO has seen them drag down businesses as they absorb management bandwidth and capital with end results that are underwhelming due to poor execution.

Scale: Whether you want to raise capital, sell your business, or simply build a long term annuity stream, the bottom line is that your success will be determined in large part by your ability to scale. The race is on to “get big fast” but KO has only met a handful companies truly understand what scale means. Of course the capital starved cannabis industry rationalizes their inability to scale due to lack of access to capital – and this is true. However, scale is about more than capital. It’s about core competencies, operational experience and attention to detail across many vectors (pricing, SOPs, logistics, etc) all rolled in to a cohesive action plan that spans the entire company.

Vertical integration is hard in any business and more so in cannabis. If you have access to capital to enter new lines of business, then hire experts who have “been-there-done-that”. It you don’t have capital (like most) you are more likely to succeed by focusing on what you are really good at and trying to get better. Investors and acquirers want the best teams. The best teams are typically the most focused. Execution is everything in cannabis and the challenges are sufficient enough without spreading oneself to thin. You know what they say about the jack of all trades…

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