One of the most important decisions a company makes early on is where to participate in the value chain. Up until now, far too many cannabis brands have participated in one too many parts. Which, as we are now seeing, is leading to an exodus of companies because of the high fixed costs associate with these operations.
Last week Acreage divested "non-core" assets. A few weeks before that, Canopy sold multiple grows globally. Green Growth Brands just filed for bankruptcy. The list goes on. Companies bet big and went vertical from the start and the cracks are starting to burst.
To me, this means companies are finally forcing themselves to focus. To decide where to participate in the value chain. Unfortunately for their investors it took them a few years and a few hundred million dollars to figure that out.
DTC and Cannabis
What I love most about social media is that it has unlocked a massive amount of productivity and commerce. Combine social media with modern day SaaS tools and logistics, you can create a brand out of thin air in a matter of weeks. This is why we've seen Direct-to-Consumer blow up. With just a laptop you can build and launch a brand with little investment.
When you decide to launch your own e-commerce company with just yourself, your phone, and a laptop, you're are deciding where you are participating in the value chain. You're not becoming the manufacturer. You're not becoming the distributor. You're not doing R&D. You're simply sourcing and marketing.
This should be no different in cannabis. Far too many brands have spent millions of dollars before having a proof of concept. Far too many brands invested in cultivation and manufacturing facilities before knowing who they were going to sell to. It's been a reoccurring theme in cannabis.
If I am starting a cannabis brand today. I am not buying a license. I am not cultivating. I am not manufacturing.
I am partnering with a co-packer. I'm securing supply. I am utilizing a 3PL for storage and fulfillment. I am outsourcing my services and sales team to support my sales efforts.
Where do I come in? Sales, marketing, and customer service. My goal is to get to a proof of concept as quickly and with as little capital as possible. I am focused on building, testing, learning, repeat.
The Innovators Solution
In the great book The Innovators Solution, Clayton Christensen talks about Integration and Modularization:
Customers will not buy your product unless it solves an important problem for them. But what constitutes a “solution” differs across the two circumstances in Figure 5-1: whether products are not good enough or are more than good enough. The advantage, we have found, goes to integration when products are not good enough, and to outsourcing — or specialization and dis-integration when products are more than good enough.
Clayton talks about this back in 2003 as it pertains to technology and microchips in particular. But, this directly applies to modern brand building as well. Integration (vertical)when products are not good enough. Modularization (outsourcing) when products are good enough.
One of my favorite business analysts, Ben Thompson, depicts this in his blog, Stratechery.
I would argue that most cannabis products are good enough and therefore can be outsourced. Modularization enables companies to compete where it matters most. It allows companies to introduce new products, faster and with more efficiency.
When products are commoditized, think about what drives the most value – brand name. The way to differentiate yourself is not through product, but through customer experience, marketing, and sales. This is where companies need to integrate and build out internally. The capital required to build out manufacturing facilities, R&D, and distribution isn't needed early on and can be modularized.
Some of the most successful companies in cannabis have taken this approach. This doesn't mean they will never participate in other parts of the value chain. They are building, testing, learning and then expanding where it makes sense. They understand this is a marathon, not a race.
Headquarters is a strategic advisory studio that specializes in California cannabis. We help brands launch, grow, and scale in the Golden State and beyond.