2022/2023: Reviews & Prophecies for the Cannabis Industry

Evan Eneman, the co-founder of the Adeptus Emerging Markets Practice and founder of Sands Lane, shares his thoughts on the cannabis industry. He takes a look back at the past year and plans for 2023 to help operators, investors, and service providers navigate the future in the meandering cannabis industry. The full post can be found here.

The cannabis industry represents one of the fastest-growing sectors in the United States and in key international markets, today with global growth trends predicted to hit 25% over the next 8 years. Supporting this growth trend are legalization movements across various states, bringing new products and services to market.

Several years ago I was asked to comment on my predictions for the year ahead for the cannabis industry. I don’t recall what percent of my predictions were accurate, but it caused me to pause and reflect on the past year (and years) and think about the “future”. So for 2022 and 2023, I’ve decided to take an informal review of the past twelve months and prophesize for the next twelve.

This past year has been a rather unique one for the cannabis industry, teetering on the precipice of massive defaults and massive growth. What a fun place to be if you have the emotional fortitude to play out your hand. It’s no secret that cannabis is an emerging market full of new potential; however, it can be a daunting task to fully understand the nuances of the market and how to plan for and navigate its future. Let’s begin with the past…

RESILIENT & NEW MARKETS

2022 opened with the first-ever adult-use retail sales in Montana. That’s right, the “Treasure State” best known for its “Oro y Plata” or “Gold and Silver” has joined the party and I’m sure those in Big Sky are celebrating. We venture down south soon after as Costa Rica finally legalized medical cannabis and is now on the path for broader adult-use consumption. April 1st was no joke this year in the “Land of Enchantment” as New Mexico launched adult-use sales. Anyone that has ever visited, knows why it earned that moniker, and now can enjoy and explore that world more deeply. The smallest state did not want to be outdone, so the Rhode Island Legislature passed the law that legalized the sale and possession of cannabis; hopefully, that means it’s perfectly legal to consume as well, and not just be a holiday ornament.

Across the pond, the other way, brings us to Thailand, who earlier this year removed the cannabis plant from its list of banned narcotics, rendering possession, cultivation, sale, and consumption of cannabis legal, and simultaneously releasing over 4,000 prisoners who were incarcerated for cannabis-related offenses. Although not all is so rosy in Thailand, as they’ve maintained a ban on all cannabis extracts containing THC. And while freeing the plant itself, the government also gave away one million plants to celebrate the momentous occasion; that’s a government “handout” most would likely be comfortable with. Even resorts are getting into the cannabis action. And back to the other side of the pond, Germany, who had previously committed itself to full legalization (they’ve had a medical program), finally provided plans for cannabis regulations. Although there’s some work to be done to codify this into law, it’s widely expected to become only the second EU country to legalize cannabis, and that’s a really really big deal as it’s the largest economy in Europe.

OTHER MEMORABLE MOMENTS OF 2022

Who wants a pre-roll with their funnel cake and giant turkey leg? Well, those attending the California State Fair this past summer were pleased to participate in the Fair’s first-ever cannabis competition. For over 150 years, the best producers of beer, wine, and cheese have been doted over, and now state-wide cannabis farmers are in the mix. Over 60 awards were handed out this year across various categories. Louis Armstrong’s affinity for marijuana gets its own chunk of the performance, as do the 1960s. Coincidentally in 2022, famed mixologist and Cocktail Whisperer Warren Bobrow honored his idol Louis, who was a foundational influence in jazz, by introducing the Klaus Mezzrole, named after the cannabis “cigarette” that his dealer, manager and cannabis activist, and the legendary jazz musician, Mezz Mezzrow used to procure for him and other Jazz legends.

Our friends at Pew Research Center conducted a survey confirming that 59% of U.S. adults still believe that cannabis should be legal for adult use (and medical), and an additional 30% feel it should be legal for medical use only. So less than 1/3 of U.S. adults believe cannabis should not be legal at all. At least we’re making progress somewhere.

And on to the head honcho, President Joe Biden decided to pay lip service to advocates by offering pardons for cannabis possession at the federal level (almost no one) and a bit more bite as he directed his administration to review how marijuana is classified under federal law. As noted in Marijuana Moment, and in response to President Biden, both Health & Human Services and the Food & Drug Administration indicated that they will move “quickly” to review the scheduling status. Unless this is a 2024 campaign strategy, I’m not sure “quickly” has the time frame most of us want. Soon after though, and possibly riding the wave of good sentiment, voters in two states, Maryland and Missouri, chose to legalize adult-use cannabis. Three other states with initiatives on the ballot during the mid-terms did not pass, but New York quickly jumped in to clear the air and awarded its first 36 dispensary licenses to businesses and nonprofits from communities most impacted by the War on Drugs. Will New York get it right? I’d like to say yes, but since no one in the administration there asked for my personal opinion, I don’t have complete confidence just yet, but I’m cautiously optimistic.

To end the year strong, as noted previously, Rhode Island saw its first cannabis dispensaries open to the public in December. And finally, the feel-good story of the year, although some tried to rain on this parade even, Brittney Griner, who was held captive in Russia for cannabis possession, was released back home as part of a prisoner exchange with the U.S.

AND NOW, A GLIMPSE IN THE FUTURE

In the upcoming years, the cannabis market will see dramatic shifts as legalization becomes more widespread and consumer access expands to new markets. What does that look like in 2023? I honestly have no idea, but here are a few thoughts…

This economic slowdown and uncertainty has been exacerbated in the cannabis sector where competitive pressures have continued to build. More brands and operators have been tightening their belts due to a heightened focus on capital preservation and efficiency, and of course, profitability. The cannabis space has been hampered by a lack of capital for a long time, even when it was flowing, it was not a fully open tap like other sectors have enjoyed. Given those constraints and the focus on fundamentals, as they always should have been, we will see an interesting environment for distressed M&A at every level of the maturity curve. Those with the ability to adjust and react to the market, to clearly see the long-term path, will be well positioned to benefit in 2023. So while competitive market pressures continue to mount, quality of operations and brand differentiation will become essential for all industry participants.

RETAIL SPIN

Differentiated form and focus within retail, and segmenting the market to attract new consumers to the future of immersive shopping experiences will continue to take shape. The days of “value” only shoppers will slowly fade as more craft and artisanal products make their way to the shelves. As all “retail” has proven over many decades, consumers segment themselves by retail brand, which ultimately requires different brands and price points on shelf; So, in short, focus on fewer, better stores that align with your strategy and unique brand positioning, and stop worrying about what others are doing.

COLLABORATION & COOPERATION

The cards are stacked against most “challenger” brands because they don’t have the resources to compete and retailers have made it even harder over the past few years. Retailers will find they need to partner more with brands, and not just because they can open a checkbook, but because they represent a different value proposition for potential customers.

BEVERAGES FOR THE WIN

It’s not a far stretch to say that the most socially acceptable format, beverages, will become a dominant segment of the market. This shift is also not “new”, but in the past 12 months, we’ve seen a proliferation of beverage brands and existing brands extending into beverage like never before.

Beverage offers the ability to reach a truly wide audience at scale. Cannabis is not a one-size fits all plant, nor should its derivative products be. Brands will continue to focus on this differentiation and share of occasions following the shift in consumer sentiment away from alcohol and towards low and no alcohol choices and more functional infused beverages.

The segment is not without its limitations, so patience and perseverance will be key. As capital is tight, the category with the slimmest margins and highest cost shouldn’t be charging ahead with reckless abandon, at least not until the rails are built, tested, and reinforced. While we’re starting to build that infrastructure, consumer demand is beginning to pull the category forward. Although I do still hear many say that beverages are “just a fad”, I’m not sure Coke, Pepsi, ABInBev, or MolsonCoors would agree. Clearly, they’re all very focused on where this space is heading.

As more locations open to consume “on-premise” and trial becomes easier, we will continue to see positive growth and momentum for this segment.

SUN-POWERED FLOWER

I’ve recently become much more an advocate of supporting sungrown flower. I will let the experts wax poetic about the benefits of terroir, many of whom I call dear friends and partners, and they are far better equipped to explain to you why sungrown cannabis will always provide a more well-rounded, richer, and warmer experience. I just feel it, and maybe that’s just me.

BUILDING BRIDGES

2023 may be the year of the “teacher.”  Consumers are more interested in the origin story, not just of the brand or the founder, but of the flower. Consumers are actively seeking transparency so they can decide who they should trust and who they should work with or purchase from. Consumers will also increasingly look for products that fit their lifestyle or that are aspirational, such as organic or sustainable farming techniques, vegan, and all-natural ingredients. Brands want nothing more than to build trust with their customers, it’s the bond that keeps them coming back, and if you’re in business, you want your customers coming back, or you may not be in business for long.

We will also continue to see an influx of new entrants, entrepreneurs, those looking to change careers, and newly converted advocates.

INCLUSION

For cannabis to thrive, it needs more representation. 2023 may be the breakout year for women, LGBTQ, and BIPOC communities to wrest their share of the industry power positions. It’s also pretty clear, diverse communities want and need diverse brands with diverse perspectives. Brands with greater representation of women in executive roles outperform their competitors.

DATA DATA DATA

Aside from my general sentiment that data lies, or it can, data is very much a differentiator in 2023. If we’re truly going to be a CPG business, we need to know what the “C” wants, needs and acts on. Many brands have been reaching outside of the cannabis data void to review what insights can be gained from traditional categories. After all, cannabis is just a plant, a raw ingredient in life, and we have tons of data on what consumers do, rather than what they say. Those who can familiarize themselves with the comprehensive data and insights gleaned, will separate from the pack.