The Downside of Narrowly Focused Cannabis Operations

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Five weeks ago, we discussed how several cannabis companies lacked focus in the industry and were dooming themselves to mediocrity by trying to be in too many markets without adequate capital. We cited MedMen as a great example, and this week’s news of Acreage Holdings retrenching across multiple markets adds further evidence that empire-building is a risky endeavor.

Several weeks into the COVID-19 crisis, though, we are reminded that those companies with too narrow of a geographic focus may be taking too much risk as well. Take Planet 13, for example. Though the company, which has done a fabulous job in Las Vegas with its 10% market share through a single dispensary, is moving to diversify its current business, that single store is extremely vulnerable to a lengthy hiatus in Las Vegas tourism. Several other companies depend greatly on the Nevada market as well.

Companies that are overly reliant upon the Massachusetts adult-use market are also taking a hit, as the state moved to shut down all non-medical sales. This isn’t the first time the governor there has taken an aggressive move that is harmful to cannabis operators, as the state banned all cannabis vape sales  for three months in September.

This week’s sudden and disturbing news that Ontario had changed its prior view and had removed cannabis retail from its list of “essential services” will hurt Canadian LPs if it persists too long, as that is a big market, even if it is under-served, and it reminds us that companies shouldn’t depend excessively on any single channel of distribution.

While the current crisis is leading to these near-term operating risks in certain geographies, we are reminded of the challenges the pioneers in the Colorado market faced following legalization, with constant packaging rule changes causing them substantial financial burden. Market disruptions can happen for all sorts of reasons.

When the dust settles and these interruptions are behind us, investors, who are already beginning to better appreciate balance sheet and cash flow risks, may also pay more attention to geographic risk. There is a happy medium between empire-building and putting all of one’s eggs in a single basket. Fortunately, several companies are well positioned from both of these perspectives.

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New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:

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Alan & Joel

Exclusive article by Alan Brochstein, CFA
Alan Brochstein, CFA
Based in Houston, Alan leverages his experience as founder of online community 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email

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