2022/2023: Reviews & Prophecies
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 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 me personally, and certainly one for the cannabis industry as well, 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
I’m not going to comment on whether or not cannabis and other emerging markets are recession-proof (although I did comment on that years ago as was reflected in a piece earlier this year)...I’ll leave that to economists who are far better at analyzing the economic stability of a sector and consumer sentiment of the same. What will be reviewed is what occurred in 2022 and what that portends for a brighter future.
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. And if California can make the news, so too can New York, with “Broadway” getting in on the act, in Cannabis! A Viper Vaudeville. 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.
You also know you’ve gone mainstream, and especially in New York, when a tennis player halts his match at the US Open, complaining about the cannabis smoke floating around the court; welcome to New York Nick. While smoke may have filled the air on the court, our friends at Pew Research Center were conducting 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, and only eight months after legalizing cannabis, the state of 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. Welcome home Brittney! We’re ready for your megaphone when you are.
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…
Although there’s been much ado about the “recession”, our friend Jeremy Siegel is less phased and more “cautiously optimistic” (as you can tell I like that phrase), that our economic conditions will ease through 2023. 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; we can’t and shouldn’t all be Walmart. How to get those segmented customers into new retail experiences will be a combined effort of brands and retailers, and not every door is the same. 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
Brands that stay together, slay together. 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. If not, we’ll see more and more brands opting to focus on delivery and direct-to-consumer options to meet the customers where they are. That doesn’t mean brands shouldn’t have a retail “showroom” presence, they should, at the very least, but if they don’t have the runway to burn cash in retail, they’d be better off “burning” it on one-to-one customer experiences to be direct and lasting relationships. And there’s no better way to operate in a capital-efficient way, than by sharing resources and costs across a complimentary community of emerging brands (which by the way, almost everyone in the cannabis space still is).
BEVERAGES FOR THE WIN
At least that is what we are betting on. 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. Here too we will see a vast array of product variation in form, focus, and quality. While we all love a tasty and refreshing infused seltzer, many love a finely crafted cannabis-infused beverage that mimics what they’re used to, being that well-balanced cocktail, light and refreshing cider, hoppy beer, or aromatic wine, consumers like to wet their whistle, and no better way to get that share of “buzz” than with a cannabis-infused beverage.
As a board member of the Cannabis Beverage Association, and having the good fortune to host many of our recent category speak-easy’s (including the speak-easy that was shut down at MJBizCon), we’ve seen interest more than threefold in just one year. That’s pretty solid growth, and that barely scratches the surface of what’s going on around the U.S., Canada, and international markets for the years to come.
These products are fast-acting, measurable, stackable, sociable, and in some ways healthier than other form factors. More importantly, we’re seeing brands (and in our case building brands) specifically cater to different audiences, taste profiles, and preferences to create the most engaging and rewarding experiences possible. 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’m recently back from attending my first Emerald Cup. I know, how could this possibly be my first after being in the California cannabis market for eight years. We can discuss that oversight over a tasty infused beverage sometime, but what’s important to note, is how much more committed I’ve become to 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.” Not in the familiar way we’ve experienced education in grade school, but more about how consumers have demanded more transparency about provenance and products in general. Consumers are more interested in the origin story, not just of the brand or the founder, but of the flower. How and where your flower is grown, how it’s processed, manufactured, packaged, sold, consumed, and everything in-between, offering an opportunity for a brand to share information in an engaging way with consumers. 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.
And it’s not only about the consumer. We will continue to see an influx of new entrants, entrepreneurs, those looking to change careers, and newly converted advocates. As such, we’re starting to see new educational programs emerge at Universities and Colleges, such as LIM College in New York, launching the nation's first Bachelor of Business Administration degree. As the complexities of the cannabis market continue to grow, so too does the demand for skilled and experienced workers.
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. Just recently, Diddy announced his move into cannabis with a $185 million dollar investment to create the industry’s first “minority-owned, vertically integrated multi-state cannabis brand.” Did he overpay for those assets? Most likely, but that’s not the point. The point is, he’s showing what others can also do…put their money and reputation on the line to lead and build things the way they want them to be, with voices and experiences vastly different from what the executives operating the regulated industry currently looks like.
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. If that’s not enough, how about focusing on the growth rate of the consumers you’re looking to target? From June 2020 to June 2021, Gen Z women were the fastest-growing customer demographic of legal cannabis users. If year-over-year sales to Gen Z women is increasing by rates over 150%, we’ll need more leaders who aren’t only focused on “targeting” women, but actually are women. As much as I can read data and look at trends, my experiences and intuition have been framed very differently, and that’s not to say I can’t adequately address the needs of diverse communities with our brands, products, and services, especially when partnering with diverse leaders to do so, but it is to say that those who make them up, should also be leading and directing what that future should look like.
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. Brands should focus on gathering and understanding where they can, test, adjust, then retest and re-adjust until there is “product-market fit”, before trying to scale. And when people tell you there are too many of “X” in the market already, but you know you make the best “X” because it comes from the heart, there’s no data that should deter you, unless you’re literally betting the farm on growing the best flower around in a hyper-saturated market, heed that advice.
That’s not to say all of your decisions should be made based on what the data are “telling” you. You may have collected the wrong information, at the wrong time, in the wrong way, for the wrong reasons, to then interrogate them and ultimately get a misleading insight. It’s important to understand how those data were gathered, compiled, cleansed, and analyzed. And, in the end, sometimes gut instinct may be a better way. So for all who say to wait until you have all the data to take an action, that’s just not how life works, especially when there isn’t “all the data” available, yet.
SURVIVAL OF THE WITTIEST
It’s not always fun to be pragmatic, but sometimes it does keep you fighting another round until you can find your opening. 2022 revealed just how stretched brands and operators are, at all levels of the industry. 2023 will be a year of focusing on efficient and effective business and financial strategies and operations. It’s easy when everything is flowing, it’s hard when your resources are depleted and you’re up against a wall. You may not be able to step backward anymore, but other moves are available. Be patient, inventive, and resourceful, and find your community.
While markets may be consolidating, we’re still too early to call the big MSO’s the winners. Many challenger brands will emerge at a time when new financing comes to the market. And although it may be easier to pay $185 million to acquire a foothold, that’s not a guarantee of your success (although I would personally bet on Diddy to figure it out). It’s also true that not everyone needs to return millions or 10x on investors' money to be successful. Focus on your game and your brand, focus on your goals and objectives, and find those that will help you get there. Running a lifestyle business that puts food on the table for you and your family, or those friends and community members you can support as well, is just as rewarding, if not more so.
And remember, content will always be king, so plan accordingly for 2023.
To all who made it this far, I wish you a peaceful, relaxing, and uplifting holiday season, and a happy, healthy and prosperous new year!
