Future of Marijuana Industry?

If 1 positive thing came out of the 2020 elections, it clearly was legalization of Marijuana in more states.

Right now I'm pretty bullish on the whole industry but Marijuana industry has problems of its own of course.

Here's my take on some of the potential issues in this industry.

1) It's being invaded by crony corporate interests. Okay corporate interest brought a whole lot of research, innovation, and knowledge to the consumers. But at the same time, lots of regulations on who gets to sell is allowing small number of connected few to form "cartels" and exercise monopoly like behavior (crack down on small players, raise prices, etc...). Small time home-growing sellers are still getting arrested and people are noticing. Who knows if one of the biggest issues 10 years from now might be Big Marijuana?

2) CBD is clearly less regulated. In fact, you can order CBD products across state borders like you buy multi-vitamins. But there are literally countless number of CBD products it seems. There are CBD beers, CBD drink mixes, CBD powders, CBD gummed, oils, chocolates, you name it... Monopolistic competition indeed. Most of these small players seem vertically integrated as well.

But who knows, maybe there might be some serious M&A action in the future once someone realizes all of it can be scaled ?  Would there be more horizontal integration happening down the line? Or would this space continue to be a cut throat space with new entrants constantly coming in and old ones going bankrupt? 

TL;DR: Would the marijuana industry be a collection of few big players (ie. Tobacco industry), collection of uncountable small slightly different players (ie. Restaurant industry), or somewhere in the middle (ie. Beer industry with handful number of big players and massive number of local craft breweries)?

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Comments (8)

  • Prospect in IB-M&A
Jan 25, 2021 - 8:40pm

There was a study basically saying that people prefer to buy their weed on the black market even in states where cannabis is legal because it's way cheaper as they don't have to pay taxes. In that regard, I'm bearish on firms manufacturing cannabis products with the aim of making their customers high.

However, I'm quite bullish on CBD products as it's easy to advertise them as "the [medical] benefits of marijuana without the high", therefore reducing social stigma related to the traditional pot smoker and presenting itself as an alternative to Big Pharma, especially in a country where opioids are killing thousands of people per year. 

As for the lay of the market, I see it as beer - very large, concentrated firms but also a popular interest into small-scale producers.

  • Associate 3 in PE - LBOs
Jan 25, 2021 - 9:05pm

Black market should go away with national legalization... very, very few people choose to buy black market alcohol despite sin taxes simply because the convenience and safety of a liquor store is worth it. The black market may survive while THC continues to sit in a grey area but I wouldn't expect it to be a permanent fixture. I think post-legalization branded edibles would be the most appealing investment... flower is too subject to commodity pricing risks and I don't think most people can really tell the difference between strains, but similar to liquor I suspect that marketing and hype will create some powerhouse cannabis brands with pricing power

  • Prospect in IB-M&A
Jan 25, 2021 - 10:24pm

https://alcoholstudies.rutgers.edu/cannabis-black-market-thrives-despite-legalization/

https://www.theguardian.com/society/2020/mar/18/cannabis-canada-legal-recreational-business

https://pdxscholar.library.pdx.edu/cgi/viewcontent.cgi?article=6115&context=open_access_etds

Check this out

Jan 25, 2021 - 10:24pm

I think your middle market approach would be great, but leaning to more players in the space. Maybe less like beer and more like wine, you'd have some more generic producers, but a lot of more artisanal producers as well for those people that are looking for something in particular. Something that I'm sure people are thinking about and trying to get in the works is standardizing different strains so that it's more comparable to wine varietals, as well as effects like terroir.

Quant (ˈkwänt) n: An expert, someone who knows more and more about less and less until they know everything about nothing.

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  • Intern in HF - Other
Jan 25, 2021 - 10:24pm

When I lived in LA they had these networks of operations underground that operate illegally in retail spaces that look like dispensaries sell it at huge discounts.

You could get an oz of decent weed for $35. If you went to a dispensary you'd pay a couple hundred or more for an oz. Had a lot of friend who went to this place for 10 years before it got shut down early this year. It took a month or two but they've already found a few other alternatives in the LA market. 

Jan 25, 2021 - 10:24pm

My guess would be the marijuana industry will become like tobacco with a few big players that dominate the market, with a smaller black market for people who don't want to pay the tax premium. The states that haven't legalized marijuana yet are at a big disadvantage. The weed industry is very regulated which means there is a large barrier to entry. The longer they have it illegal, the longer it will take for the smaller, local players to build up their capital and resources to scale. What's stopping the owners from states where it has been legal for years from starting a franchise in a brand new state with no real competition? They have the resources and expertise to dominate the market. The owners in Washington and Colorado that have been scaling since it was first legalized in 2012 have a huge advantage imo.

Jan 25, 2021 - 10:24pm

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