February 27, 2019

The Great Cannabis Normalization

As the cannabis space emerges from almost a century of prohibition and folds into the normalized routines of society, it promises genuine positive change and significant financial opportunity for those able to navigate the developing complexities. Two out of Three Americans are now supportive of regulated legal cannabis. Assured success for those early adopters operating within the supply chain appears to be a foregone conclusion. Present legislative and ballot initiatives across the U.S. show a clear progression of cannabis acceptance transitioning from No Cannabis -> Limited Medical regimes -> Expanded Medical regimes -> Adult Use regimes. The ‘Green Wave’ effect is plainly visible as regulated Adult Use cannabis markets are now established across the West Coast, will soon encompass most of the Northeast, and are now rolling into the Midwest.

The potential size of the cannabis market should not be discounted as an estimated $300B in annual illicit demand moves into the regulated and taxed arena. The growth proposition is readily apparent. It is likely that one day the full global breadth of the cannabis and hemp products market combined with ancillary business services of the specialized industry will measure in the trillions of dollars.

Infused with ample capital, emerging U.S. multi-state operators (MSOs) and aspiring Canadian conglomerates are competing to scale cultivation capacity and bolster distribution networks. Wall Street has certainly taken notice, preparing infrastructure for increased capital markets participation in anticipation of a much larger industry ahead. Cannabis companies are quickly expanding and intently developing a diversified cannabis products market that goes far beyond merely slinging the dried flower of a previously illegal plant. Disruption will touch numerous consumer end-points that include: everyday foods, new social lubricants, cannabis restaurants, formulations concocted as over-the-counter drug substitutes, unique cannabinoid medicines aimed at devastating diseases, wellness related consumer packaged goods of all kinds, cosmetics, pet products, textiles, fashion, building materials, and any industrial component typically made from fiber, wood, or a petroleum base. 

Macro trends are additionally supportive of this sea change. Discretionary consumer dollars are increasingly spent on purchases that are supportive of personal wellness and cognizant of overall environmental sustainability. Cannabis products will be there to answer these changing preferences. Why take multiple medications when a cannabis therapy can produce a similar or better result with fewer side effects? Why drink a beer when a cannabis beverage can deliver a similar effect hangover-free? Why grow cotton for clothing when an equivalent amount of hemp fabric can be grown with half the water? Why cut down a decades old forest for timber and paper when a crop that goes from seed to harvest in a matter of months can be processed as a replacement material? Why make plastics out of petrochemicals when hemp bio-plastics offer a sustainable and biodegradable alternative?

The opportunity at hand is only matched by the complexity of deriving and implementing strategies that account for a constantly changing labyrinth of regulation and new product offerings. Enthusiasm now shifts towards a focus on growth execution plans that necessitate distribution capacity through brick and mortar locations that will maximize potential future sales. This is no easy feat as operators consider best practices on roll-up and roll-out strategies, standardizing site selection criteria, demographics, analytics, and how to negotiate transactions in a space that has no generally understood nomenclature for use or exclusivity clauses. Cannabis retailers have to walk a tight rope to identify sites that reinforce brand identity, meet all license and local zoning criteria, and simultaneously convince prospective landlords and stakeholders that their tenancy presents no deleterious property impacts. Instead, cannabusinesses must demonstrate how they create constructive project synergies that drive traffic and attract consumers with ample disposable income.

Property owners must similarly untangle their own pile of coat hangers. While cannabis may be retail’s brightest spot in 2019, anticipatory consideration must be given to work around “prohibited” or “noxious” use clauses that likely exist across standing leases, loan documents, or Operation and Easement Agreements. Despite increased momentum towards some level of banking reform or even full federal decriminalization, cannabis still remains federally illegal and consequences must be considered that range from increased security concerns to convincing institutional partners on the viability of adding a cannabis retailer to a merchandising mix. The passage of the 2018 Farm Bill further complicates the cannabis question, as traditional retail participants from Sephora, Neiman Marcus, DSW and Simon Property Group begin to wade into the cannabis and hemp products space. The upcoming 2020 U.S. presidential election is likely to serve as an additional catalyst that propels cannabis normalization forward. How property owners construct commitments on allowable uses and product lines for these interested participants will have long ranging implications.

The future is bright for those able to navigate the details.  Building a team that can articulate complex narratives while delivering practical strategic solutions in a constantly shifting space will be the key to unlocking the value inherent in The Great Cannabis Normalization. If you don’t have a team, contact Canntilever, and we’d be happy to talk.