Industry Voices

Industry Voices: Are Cannabis Companies Growing Too Fast?

By Peter Marcus
Jun 18, 2020

Beyond its implications for public health, the COVID-19 pandemic impacts the global economy as well. At a time when even many well-known businesses in established industries are struggling, companies in the cannabis space are realizing that no industry is safe from disruption.

Cannabis is one of North America’s fastest-growing industries. The industry even experienced an uptick in sales during early stages of the quarantine, and it continues to hire during the economic crash. However, some of the nation’s top cannabis businesses are reporting financial struggles. 

Yes, many states deemed both medical and recreational cannabis dispensaries “essential” businesses during the lockdowns, but the coronavirus crisis shined a light on the growing issues surrounding long-term stability of many multistate, publicly-traded cannabis conglomerates. 

Rapid Growth Leading to Overexpansion 

Several public cannabis companies, have extremely fast revenue growth and soaring stocks. However, when scaling at this rate, companies sometimes fail to follow basic business principles which aim to support steady  growth over an extended period. Being publicly traded can exacerbate these issues, as investors demand rapid return on investment.

Growth can be exciting for a company. But too much too quickly can lead to uncontrolled expansion. Numerous multistate operators are opening new stores or expanding facilities.

But examples such as MedMen’s retreat from Arizona suggests operators may not be conducting proper research on the markets they enter. Amid the cannabis sector’s “green rush,” companies often forget they need the right mix of cash, cannabis and sales channels to succeed.

Built to Cash Out vs. Built for Sustained Success

A vast number of cannabis companies began with the intention of becoming the market leader, the “Starbucks of cannabis.

But today, the traditional warning signs of a troubled business are being ignored due to the allure of rapid growth. Unmitigated growth doesn’t only fail to allow companies to ingratiate themselves in the neighborhood and become a part of the fabric of the community, it can also obstruct long-term success.

Knowing whether a company is growing too fast starts with strategic planning. Losing revenue quarter after quarter is a good indication that a company should not be expanding. But many do so anyway. So, what’s the best sign a company is ready to expand in a responsible and sustainable manner? Organic revenue growth.

While the massive global impact of COVID-19 has forced us all to adjust to the “new normal,” the massive growth of the cannabis industry is backfiring for some. Even before the coronavirus crisis, massive cannabis companies were struggling to raise funds, with stocks stuck in a steep nine-month downturn

As such, privately-owned cannabis companies that are “built to last” could to gradually take over significant segments of the sector. By focussing on responsible, sustainable growth, they may come out the other side of the pandemic stronger than ever. 

Peter Marcus is communications director at Terrapin Care Station.

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