Brand Expansion Models for Cannabis Companies
By Tom Adams, CEO Global Go Analytics
Discover the strategies behind major cannabis brands' expansion into new states, as they navigate a complex web of regulatory hurdles and fierce market competition. Focus on the strategic choices they face, from going it alone to forging partnerships, and learn how these decisions impact their revenue and profits. From MSOs to kitchen-table start-ups, take a look at the trade-offs and critical decisions that cannabis brands confront as they enter a new state.
Successful cannabis brands looking to expand into new states initially assess the regulatory strictures that determine each state’s overall growth prospects, then the competitive landscape that will impact its market share. Then they move on to critical decisions about how to enter a new state:
Should the company “go it alone” and either apply for operating licenses from the state or acquire companies that already own them?
Or should it partner with companies already licensed and operating in the target state?
If the latter, what sort of deals should it cut with those partners?
The major multi-state operators (MSOs) generally go it alone, adopting the same vertical integration model that they learned to love in restrictive licensing states like Florida. To the extent they sell their branded products in their own stores, MSOs get to book as revenue every dime the consumer spends, which in most other CPG product categories would be split at least four ways: the “farm-gate” price of the raw materials, the value-add of the manufacturer, the wholesaler’s mark-up, and the retailer’s gross margin.
But most branded-products companies have neither the resources for – or, frankly, any interest in - being vertically integrated, either up the supply chain into cultivation or down it into retail. That still leaves them plenty of options, from going it alone as a fully state-licensed manufacturer/distributor to a variety of less expensive partnering models.
Cannabis Brand Licensing Models
Global Go Analytics has worked with several brands on expanding to new markets and has developed the nearby table to compare the different approaches. The assumptions shown represent a wide range of actual deals terms, many of which are subject to negotiation with in-state partners. And on the back end, results will vary based on regulatory regime, scale, efficiency, and strategic decision-making. But these models represent the basic choices brands have to make as they expand outside their home states.
Asset lite —The out-of-state brand-owner contractually grants the right to use its brand names, recipes, and processes to an operator in a new state. It coordinates marketing with that partner and provides promotional materials. Increasingly these days it embeds a “brand champion” in the local partner’s sales force. But the local licensee assumes almost all other costs (manufacturing, packaging, in-state media buys, salespeople, physical distribution, and customer service) and it pays a royalty in the 10%-15%-of wholesale revenue range to the brand.
Asset medium —The out-of-state brand-owner also provides 1) materials legal to ship across state lines (such as packaging and – in edibles – the non-medicated product base), 2) a larger dedicated sales team, 3) more in-state marketing support. The in-state partner manufactures, markets, sells, and physically distributes the finished products, and shares about one-third of wholesale revenue with the brand house.
Asset heavy —The out-of-state brand-owner either a) builds and operates licensed manufacturing/packaging facilities or b) pays a white-label manufacturer for the finished product. The brand house also deploys its own full sales team and covers almost all in-state marketing costs. Essentially, it is becoming a state-licensed manufacturer, but hiring a state-licensed, full-service distributor to handle physical distribution and customer service, typically for about 25% of wholesale revenue.
Go It Alone —The out-of-state brand-owner replicates its home-state operations from the ground up. It develops its own licensed manufacturing/packaging/distribution facilities, hires its own sales and distribution teams, and pays for all in-state marketing, pocketing all of wholesale revenue.
Global Go Analytics modeling of the options suggests that going it alone generally allows a company to pull the biggest chunk of gross wholesale revenue from its products through to the profit line on its P&L (28%). “But the higher margin also comes with much higher cost and capex investment,” notes Jesus Burrola, CEO of POSIBL, a licensed cultivator and manufacturer in Salinas, California.
Cannabis Brands Expanding into New States
That’s why most of the early successful brands in western states went asset-lite in their first expansions beyond their home states. In some states, they had no choice given regulatory regimes that in those days sometimes barred out-of-state ownership of licenses. But it also allowed them to move quickly into multiple new states at a lower cost.
“You can get there more quickly, especially in smaller, new markets where it can be pretty profitable since there’s less price compression,” Wana Brands founder Nancy Whiteman said on a panel called How Brands Scale Outside the MSO Structure at the September 2022 Benzinga conference “But it’s important to get there early.”
The asset-lite model carries its own risks, however, most importantly those implicit in having less control. The downside risks can include underperformance by a partner’s sales and marketing teams or, worst of all, bad manufacturing or other practices by a partner that can taint a brand name in a new market. Contracts need to be carefully worded to spell out expectations and provide recourse if things go poorly.
That’s why more recent expansion efforts have typically gone heavier on a brand’s involvement. Even at the asset-lite end of the scale, brands are getting more involved in all aspects of the business in the expansion state. “It’s better when we do more of the marketing and sales,” Whiteman said.
Cannabis Expansion Presents Unique Challenges
At the next step up the scale, in the asset-medium model, founder Luke Anderson of beverage-maker Cann outlined on the same Benzinga panel how Cann purchases its own packaging and produces the non-medicated base of its drinks in multi-state volumes at its home facility in California. Those items can then be legally shipped to partners in other states that infuse the THC, complete the manufacturing process, and distribute the final product.
Further out on the asset-heavy end of the scale, founder of California’s Garden Society Erin Gore told the Benzinga panel, “We’re taking templated manufacturing to new states,” mainly, she said, because “…my background and strength is in manufacturing.” But the company has found there are several upsides to the strategy: “There’s a lot of IP we don’t want to lend to partners….and as the manufacturer we can drive lower costs.”
“Ultimately, the best financial path really depends on scale, capital structure, and operational efficiency,” is how Burrola sums up the calculus. GGA’s analysis suggests that all the models can produce similar profit margins in the 30% range as a percent of reported company revenue, since brand-company revenue and expenses both climb as the role of local partners shrinks. But brand profit as a percent of total wholesale revenue climbs dramatically – assuming all goes well – the more of a role the brand keeps to itself.
The bottom line is that different brands are finding profitable growth through interstate expansion using all the four models we outline here, and many variations on them. Generally, though, as they gain experience and hence stronger backing from investors at a better cost of capital, the more established brands these days are taking more risk in pursuit of more profit.
Who is Global Go Analytics? Learn more
Tom Adams is the founder and CEO of Global Go Analytics, where he provides strategic planning services to top companies, entrepreneurs and leading investors in legal cannabis. He can be reached at [email protected]
To put the most experienced strategic analysts in the business in your corner, fill out the form below to speak with a Global Go Analytics consultant today: