2020 will without a doubt go down in history as one of the most challenging years of the century. It started with the discovery of a novel coronavirus in Wuhan, China in late 2019, and snowballed into a global health and economic crisis that we will take years to recover from. The pandemic has led to an economic downturn of immense proportions, with the U.S. suffering Great Depression-era levels of unemployment.
The crisis has hit most businesses hard, especially those in the tourism and hospitality sector. The state legal cannabis industry was declared essential by most states, allowing them to remain open during the lockdown. However, it hasn’t been smooth sailing, and quite a number of multistate marijuana operators have been unloading assets, cutting overhead costs and scraping plans for expansion.
Other MSOs haven’t had it so bad, and they’ve been able to weather the crisis a lot better than their counterparts have. Why is that? For starters, preparedness is key, and most of the multistate marijuana operators that are doing well had a capital and cash-flow cushion of at least two years. Illinois-based Cresco Labs, for example, had a 70 month cushion while Florida-based Trulieve had a cash coverage of 44 months.
This gave these firms a parachute to use once lockdown orders were issued and the economy slowed to a crawl. On the other hand, MSOs that had less than a year of cash coverage had to quickly raise more money or they would have cash flow issues. Additionally, struggling MSOs seem to have weak competitive positions in markets, and this put them in a vulnerable position once the pandemic hit.
According to Mike Reagan, an equity analyst and managing member of Denver-based MJResearchCo, it’s important for a company to have a dominant or strong position in the markets rather than be a small player in many markets. “Ideally, you want to dominate a lot of markets, but that’s hard in cannabis because each market is different.”
Finally, MSOs that are thriving centered their expansion plans on realistic expectations based on ROI. Tons of cannabis companies spent 2017-2019 acquiring assets and expanding their capacity, and most of it was financed by investors who were not concerned with an immediate return on their investment. Instead of focusing on reasonable goals and working on investment payback, they burned through cash so they could be able to claim they were growing through “massive news announcements,” says Lee Dorkin, founder of Colorado-based Emprouen Advisors, a cannabis management and consulting firm.
“But that’s absolutely the wrong approach and why we have a trail of failed MSOs at our feet right now.”
Industry watchers assert that companies like The Supreme Cannabis Company Inc. (TSX: FIRE) (OTCQX: SPRWF) are closely analyzing how different MSOs are faring in order to learn and implement vital lessons going forward.
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