To profit from cannabis, you need to recognize when companies do this…
There are numerous roles to play as a cannabis business.
You can grow cannabis.
You can create extracts from the flower.
You can process flower and extracts into products, run a distribution company, or manage retail.
This isn’t a complete list, of course. But across the entire cannabis ecosystem, it’s important to know that not all of these roles will consistently make money over time.
Some are naturally situated to capture the lion’s share of cannabis profits, while others will fight just to keep the lights on.
As an investor in this space, it’s critical that you know which companies operate in those prime spots.
Of the hundreds or possibly thousands of businesses trying to grab the biggest share of the cannabis consumer’s wallet, you want to know who will have money left for shareholders so you can avoid the ones who will just be squeaking by.
Don’t Be a Cannabis Commodity
They avoid becoming a cannabis commodity.
A commodity is a basic good or service that can be interchanged with other basic goods or services of the same type.
When you think of a commodity, one naturally thinks of grains like wheat, corn, and soybeans, energy products like oil and natural gas, or metals such as gold, iron, or copper.
But a business can operate as a commodity. Those forced to compete purely on price are commodity operators. They add little value and therefore cannot collect a premium for their products.
Companies that operate this way retain no pricing power.
And when you look at the cannabis supply chain, you want to narrow your investments to companies operating in the two sectors where it’s easiest to maintain that pricing power.
1. Build a Brand
One sector that retains the most pricing power lies closest to the customer.
Companies operating in this sector build relationships directly with the end consumer. They build a brand or reputation that customers come back to time and again. They create an experience that cannabis consumers pay a premium to enjoy.
But a brand can be two things.
It could be a product or suite of products: a line of premium, pre-rolled joints, a high-quality vape, or infused edible that consistently delivers on quality, taste, and effect. These products will be the Coca-Cola or Smart Water of cannabis.
A brand can also be a retailer. Operating stores where customers feel welcome and know that they can trust the products sold provides a lot of value. They exercise pricing power over the companies attempting to get products on these retailers’ shelves.
Trulieve is an impressive case study in how cannabis operators can achieve total market domination. Find out how this leading MSO got to be Florida’s favorite cannabis brand.
For example, Walmart wields enormous power over product manufacturers. CVS and Walgreens are other examples of retailers as brands that consumers trust.
And when looking at a multi-state operator (MSO), you want to see how effective their retail store brand is at building customer trust.
For a list of cannabis brands that we think are positioned to pay their shareholders impressive returns, you can check out the 2020 Pot Profits Roadmap.
There’s another way to maintain pricing power in cannabis – innovate.
Think of these innovators as the Intel of cannabis. They don’t necessarily sell products directly to customers. In fact, innovators like Intel are often as far away from the end consumer as you can get.
But they build a reputation for high-quality advancements that product manufacturers or retailers make a point of highlighting in the final product.
This could be a developer of strains, like Berner‘s Cookies. Retailers across the country fight tooth and nail to get Berner’s Cookies on their shelves, and Berner is highly selective about the retailers with which he chooses to work.
(My colleague Danny Brody recently listed Cookies as one of his three top cannabis brands to watch. Check out this video report to get his other two picks.)
It could also be a pharmaceutical company looking to develop customized cannabinoids to treat diseases. Or a biotech company producing the purest cannabinoid isolates from yeast for far cheaper than any extractor working with cultivated flower could ever hope to achieve.
Losing pricing power forms a trap that business owners step into time and again – especially when operating in the biggest market to emerge on the global scene in decades.
The pile of money to be made reaches so high that it would seem anyone can get rich by merely venturing into the industry.
But the truth is that most of that money will flow to the companies that either build a brand or tirelessly innovate.
There are plenty of incredible cannabis brands out there that are delivering profits to folks like you right now. Discover our top pot stock recommendations right here.
Until next time,
Don Yocham, CFA
Executive Director, National Institute for Cannabis Investors
3 responses to “The Most Cannabis Cash Will Flow to the Companies That Do One of These Two Things”
July 08 2020