The cannabis companies focused on these sweet spots will capture the most value for you…
There are two ways to make money in cannabis: get as close to the customer as you can with a brand – or innovate.
Innovation is not just about invention. There are many ways to go about it. And any company can do it, provided the art of discovery resides deep within its DNA.
Some companies focus exclusively on creating new technologies and processes.
Place them on a map of the cannabis supply chain, and you’ll see pure innovators work about as far away from the customer as one can get:
But some sectors of the cannabis industry are more prone to adding value through innovation than others.
To find the sweet spots, let’s take a walk through the cannabis supply chain.
Cannabis Supply Chain 101
Cultivating cannabis, for instance, does not lend itself to earning excess returns for investors.
Farmers tend to be so efficient that any edge developed through innovation is quickly adapted by other growers. Either that happens, or other growers scramble just as hard to gain that same efficiency by other means.
In either case, this constant pressure quickly erodes the pricing power any single grower may have achieved.
Gains are temporary and so is the value add. Moreover, the skill sets farmers rely upon to make them so efficient do not lend themselves to groundbreaking innovation.
The same goes for processing and extraction.
Sure, companies in these sectors claim they have some breakthrough process. But any cost advantage they gain over the competition burns away as quickly as a fog on a hot summer day for the same reasons as they do for the farmer.
Again, it’s all about efficiency and the constant grind to eke out every ounce of performance from the equipment they maintain.
Now, that doesn’t mean these companies can’t find some other edge.
They can build brands around the consistency of their flower or extract. But companies that are the best at developing strains don’t tie up precious capital in farming. They innovate strains and contract with growers to produce them. Only very few growers or extractors can manage to do both.
And when you add a second dimension to the Cannabis Supply Chain graph above – one that captures how much money is left for investors at each stop along the cannabis supply chain – you’ll see an interesting pattern emerge.
The Value Chain Smile Curve
It’s called the value chain smile curve.
The higher a sector plots on the graph, the more value that sector tends to capture for shareholders.
As industries mature, the producers and processors in the middle lose all pricing power.
Meanwhile, companies focusing on research or building brands capture most of the value the industry has to offer. And this pattern is not unique to cannabis. It’s typical of almost any industry.
Focusing on the sweet spots is exactly how I approach picking cannabis stock recommendations for our NICI Membership subscribers.
I want to recommend those names we believe are best positioned to capture the lion’s share of the profits from the cannabis boom – and many of these are trading at a massive discount right now.
You can learn more about NICI Membership and find out how to access these premium cannabis plays right here.
Don Yocham, CFA
Executive Director, National Institute for Cannabis Investors
3 responses to “How to Find the Most Profitable Sweet Spots on the Cannabis Supply Chain”
July 14 2020