2022 was wrought with macro-economic challenges. Inflation, rising interest rates, and geopolitical conflict left capital markets depressed with trickle down effects on VC funding. High growth industries that require more capital felt these effects particularly hard. This includes the legal cannabis industry, which has its own unique challenges– regulatory hurdles, limited access to financial institutions, price compression, and illicit market competition.
As an example, BDSA cannabis retail data shows that average retail prices across mature markets (AZ, CA, CO, NV, OR) fell 14% between Q3 2021 and Q3 2022, with some markets seeing higher than 20% compression (BDSA Retail Sales Tracking, 2022). As a result, mature markets in particular saw a flattening of the hockey-stick growth observed in past years. With SAFE Banking officially scrapped from any immediate legislation, the ongoing capital crunch is destined to continue. Much of the industry is turning its head toward emerging Eastern and Midwest markets as a key to industry and individual operator growth in 2023. As Q1 ramps up, we wanted to assess how some of the largest MSOs are positioned.
2022 In Review: Mature Cannabis Market Stagnation & Stunted M&A
Mature markets tracked by BDSA (AZ, CA, CO, NV, OR) saw an aggregate decline in topline sales of -12% from Jan-Nov 2022 compared to Jan-Nov 2021. This is a stark comparison to the +18% growth seen from the same period 2020 to 2021 and +11% growth in newer markets in 2022 (IL, MA, MI, PA).
In tandem, the S&P 500 saw a ~25% decline leading 2022 to become the year of debt, which accounted for ~95% of retail and cultivation capital raised, with public companies bringing in ~75%+ of that total (source: Viridian Capital Advisors). When compared to smaller peers, MSOs have a leg up in securing “good” debt terms crucial to weathering the capital crunch storm.
MSOs also took a more cautious approach to M&A, in part leading to a ~40% drop in total transactions in 2022 (source: Viridian Capital Advisors). For smaller players struggling with price compression, this means securing an acquirer is a less likely lifeline. With less capital available to grow via M&A, MSOs will need to emphasize smart cannabis retail operations, brand distribution, and product innovation, resulting in an industry-wide mindset shift toward margin expansion and the path to profitability.
Overall, BDSA analysts believe players with broad market exposure and more cash on hand will be better positioned to survive current headwinds. But brand concentration, category assortment, and presence in Eastern/Midwest markets will be important levers for MSOs to pull to maintain their competitive edge.
A Look at Eastern Positioning for the Largest U.S. Cannabis Operators (By Market Cap) Heading Into 2023
Despite the M&A slowdown detailed above, Cresco made news in July announcing plans to acquire Columbia Care in an all-stock merger. With other MSO-led deal announcements recently falling through, this transaction has potential to be a unique growth story in 2023. Part of this story is the potential combined entity’s sizable foothold in the Midwest/Northeast. The companies will bring together Columbia Care’s assets in AZ, CA, CO, DC, DE, MA, MD, NJ, PA, FL, IL, NJ, NY, OH, PA, UT, VA, and WV and Cresco’s assets in AZ, FL, IL, MA, NY, OH, and PA. This puts the combined entity’s TAM around ~$20.69B in 2023, a 14% increase from our 2022 forecast (BDSA Market Forecast, Fall 2022).
The merger also brings together two strong brand houses. Cresco Labs was the #1 best-selling cannabis brand-house across BDSA tracked markets. They also have two top-five Flower brands – High Supply and flagship brand Cresco. Columbia Care may not be the top 10 brand house Cresco is, but their retail footprint is impressive and nationally expansive, with a presence in 18 markets. They do come in as a top ten cannabis brand house in East Coast markets and we expect to see high-growth over the next few years including MD and NJ. Columbia Care continues to broaden their overall portfolio, adding two new brands in 2022– Hedy and Tyson 2.0 (through a licensing partnership). Many of the NewCo’s brands have strong distribution supporting their growth story in 2023 – with top-selling cannabis brands such as Cresco, Classix, Hash Supply, Mindy’s, and Seed & Strain in 50-75% of stores (BDSA Retail Sales, Nov 2022).
Curaleaf is the largest cannabis operator by market cap with retail operations in 16 states (AZ, CT, FL, IL, MA, MD, MA, MI, NV, NJ, NY, OH, OR, PA, UT, VT). The combination of those markets represents a $17.9B TAM in 2023, an approximate ~15% increase from the combined total addressable market in 2022 (BDSA Market Forecasts, Fall 2022). Beyond broad market exposure, Curaleaf heads into 2023 with strong brand positioning and market share in key states.
Curaleaf’s Select brand (acquired 2019) was a Top 5 brand across BDSA tracked markets (BDSA Retail Sales, Jan-Nov 2022). Curaleaf’s brand strength is in part due to strong distribution, similar to Cresco/Columbia Care above. Select, and the overall Curaleaf house of brands are also available in ~50-75% of retail stores in their active markets (BDSA Retail Sales, Nov 2022). Curaleaf also has strong presence (~13% aggregate market share) across geographically diverse states such as AZ, NJ, and PA. Having a presence in higher growth markets like NJ and PA might offer some bottom-line protection against price compression happening at different levels across the country, given that price declines are most pronounced in mature adult-use markets.
Trulieve heads into 2023 with operations in 9 states, including AZ, CA, CT, FL, GA, MA, MD, PA, and WV. Combined, Trulieve is looking at a TAM of $12.6B (BDSA Market Forecasts, Fall 2022). Trulieve’s deepest presence is in Florida, where they own approximately ~25% of the state’s 475 dispensary locations. Edibles were not legal in the FL medical market until late 2020, causing Trulieve’s category assortment to look a little different from other MSOs. Most of the aforementioned players bring in around 80-85% of topline sales from Inhalables categories (Flower, Pre-Rolls, Vape, and Concentrates), which aligns with Inhalables share in the overall market.
Trulieve recently announced a few strategic partnerships we will be keeping an eye on as well. Trulieve will be the exclusive provider of Khalifa Kush in PA and the exclusive provider of Connected Cannabis and Alien Labs branded products in Florida. In lieu of M&A, strategic partnerships might be seen as a lever to pull in 2023 to push new assortment and margin expansion with fewer resources needed for research and product development.
Another Florida-based MSO, Ayr Wellness was in only two markets in 2019, and expanded (largely via M&A) into 7 states by EOY 2022. With operations in AZ, FL, IL, MA, NV, NJ, and PA, Ayr is looking at a $11.6B TAM in 2023. Of Ayr’s nearly $225m in brand sales (BDSA Retail Sales Jan-Nov 2022), about ~67% came from their flagship states – NV and MA. Ayr has consistently maintained between 5-6% market share in these states YoY despite new entrants, particularly in the MA market. Ayr boasts 32 unique brands under their brand house, more than any other player in this list by a long shot. For context, the combined Cresco/Columbia Care comes in at #2 with 21 owned brands. Perhaps unsurprisingly, Ayr sees a bit more assortment in terms of share of sales by category, with 15% of sales coming from Edibles. Ayr’s presence in high growth markets and diverse brand and category assortment provides them some nimbleness to weather price compression and inflationary dynamics in 2023.
Green Thumb (GTI):
Illiniois-based Green Thumb is another multi-state powerhouse with presence in 10 states (CA, CO, FL, IL, MA, MD, NV, OH, PA, VA) representing a $16.6B TAM in 2023 (BDSA Market Forecasts, Fall 2022). Green Thumb touts a top ten cannabis brand, Rhythm, which drove $405m in sales Jan-Nov 2022. Rhythm is another example of strong distribution – available in ~75% of stores in IL, MD, MA, NJ, and PA, and was still holding an average retail price that is ~10% higher than the aggregate ARP across these markets as of November 2022. Green Thumb brand house is also comprised of Beboe, Dogwalkers, Doctor Solomon’s, and Good Green. Brand diversity can help to offset some risk around price/margin compression by offering a progression of offerings to target consumers shifting from premium to value products as inflation continues to hit U.S. wallets. Notably, Green Thumb has nearly ~20% market share in IL, a market BDSA predicts will expand by another ~20% in 2023 (BDSA Market Forecasts, Fall 2022).
Of all previously mentioned companies, MariMed might have the deepest, relative presence in the East/Midwest. MariMed currently sells 8 in-house brands across operations in 8 states including DE, IL, MA, MD, MI, MO, NV, and OH. Of the operators discussed, MariMed sees the highest percent of sales driven by the Edibles category, making up 20% of their topline retail sales in 2022 (BDSA Retail Sales Jan-Nov 2022). MariMed touts a couple “Premium” brands that have largely stood up to inflationary dynamics. To highlight their edibles presence – Betty’s Eddies is the #2 Taffy brand across BDSA tracked markets, only behind Lost Farms. It’s worth noting that in the only state that both brands compete – MA – Betty’s Eddies ranks #1. Though a smaller category within Candy, Betty’s Eddies has built brand awareness and dare we say even some brand loyalty – Betty’s saw only a -10% decrease in ARP between Jan-Nov 2022 which was far less than the average price compression seen across BDSA tracked markets where the brand is sold.
Their inhalable brand, Nature’s Heritage is another notable call out – ranking as a top twenty brand in the most competitive category. Nature’s Heritage is priced 10% higher than similar products, yet has seen monthly dollar sales hold steady across BDSA-tracked markets in spite of significant price compression in the 2H 2022.
Driving Success in 2023
2022 delivered several complex challenges to the cannabis industry. With little regulatory relief on the horizon, we expect headwinds to continue in 2023 as operators navigate price compression and a capital crunch. Through the trees, there are still positive catalysts – after launching Adult-Use in December 2022, NY will see its first full year of recreational sales in 2023. MD and MO also legalized Adult-Use in 2022 and are expected to launch stores in 2023 or early 2024. In line, we believe Eastern/Midwest markets will be a major focus area for MSO strategy and investment. Growth strategies historically focused on M&A will shift gears toward expanding strong brands in new markets, increasing distribution across markets, and finding pathways toward margin expansion. BDSA will be tracking these MSOs and the operators looking to challenge them, as the Northeast landscape continues to evolve in 2023.
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