Using Data to Drive Investment Decisions: Part II Audio Transcript

Hello, everybody, this is Micah Tapman with BDSA following up on our webinar from a couple of weeks ago on using data to drive investment decisions, really excited to get back in touch with everybody. And we’re going to go ahead and dive right into some really fun data. I also have my colleague, Michelle on the line, Michelle is going to give us some deep dive analysis on a few of these particular data points. And really pleased to say that Michelle is our primary author for this whole deck. So a big shout out to Michelle for doing a great job pulling together all of our data
forward to hearing from you a little bit, Michelle on some of these specific points. So just a little bit of a recap from last week, actually two weeks ago now. So a couple of weeks ago, we talked about how we wanted to select geographic targets because of the segmentation of the cannabis market, remembering that every market in the US is really defined at the state border by state regulatory organizations and the different laws and restrictions across those states. Canada obviously is a bit different with the provinces being a bit more unified under a national landscape. But even in Canada, there is different there are differences between provinces. We’re seeing that now with Ontario opening up licensing, for example, another aspect that I noticed recently, Alberta has quite a open and permissive licensing system for cannabis retailers compared to British Columbia. So despite British Columbia being larger than Alberta in terms of population, and despite British Columbia, frankly, having a very good sort of cannabis ecosystem, as many of us will remember from visits up to British Columbia, probably quite fondly.
It’s expected that Alberta will actually have a larger market in British Columbia, because of the more permissive licensing system that the provincial government has put in place in Alberta versus British Columbia. So how does that translate for us, you’ll recall, we identified Arizona and Colorado as two markets that are of strong interest to us for this hypothetical investment, whether it’s a merger acquisition, or as an individual or venture capital investor, or getting involved. The reasons for this, we were thinking, Arizona’s got a very strong medical market, one of the strongest in the country, really fascinating landscape, they’re growing population within Arizona. We all know that. It’s a beautiful, beautiful place to visit. And a lot of snowbirds now, mechanics and Phoenix area home. So really burgeoning population, Colorado, sort of similar oldest recreational market in the country. 2012. legalization, one of the largest markets in the world, even with a very small state, only about five and a half million residents in Colorado, although you do see about 40 million tourists in Colorado. So again, fast growing states really interesting. Cannabis markets, a little bit different Arizona being medical Colorado being recreational. But this week, we’re going to now dive in on some of the real underlying data. So we looked at that market forecast data, we looked at the growth of the categories and sort of what’s moving. And now we want to dive in a bit deeper and really look for some opportunities to find good investment,
or acquisition targets. So there’s some obvious ones, right? We want to look for companies that are growing, we want to look for companies that are gaining share. Now one nuance to that is what do we mean when we say a company is growing? Is it growing? its revenue? Or is it growing? Its units move through its retail channels, or through wholesale? Is it gaining share in terms of dollar share or unit share? brand share? So how do we sort of evaluate that becomes an interesting nuance that investors really need to pay attention to.
The same applies on the eliminating targets. As an investor, my goal when I am reviewing investment opportunities, is to eliminate opportunities. It’s actually that way, because I see far more opportunities that I don’t like and don’t want to go into than those that I do want to go into. And so I’m trying to sift that haystack to find the needles. And if I can identify, four opportunities and eliminate them. I can save myself a lot of time and wasted energy on due diligence. So one of the hidden points that PDSA data exposes that’s really fascinating, is to look for companies with too many products in the market, too many skews, and we’re going to talk in more depth about what exactly that means.
So this hidden element is a way to really parse the data quickly and easily and identify companies
Probably don’t have enough focus to be successful in the long term. Now, this is not binary, there are companies that are going to prove the exception to the rule. But in general, companies need to have a relatively small number of products on the market, in order to support those products growth in this really goes to the point that all companies need to have focus. And all companies need to be able to prioritize, and eliminate those things that are not really driving some of their growth. So in this case, we’ve just pulled a list together of companies that we’re going to be talking about, and how many views they actually have on the market. And just for a second, take a look at that list and the difference from the top to the bottom of that particular list.
45 views?
How can you run a company when you’re worried about 45 different products on the market. And some of you will have seen in other businesses and other areas, companies that have really run into this problem. One of the ones I recall from many years ago, which was sort of a funny story was actually the car company, Volkswagen, which ended up with, they had all these different types of windows that they were putting into their cars. So they had a number of different cars. And then every car had a different window, and a different type of window, which made it to a different button on the window. And they got a new CEO, and this is back in the 90s. And the new CEO came on board. Basically, it was like, why do we have different window buttons for different cars, let’s just consolidate and bring this all together. And we’re just gonna have one window. And that’s the sort of concept here of really dialing it back and saying, Hey, can we get by with, you know, eight skews, or 10 skiers? Do we really need 20 or 30 skews or even 40 skiers in order to appeal to the market. And what will you see if you get into the date data here is a lot of this you differentiation is around strains. Now in cannabis strains have been a very big topic for a long time. We hear strains like Blue Dream, Skywalker, G, all sorts of different strains out there. The names are a lot of fun, they don’t really mean very much. And they’re made up by the growers. So that is very complex. And that is reflected in what the consumer is dealing with. And one of the things that we’ll discuss in a little more detail and Michelle can dive down is how strain characterization. And this branding by strain really can be counterproductive for companies where you end up confusing the consumer, the shopper more than you are driving actual sales. And we’ll talk a little bit more about some of that.
So what we’ve done here, and this is a sort of unique webinar for us, we’re really excited here, we’re actually exposing some really core data that BDSA presents to our clients. Now normally, non-clients don’t have any access to any of this level of data with brand share movement. But what we did is we looked back a couple of years, we now have over six years of records. And so what we did is we don’t back into the archives to 2017 2018. In this case, we’re looking at the Arizona sublinguals market, to show how you can identify a brand that starts to over perform, or to my other point about eliminating, you know, certain opportunities, because they’re not great, you can identify brands that are performing below par for that particular market.
So if we look at this, the one that’s real obvious here is select. Right, so select comes onto the market. In q1 of 2018, they start to do pretty well you see some growth, and then it really takes off. And that growth rate is obviously astronomical 100,000% growth. So really, really spectacular growth by this particular brand, going into the market. And calling out you know, one of the big points here, they only launched we’re only brought to market eight different skews from 2017 to 2018. And you compare that to some of the other brands that were trying to operate in this market. And their skew count was frankly really high.
You know, there’s an argument to be made that maybe 17 skews is reasonable. I think it would be very, you’d be very hard pressed to say you need 45 different skews. Now when you dive in on these, a lot of time this this skew variation is so minimal that consumers really going to struggle to understand what which skew is which and which one they should really buy, depending on what they’re looking for. Whether they’re looking to manage pain, whether
They’re looking to relax, whether they’re looking to unwind at the end of the day, all those different things. So this chart
gives us a nice clean visual, which is great to see, when you see a line going up into the right, you immediately jump in and you say, okay, what’s going on there. And then when you see a line declining down into the right, again, sort of easy to look at this and say, we probably need to understand what’s going on with this company before we went any further. Now, one important point, dollars versus units. So this is important to think about. So as we are looking at this, right, this is dollar share of the market. So very, very important that we’ll dive in a little bit more on why that is so important. And one of the later slides.
So one of the points here looking at this idea of strain versus
what’s often on the label, which is more about strain, flavor, mood effect, what do we really put it? What do we say on our label. And you can think about this, right? From the most simple, right? If it’s a Coca Cola, they just put Coca Cola on the label, they don’t really put anything else in, we just buy the brand, Coca Cola. But for a lot of other products, you want to actually put something else on the label, because you don’t have that Coca Cola brand with 100 plus years of history, and brand loyalty. And so companies have to make a choice, they have to figure out something to put on the label. And in this case, we’ve got two companies that chosen very, very different pathways to advertise their products through their labeling, select, focusing on flavor and mood and effect and chronic health focusing on strains. And we can see the performance of the two companies
across this time period. And if you recall, when we were looking here, chronic had nine skews, select head eight. So these were sort of going up against each other, really head to head. And it’s very, very interesting to look at how well selected by going to market with this flavor and mood and effect. And again, these are attributes that PDSA codes in its database. So it’s relatively easy to actually go into the data and understand which companies are focused on flavor and mood and effect versus which companies are focused on strain specifications and sort of building that out.
So jumping over now, we’re looking at Colorado sublinguals. In this particular case, and sort of thinking about how the market performed in Colorado, again, same time period 2017 to 2018. And remember, previously, we were looking at Arizona, which was a medical market, in this case, we’re looking at Colorado, also a medical market. So sort of a bit of an apples to apples comparison, although do remember, and this is very important, as you look at market evaluation for the medical market in Arizona, is going to be different than the medical market in Colorado. So always a nuance to it. And none of this data, frankly, is, is actually simple. We try our best to PDSA to simplify the very complex. But always keep in mind, there are layers to everything that we’re talking about here. Again, we can look at the success of some of these companies. And you can see the brand growth, brand share growth across these companies, they’ve really done well with a smaller number of skews. So when we look at this, we do see correlation between a smaller number of schools, skews and increased performance by these particular companies.
By the way, I forgot to mention at the beginning, please feel free to ask any questions during the presentation. You can enter those into the chat, we’ll try to keep an eye on those. Happy to dive in and try to answer those questions in real time rather than waiting until the end.
So our focus here is really on this idea of succeeding with simplicity, right. So by narrowing our focus, and really paying attention to what drives purchasing decisions, we can really start to see companies that are going to outperform the market and do better than their competitors. And this is something that, you know, we really see across these three companies in one who’s doing well, who’s struggling a bit with their performance as they try to bring these products to market. I think, you know, this is one Michelle, if you want to jump in here a little bit and talk about how important it is for the consumer side to really understand this idea of sort of mood and effect emphasis versus the strange specification.
Sure, I’d be happy to. I think there’s two things happening here. Kind of circling back to what you
about having too many skews. The main difference between these three brands is that incredible wellness at the time only had five and Mark haha and sweet Mary Jane each both had about 40. So with eight times as many skews and in addition to that incredible wellness offered their products with no flavor strain specification or mood and effect at all with any other products. Whereas Mark haha and sweet Mary Jane amongst their 40 the majority or all of their products offered and displayed at least one or two flavors, strain specifications, wound effects and between those 40 products with all those different advertisements, it really complicates things and options are good, but too many options are overwhelming and confusing, especially with all that extra information. Whereas incredible wellness with their five skews marketed all of them with nothing but the word natural and their cannabinoid content. So when a consumer walks into a store and sees an ad for n is seeking a certain feeling or relief from that product, and they walk in and see an incredible wellness product that says relax, revive focus and has the same cannabinoid content or better have that of its competitors. That’s the product that the consumer is going to choose because it’s way more easy to mentally digest, then all the other complicated advertising offered by its competitors.
Thanks, Michelle. And so again, very simplicity is often going to win at the end of the day. So something to really focus upon. One of the things I’ll go back to actually on this prior slide, you noticed that these wellness benefits to consumers are really looking for these wellness benefits, right sleeping, relieving pain, relaxing, being mellow. This isn’t necessarily a complicated concept or product for somebody to purchase. And a lot of times as we look at it, compiling all of this market research, we see companies that, frankly do seem to overcomplicate the intention here and the intended use for the consumer.
And so jumping forward now, so we’re now moving on and we’re looking at the adult use market in Colorado. So again, we’ve got three different markets that we’re looking at Arizona medical Colorado, medical Colorado adult use. And again, we can see the different performances of the companies, we do see some correlation again, based on skew count, and which companies perhaps are overcompensating again, Mark Haha, very, very strong brand in a lot of ways, but potentially overcomplicated with that high count or high skew count. There, we also see the introduction of competitors into the market, with elite VR, some coming onto the market and really starting to take some market share away from other companies. So very, very interesting to sort of dive in on all of these details. And note that each of these slides that we’ve been looking at, again, this was Colorado medical, and Arizona medical, each of these does need to be looked at as its own market, you can’t cross compare between Colorado medical and Colorado don’t use because they are fully separate markets. So just a reminder during the data analysis stage.
And this is a fascinating one. As we dive in here to look at this, and we look at the price points and how well incredible wellness really did coming onto the market. You look at the performance and their dollar share, which is indicated in the table at the bottom of this slide. Incredible wellness comes onto the market and really sees as a lot of market share by dollar value very, very quickly. And so when we sort of say why did they grab that dollar share, where did they come from? And how did they really when this price point really jumps out at us. And we can see that they’re their price point was much, much lower than Mary’s medicinals was. So again, very obvious, we know that price is one of the primary determining factors of the purchase decision in the dispensary. And so when we see this sort of data, it’s very obvious what’s really driving these consumer purchases and how well incredible wellness can do by under pricing some of its primary competition. One of the primary uses of the PDSA data that we see with our brand clients is actually understanding the right price point for their particular brand. It’s either maximize the unit sold, or maximize their profit margin or gross margin on each unit.
So, if you’re not sure, if you want to jump in with any particular points on this, I know you’ve done some really deep analysis on this.
The only thing I think I would add is just to emphasize how similar the two companies skews weren’t. So even though they didn’t differ that much in terms of how many skews they offered, the skews that they did offer were identical, essentially, in terms of cannabinoid content, the ratio, how much was in the container itself. So, you know, there were products with the exact same composition that sold for 50%. Cheaper. So you know, realistically, why on earth would someone walk into a dispensary and see two products with that are the same exact thing with a different label on it? And one is $15, cheaper? You know, I don’t think it could get any more obvious than that about what the choice would be there. So on top of, yes, understanding the price points that Mary’s was selling it, I think incredible wellness did a good job of also understanding their skews and what, what cannabinoid content and what ratios and which of their skews were successful in terms of which ones to mirror and then adding the price aspect ratio on top of that by offering essentially the same exact product at a cheaper price point consistently.
Terrific. Yeah. Thank you very much for that. So
let me just review.
Yeah, so a question that just came in was talking about the sort of importance of budtender recommendations in the purchasing decision? And, you know, how does that really play in? Certainly all of the data that we look at indicates that bud tenders are very, very significant, you know, within that purchasing decision, process. One of the things that’s most interesting, and one of the reasons actually, that I think that as we think about
this idea of like strange specification, which we called out, you know, some companies really focus on strain specification. Part of the challenge, there is a lack of education for a large part of the shopper base. So when you think about those shoppers coming into a dispensary, and let’s say you have a strain called Gorilla Glue, number four, they have no idea necessarily what Gorilla Glue number four means. And you compare that to product we’re all familiar with, you think about, you know, Cherry Coke. Well, the name of charito tells us what it is, right? It’s kind of tastes like cherry. And so when you list something with its flavor, or you lift something with its mood and effect, what’s a five hour energy, it’s very obvious to the consumer, what they’re getting, or what they’re supposed to be getting, when they purchase that particular product. Now, this is an area that is extremely sensitive from a labeling point of view. And large companies in particular struggle with this with, you know, the government regulators telling them that they cannot necessarily advertise on their packaging, certain effects, right, you can’t say that something is going to cure cancer. If it hasn’t been proven to cure cancer, you can’t say that something is going to, let’s say promote sleep if it hasn’t been clinically proven to promote sleep. However, there are ways around that and labeling experts have done a very good job of coming up with names for products and other things that sort of imply that mood and effect without actually specifying it. And that’s just a nuanced aspect of, you know, product management, and commercialization, that frankly, the natural products industry, in particular with functional foods has done a really exceptional job of trying to split the hairs between what the government says you can and can’t do, and what companies really need to do in order to move product off the shelf.
So another aspect to look at that I mentioned earlier is the difference between dollar share and unit share. And this is something that BSA spends a lot of time making sure our data is correct. And so we understand both the dollars and units sold. Obviously, if you have a high price point item, it can dominate in dollars sold, even though it didn’t dominate any unit sold. And we don’t get into the gross margin analysis for these companies because we don’t pull the data in for how much a particular product cost to make, or distribution costs or traits, etc. But we can see how many units are moved versus how many dollars come in from the sale of that product. And in this case, we can see the difference in the share. So looking at Mary’s medicinals for example, I’m gonna dropped in q2 of 2018 was at its high watermark about 27% of the dollar share for that mark.
In a drop down to 19%, while incredible wellness had a good uptick to about 15% of the dollar share, you compare that to the movement of unit share, it looks a little bit different. So the line is sort of similar. But the actual amount of movement within that share is different between the two. So the real important point here is when you’re doing these evaluations, make sure that you watch both dollars and units that are moving. So as part of this due diligence process, you’re going to want to focus on both. And from an investment point of view, for example, if you see a company that’s doing very well on units, the big question there is probably understand, do they have a good gross margin on each unit that is moving? If they do, that’s probably a very, very interesting company to dive deeper into. If they don’t, it’s the old adage, right, you can’t, you can’t make up a negative gross margin with volume. So you’re in for a bad ride, if you try to get into that company or acquire that company. And certainly the cannabis industry has seen plenty of companies that price themselves out of business, by trying to get into a price for having to drop pricing in order to compete, but their gross margin ended up in such a place that they just could not make a living with those particular products.
And again, this was, you know, sort of coming off of this particular item, you know, looking at these price points of incredible wellness and Mary’s medicinals, 50 to 90, and then you jump over here, and it really starts to become very, very evident, sort of what was driving some of these particular points. And one of the great things about what I see within the PDSA data, what I love about this is how easy it is, frankly, to pull this data out and take a quick look at it. And I’m a very visual type of guy. So when I’m doing analysis, I always love to see these line charts, that really let me just focus in on the areas that are most important. So that I can get down to more sophisticated due diligence work. And I’m not wasting my time on areas that, you know, frankly, are really good ends.
Alright, and So, in summary, as we look through this, you really need to make sure as an investor, that you understand the customer, remembering that the customer is the top of the funnel, right? They’re the people pouring the money into the system. And so if you don’t understand why a customer a shopper is spending their money, then you really can’t find a good business to invest into, you’re only going to be doing it by blind luck. So knowing that customer is really critical, and understanding to the question that was asked earlier, really great question, understanding who influences the customer. So in
sort of an interesting point, if you think about normal commercial, retail products, advertising is hugely important to those products. So you must make shoppers aware that the product is available, and they must understand the benefits of the product, in order for them to really want to purchase that particular product. That’s TV advertisement and print advertisements, influencers on Instagram and everything else. Well, in the cannabis industry, a lot of those channels are very, very difficult to access for advertising. And so really understanding the customer and how they’re influenced becomes incredibly important. Because you can’t sort of advertise them to death, or advertise to the point where they’re just like, Oh, yeah, of course, I know what that product is. Because I’ve seen, you know, 25 advertisements for it in the last month, that bud tender really does determine a lot of their
choice in the dispensary. They are of course, we all know that counter decisions are influenced by the clerks at the counter in every industry. And in this one in particular, because they don’t have TV advertisements, inundating them with what is Gorilla Glue number four, it’s the budtender, who’s going to be explaining what is this product? And how does it work? This really gets to point number two about simplicity. If you can dial back your organization’s pension for complex solutions, and I think every single company that I’ve ever looked at, there’s always this sort of engineering mindset of we’re going to make the next day we’re going to make one more thing. Let’s just change that thing. And we’ll make another version of it. And you do that a few times. And next thing you know you’ve had you do have 3040 different skews with all these different products. So as an investor, it’s a red flag. When you see that type of behavior, it means the company has there’s a decent chance at least the company is losing focus isn’t able to rein in its product development team is unable to really double down and focus on what’s working. And they’re maybe not paying attention to the data team and understand what is working for them. So they may not even be aware
Of which products are really driving their revenues, and which products are frankly cannibalizing the shopper experience.
And then of course, understanding that competitive landscape. The number one problem, of course, with any company coming to market is when they miss price their product, right, if you miss price, your product either too low and your gross margins not good enough, or too high, and no one is going to buy it compared to another product. Really, really basic concept. Of course, as soon as you drive into pricing as a concept, and you dive into what really drives pricing, it gets very complex. And that’s the whole point of the BSA data suite is a try to bring some understanding to the concept of price bands, which prices are really going to move a product. And if you drop the product price, for example, by 10%, what is the expected increase in unit sold when you get that price drop. And of course, doing that price elasticity analysis is core to understanding any business. But particularly as an investor, many of us as investors are coming in and looking to improve a company. So there’s a huge point there of saying, hey, I want to come in and improve this company. How do I do it. And one of the ways may be doing a data driven analysis of pricing so that you can really optimize pricing to increase unit soul and maximize revenue while maintaining a decent gross margin and profitability for the company overall. So with that, we’re going to wrap up just about on time, I think I’m just a little bit over. Thank you very much for your time and attention today. If you do have any questions, please feel free to drop us a note. We’re more than happy to try to answer any questions or direct you towards data sources that would help answer those questions. Again, thanks very much for your time. hope everybody is doing well and not going to complain too crazy during these COVID-19 days.