Ep 14: The Cannabis Industry Is Growing Up — The Shift

with Filip Gacic · The Shift, a podcast by Headquarters

Cannabis is entering a new era - consolidation, sales beyond dispensaries, and blurred lines between regulated cannabis and hemp THC.

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Auto-generated from the episode audio and lightly edited for readability.

0:08 consolidation. I know, not exactly the word that's going to get people jumping out of their seats, but what's happening underneath that word is actually pretty fascinating because for most of the modern cannabis industry's existence, the story has been expansion. more states, more licenses,

0:28 more cultivation, more dispensaries, more employees, more everything. The assumption was pretty simple. Cannabis is becoming legal. Therefore, the market gets bigger. Therefore, we need more capacity. But what happens when the industry looks

0:47 around one day and realizes maybe we built too much? That's the question I think we're starting to see play out in some of America's more developed cannabis markets. According to MJBizDaily, a recent acquisition involving 15 cannabis

1:05 retail locations in Colorado is being followed by the closure of a Denver cultivation operation affecting 141 workers. And this isn't happening in isolation. In Florida, another operator recently

1:23 announced the closure of two facilities affecting 211 jobs. Now, I'm deliberately not interested in turning this into a conversation about either company because I think the companies are almost besides the point. What interests me is the pattern.

1:42 Facilities close, operations combine, jobs disappear, assets move between owners, and suddenly the cannabis industry starts behaving like well, every other established industry.

2:00 That's quite a change from the green rush mentality. There was a period when legalization itself was almost treated like a business model. Get the license, build the facility, open a store, demand will come, except economics eventually

2:18 shows up. And economics doesn't particularly care how exciting your industry is. If ten businesses can produce something the market only needs from six of them, eventually something has to give. And we may already be seeing that

2:38 adjustment. A report covered by Forbes earlier this summer found that US legal cannabis employment and sales declined together for the first time since adult use legalization began expanding across the country with price compression and

2:56 cultivation over supply among the pressures identified. Now, that I find interesting because declining employment doesn't necessarily mean cannabis is disappearing. It could mean something much more mundane. The industry simply doesn't need the same number of people,

3:15 same number of facilities and companies to produce the same amount of cannabis anymore. Think about what happened to almost every major industry before. At the beginning, everybody rushes in. There are hundreds of companies. Everybody thinks they've discovered the next enormous opportunity. Then

3:35 competition intensifies, prices come down. Margins get tighter. Companies combine. Facilities close. And eventually a much smaller number of players control a much larger percentage of the market. Airlines did it. Telecommunications did it. Banking did it. Beer certainly did it. So why would

3:55 cannabis somehow be immune? And here's where this becomes a much bigger question than a couple of cultivation facilities closing. So what does cannabis look like if consolidation continues for another 10 years? Do we still have hundreds of regional operators? Or do we

4:13 eventually end up with a handful of enormous companies controlling cultivation, controlling manufacturing, distribution, and retail across multiple markets? And if that happens, what do we gain? Lower costs perhaps, more consistent products, more efficient distribution.

4:32 But what do we lose? Producers, variety, competition, jobs, maybe some of all four. And I don't think we know the answer yet. But I do think we're beginning to ask a very different question about cannabis

4:52 because 10 years ago the question was how big this industry can become. Today in some markets the more interesting question might be how many companies does this industry actually need? And that's really the shift. Cannabis spent years in its expansion era. We

5:12 may now be watching the beginning of its consolidation era. And if history is any indication whatsoever, the industry that comes out on the other side could look very different from the one we know today. Why do we buy cannabis the way we

5:31 do? Think about it. If you want wine, you can go to a supermarket, a wine shop, a restaurant, a vineyard, a tasting room, even a farmers market in some places. If you want coffee, supermarket, coffee shop, cafe, farmers

5:49 market, but legal cannabis largely developed around one very specific experience. You walk into a dispensary, you show your ID, you look at a menu, you speak to a budtender, you choose your product, and you leave. But is that really the

6:07 final form of cannabis retail? Because something that happened in New York this week made me wonder. On August 6th, the New York Governor Kathy Hochul signed legislation expanding where licensed cannabis micro businesses and dispensaries can

6:26 participate in approved cannabis showcase events. Cannabis Business Times described the legislation as expanding market opportunities for licensed micro businesses and dispensaries at approved events,

6:44 including farmers market style settings. And yes, on the surface, this sounds like a fairly small regulatory change. Cannabis at farmers markets, great. Moving on. Except I don't think that's the interesting part. The interesting part is what happens when you take

7:03 cannabis out of the dispensary because suddenly the context changes. You're no longer walking into a building specifically because you want cannabis. You're walking around a market. You're looking at local products. You're talking directly to producers. You're discovering things you weren't

7:21 necessarily planning to buy. That's an entirely different consumer experience. and other industries understand this extremely well. Think about wine. Part of the reason wine has such a strong culture around it isn't just the liquid inside the bottle. It's vineyards, tastings, regions, terroir,

7:41 food pairings, stories about where the grapes come from. Coffee did something similar. Coffee went from being something you bought in a tin at the supermarket to something where people genuinely care about origin, roasting, preparation, and the person making it.

8:01 Craft beer did it too. Breweries became destinations. So, why couldn't cannabis eventually develop its own version of that? And I think cannabis is particularly interesting because technically this starts with agriculture. Somebody grew this. Different genetics produce different

8:19 characteristics. Different cultivation methods matter. Geography can matter. Processing matters. There's an entire story behind a finished product. Yet, the consumer often encounters that story through a package sitting behind a counter. That's kind of a strange thing

8:37 when you think about it. Now, obviously, cannabis isn't tomatoes. There are age restrictions. There are public health considerations. There are rules around possession and consumption. And none of that suddenly disappears because somebody puts up a farmers market tent.

8:55 But that's precisely why I find New York's experiment interesting. It asks whether regulated cannabis can exist in a more traditional marketplace without pretending that cannabis is an ordinary agricultural product. And maybe that's where cannabis retail eventually becomes really interesting. Not placing

9:14 dispensaries, but expanding beyond them. Maybe it's dispensaries, showcases, markets, events, cultivation experiences. Maybe retail becomes less transactional and more educational. We don't really know yet, but I think it's worth remembering that the dispensary

9:32 model we recognize today isn't some natural law of cannabis. It's simply the retail model that developed around the first generation of legalization. And first generation models rarely end up being the final ones. So here's the question. 10 years from now, when people

9:51 think about buying cannabis, will they immediately picture a dispensary or will that seem as limiting as saying the only place to experience wine is a liquor store? And that's really the shift. Maybe the next evolution in cannabis isn't another product. Maybe it's changing the place,

10:11 the context, and the experience in which consumers encounter the product in the first place. I want to finish today with something that's becoming increasingly difficult to define. Where exactly does the cannabis industry begin and where does it end? Because for most consumers, the answer used to be

10:31 pretty obvious. Cannabis was sold in a dispensary. Alcohol was sold in a liquor store or a bar. Everything had its place. Nice and simple. Except it's not that simple anymore. Hemp derived THC products, particularly

10:49 beverages, have increasingly appeared in conventional retail and hospitality environments in parts of the United States. And that creates a rather strange situation. You can have two products that produce intoxicating effects from THC, but depending on how they're produced, where

11:09 they're sold, and which regulatory framework they fall under, they can exist in completely different systems. One might be sitting inside a licensed dispensary. The other might appear in a setting consumers don't traditionally associate with cannabis at all. And that's where this gets interesting

11:28 because this isn't really a conversation about whether THC beverages are good or bad. It's a question about categories. According to Axios, the growing presence of hemp derived THC beverages outside traditional dispensaries has created increasingly complicated questions for lawmakers around age restrictions,

11:48 around labeling, product testing, and where these products should actually be sold. And I think there's a very reasonable question hiding underneath all of that. If two products contain intoxicating THC, should consumers expect the same rules, the same testing

12:06 standards, the same labeling requirements, the same age restrictions, or does the legal origin of that THC justify treating the products differently? Because from a regulatory perspective, the distinction can be extremely important, but from the perspective of the person looking at a

12:25 can in a refrigerator may not be obvious at all. And that's a fascinating problem. Regulation tends to organize products according to legal definitions. Consumers tend to organize products according to what they actually do. Those two things don't match.

12:44 Think about alcohol. Consumers generally understand that beer, wine, and vodka are different products. But they also understand that all three belong to the same broad category, alcohol. There are expectations attached to that

13:02 category. Age restrictions, labeling, rules about where you can consume it, social expectations around impairment. THC is developing in a much stranger way. We have state regulated cannabis, federally legal hemp, hemp derived

13:21 cannabinoids, medical products, pharmaceutical cannabinoids, and products that can look remarkably similar to ordinary consumer goods. That's a lot for an average person to understand. And maybe we're approaching a point where the legal

13:39 definitions and the consumer definitions of cannabis are starting to collide. Because once cannabis derived or hemp derived products start appearing outside the traditional cannabis environment, the dispensary is no longer doing all of the explaining for you. The package has to do more. The regulation has to do

13:58 more. Consumer education has to do more. and age controls become an even more obvious part of the conversation. So I don't think the interesting question is should THC products be sold outside dispensaries? That's ultimately a regulatory and public policy decision. The more interesting question is can we

14:17 continue regulating products primarily according to where the THC comes from when consumers primarily experience what the THC does? because those are two very different ways of looking at the exact same product category. And that's really the shift. Cannabis used to have very

14:35 clear boundaries. The dispensary was one of them. Hemp derived products are beginning to blur those boundaries. And now regulators, retailers, and consumers are being forced to answer a surprisingly complicated question. When a cannabis related product no longer

14:54 looks, feels, or is sold like a traditional cannabis product, do we still treat it like cannabis? I don't think we've completely figured that out yet.