Local vs. National Cannabis Business Models
Why Thinking Big With Cannabis Right Now May Harm Efficiency
Most know that cannabis is ‘federally illegal’ yet legal within certain (most) US states. The famous 2013 Cole Memo essentially said ‘No federal funds/focus will be used for cannabis law enforcement if state-licensed operators are following state laws and states are enforcing their laws’. This is still the circumstance in 2024, and so to this day, one can think of each US state (and territory) as its own siloed governance and industry as far as cannabis. Put even simpler: Nothing ‘legal cannabis’ can cross any state line legally (of course referring to the plant and products, but also any state rights granted via state licenses). This is what creates the current complexity of our national industry (and the crux of this blog).
What Is A Cannabis ‘MSO’?
A common, and often loaded, phrase in the cannabis industry is ‘Multi-state Operator’ (“MSO”). In a literal sense, it implies one governing entity operating cannabis facilities across more than one state (cultivation facilities, manufacturing plants, retail dispensaries, etc.; any licensed cannabis business of any kind). In recent years, it has been used to create somewhat of a ‘Wall Street vs Main Street,’ ‘Big Cannabis vs small mom’n’pops,’ ‘us vs them’ dynamic. But that does not tell the complete story, is not fair to every operator, and is not the focus of this blog.
Multi-State Cannabis Requires Ground-Up Resourcing
The bottom line is that if you want to operate in different states, you need to ‘start from the ground up’ each time (team, property, capital, licensing, and more). And that often takes far more time, effort, money, and resources than, say, opening a second facility in the same town. This is why, as we are now eclipsing 40+ state programs in 2024 (from less than 5 programs less than 15 years ago), we have seen ‘Big Cannabis’ emerge (i.e., those governing entities with national investors, real estate prospects, and other resources of that scale). But there are plenty of exceptions; private, smaller, family businesses that are leveraging the ‘bigger picture’ strategy.
What’s The Right Cannabis Expansion Strategy For Me? – B2B vs. B2C
Business-To-Business (B2B) Cannabis
In the (still) nascent national cannabis industry, is it better to be ‘a mile wide and one inch deep, or a mile deep and one inch wide’? After you secure your first ever cannabis business license (yay!), should the expansion strategy be to grow 5x (e.g., have five facilities in one state; even one city), or should it be to secure one facility in five states? The first consideration could be whether you are more upstream and B2B-oriented, or more branded-product, customer-facing, B2C-oriented. As far as B2B, cultivation and mass-production (‘white-label’) processing facilities are generally large, unmarked buildings, outside of town, and do not require customer recognition or foot traffic to be successful. These businesses are geared toward helping create products from raw materials for the entire industry (focused on fellow operators; dealing in wholesale).
Business-To-Consumer (B2C) Cannabis
Conversely, examples of B2C-oriented businesses are whether you are in retail (operate dispensaries) and if you are developing a specific cannabis brand (and its line of products) as your core business. B2Cs are best when serving their community directly (i.e., creating an accessible, recognizable, reliable, and enjoyable experiences for end consumers). This is achieved via awareness and reputation (focused on end consumers; dealing in retail). B2B businesses may want the most efficient and diverse footprint as soon as possible (one facility in five states; casting the widest B2B net) while B2C businesses may want to be ‘locally loved’ first (e.g., a brand developer focusing on ‘being in every dispensary in State X’ before entering a new state; or, a dispensary owner working to open their second, third, etc. store in the same large city (let alone same state) before looking into another state.
Are You A State Cannabis Staple or Business Exit Extraordinaire?
There is also your overall corporate strategy and risk tolerance to consider. Are you building a family legacy for decades (e.g., open a storefront as the flagship of your small town and pass this business down through generations), or do you feel there is an opportunity to enter this industry ‘on the ground floor’, participate in its fast-paced growth, and exit within ~5-7 years for (hopefully) a disproportionate profit (e.g., more of a ‘return on investment opportunity’)? The general perspective is that cannabis is an emerging industry, and emerging means ‘moves way faster than other industries; successes and failures are intense and conspicuous.’
Business Risk and Timing Goals Are Critical
If you are more ‘Main Street’, hometown, deep roots, risk-averse, and ‘long-game’ oriented, you may consider focusing on being a ‘State Staple’ where you are one of the few top brands/facilities in your state (presumably, as long as you can maintain it; regardless of any ‘Wall Street’ movers/shakers or federal landscape changes). Your position of depth helps hang onto your local market with sincere loyalty. Conversely, if you are risk-prone and see this as more of an opportunity on which to capitalize over a shorter-term, you may consider focusing on being an ‘Exit Extraordinaire’, where you are seeking modest local market share, but to be spread across several states (presumably, to be more attractive to a corporate/larger buyer a few years down the road who’s seeking to enter the industry ‘overnight’ with their formerly non-cannabis national brand via acquiring multiple cannabis licenses in multiple states).
Watch Out For Compliance Inefficiencies and Stunted Market Growth
And oh, the regulations! As established earlier, each state program is its own silo of cannabis regulations and cannabis operations. This means what could score you more points on one state license application might get you disqualified in another. Moreover, what may be legal (even promoted) in one state (e.g., signage, phrasing, facility distance from a certain other type of facility) may get your operating license revoked in another state. As hopeful MSOs enter each state, they must interpret each unique set of regulations, and produce first-class application materials specific to those, let alone maintain compliance with them every day of operation (while following other regulations in another state simultaneously). That alone creates barriers to expansion, as most operators are already overwhelmed with their one facility and/or one state’s set of regulations. There is no use investing so much time/money/effort into new state expansion if you are not putting your best foot forward in the process.
Never Underestimate Cannabis Competition Across Other States
On the other hand, if you do not, at some point, try to expand across the country (state by state), it can be incredibly difficult to compete (customer recognition, loyalty) with those that have done so, 5-10+ years down the road. They may never ‘steal’ from your hyper-loyal local market share. But you will struggle to grow beyond your local market (and likely struggle to exit when the time is right) as they readily expand, and position for sooner, large exits.
Talk to Cannabis Consultants Who Are ‘There’ Locally, and ‘Been There’ Nationally
A good mix of support from local and national experts is the key. Locally, start seeking out trustworthy legal representation. They can help you form the proper entity (LLC, C-Corp, etc.) and can likely introduce other local service providers like credit unions (for banking) and realtors (for property search). Your local team, especially in an emerging state (i.e., one with a new cannabis program), may not be cannabis experts, but they are your ‘boots on the ground’ experts for you as an entrepreneur.
National Experience Translated To Local Cannabis Expertise
You are best speaking to a cannabis expert with a national footprint once you start considering your strategy specific to the cannabis industry. A cannabis firm that has only worked in one or a couple of states for a couple of years has that fraction of the vital experience of a firm that is worked in tens of states (navigating their regulations and starting up operations) for over a decade. Seek out professional cannabis services firms with long and successful track records of drafting financial models and business plans, writing applications, securing licenses, starting up facilities, and helping their clients successfully exit the industry (when the time comes).
Partner With Canna Advisors
Last, look no further. Reach out to us at Canna Advisors today to start brainstorming or to get your burning questions answered in a one-on-one hourly consultation. We can discuss your general strategy and introduce some local resources to set you on your way.