Pivoting From Medical Cannabis Business To Adult-Use

Lisa
April 1, 2021

As state markets expand from medical to adult-use, numerous operators are pivoting to the more lucrative space and its substantial customer base.

Retail cannabis companies looking to expand from medical to adult-use have quite a bit to consider, from application filing to day-to-day operations. Transition planning must begin well before applying if a company wants to succeed—with the process continuing well after being granted a license.

The work is substantial but certainly is rewarding. While the adult-use market is ripe for the taking, only the prepared are poised to become successful. 

A Booming Market With Hurdles To Clear 

Cannabis is brimming with opportunity. 

The market’s remarkable growth is represented by the gains made since the legalization movement began more than half a century ago. Federal legalization is on the cusp, reform is incrementally coming along and the market is booming.

Medical and adult-use helped propel legal spending 36.5% in 2019, according to Arcview Market Research and BDS Analytics 8th State of Legal Cannabis Market (SOLCM) report. Staggering market growth should continue for several years. Total spending expects to increase at a compounded annual growth rate (CAGR) of 18.2%, reaching $33.9 billion by 2025, according to the report.  

Companies and operators well-versed in the market’s nuances are primed to become regional, national or international leaders. The race for market dominance is underway, with multi-state operators (MSOs) gaining significant footholds in states and the global market. Only a few are likely to prevail, as smaller MSOs and other operators face hurdles in a marketplace that is due for consolidation. 

Just as businesses must consider hurdles, so too must states. Like medical businesses planning to pivot to the adult use space, it is suggested that states consider their course well before expanding to adult-use. Otherwise, additional regulatory burdens could arise during the process.  

While largely unproven in the marketplace so far, states faltering with expansion efforts must be part of an operator’s thought process when determining its course. Choosing an overly regulated or oversaturated market is likely to create significantly more hurdles for a business. Some operators will have to make do with the laws in their already established state markets. Those looking to scout their next venture would be wise to stay up to date on local regulations or have the team in place for market scouting due diligence. 

The Various Components To Licensing

Cannabis companies must always stay up to date on regulations and best practices. That importance includes the licensing phase, where every parameter must be met before an applicant can even qualify for a license. Depending on the state, some parameters may include:

As the industry grows by state and country, operators must understand the myriad of laws governing each region, including country, state, and municipality. Staying atop this complex segment is daunting but necessary to expansion and compliance efforts. Companies that do so can successfully navigate the hazy scenarios that arise when layers of regulations inevitably contradict. 

Typically, it takes companies years to assemble a team of experts to oversee and implement each component. Often, companies find a more efficient solution by partnering with consulting professionals who fast-track solutions.    

Adaptations In The Day-To-Day Retail Experience 

Existing medical cannabis retail operators and brands that successfully receive their adult-use licenses are on the way to potentially doubling store revenue. That is if they can contend with daily operational adjustments. 

As mentioned above, cannabis dispensaries are required to manage within a high-stakes legal and regulatory environment. Most daunting is federal tax code 280E, which prohibits cannabis businesses from subtracting standard business expenses like equipment, marketing, rent, and salaries. Medical companies already face this issue, but pain points tend to grow with a more extensive consumer base. 

Companies also must handle shifting operations. Day-to-day changes include an influx of new customers. Increased foot traffic results in a demand for additional front-of-the-house and back-of-house staff, from security to budtending to production. 

Product offerings are likely to change as well. In certain states, laws allow medical patients to purchase products with higher THC potency than adult-use consumers. If that is the case, operators need to establish new pipelines for their expanded supply chain. Some retail companies should have no issue with new order fulfillment if their existing partners already produce adult-use products. If that isn’t the case, a search for new associates will be necessary. 

The business may also need technology upgrades to track compliance, security, trends and manage inventory–all business components that only grow in importance as added products, consumers and revenue are introduced to operations. 

Again, 280E rears its frustrating head as new and increased business expenses can’t be written off. The rise in costs must be factored in when assessing and adjusting margins. If administered correctly, new costs should offset in time as customers arrive. However, the tax hit will continue to be daunting until federal regulations change. 

Medical operators pivoting to adult use with a new location have to consider all the previously mentioned, and then some. The most crucial additional consideration has to be location planning–an essential step to assuring a new store is situated in an ideal area. The process can be long and daunting but cannot go overlooked. To emphasize one more time, stay up to date on regulations well before applying. 

Brand Developing Early On And Ongoing

Brand development is a critical first step for any cannabis business, whether starting up, expanding into the adult-use space or launching in a new marketplace. The same approach almost never works for both ventures. Think about it, a medical patient is unlikely going to have their interest piqued with the same marketing a casual adult-use consumer might.  

As such, companies have to consider their branding and marketing early in the process. Like daily operations, branding efforts will continue well beyond the application phase. Brand planning should start before the licensing phase and continuously develop as the store matures and regulations shift. 

Marketing extends beyond customer appeal. It has to include product packaging, functionality and the possible regulations attached. Operators must consider two integral aspects when assembling a brand’s marketing approach in any state. The plan must include business-specific components, such as name, logos, and its go-to-market strategy–and may be required in a state’s application. The same can be said for brand licensing and its focus on compliant product formulations and packaging. If either goes overlooked, the transition process could be halted in no time.

Once licensed, newly minted adult-use cannabis retailers have to market the business. Marketing is more difficult in cannabis, regardless of the sector. Due to federal regulations, companies remain restricted from most conventional online marketing means, including social media and Google paid ads. With federal prohibition stifling many traditional marketing avenues, brands must find compliant methods to market their company during a key expansion period for the company.  

Rely on Experienced Resources

With a myriad of tasks and considerations, even leading operators can struggle to transition. Give your team a break. Experts at Canna Advisors are eager to help your business navigate the strictly regulated cannabis space, from licensing to operations for cannabis and hemp businesses. Contact Canna Advisors today to get started.  

 

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