I’ve had the good fortune of speaking at several cannabis conferences, usually pontificating on the subjects of branding and marketing. I often began with the following opening comments: “I’m happy to see all of you here today. Most of you will be out of business within a few years.”
Talk about a crowd-pleaser.
However, I’d rather be the bearer of bad news than the painter of unrealistic pictures. And the fact remains, the cannabis industry is not immune from the laws of expansion and contraction that have impacted virtually every other business sector. We simply have more rose-colored glasses.
Often a forecast is best started with a look back, so let’s see how other emerging industries evolved and try to peel off some high-level lessons.
In 1900, the automotive industry was just beginning. But by 1908, there were 253 auto manufacturers in the United States alone. Soon, the laws of contraction hit hard and fast. William C. Durant founded General Motors Company for the express purpose of consolidating the industry. In the early years of the century, he began combining Buick, Oldsmobile, Cadillac, Oakland (later Pontiac), Chevrolet, and other lesser-known car and truck brands under the GM umbrella.
Fast forward a heartbeat, and by 1929 the industry had receded to just forty-four companies, with the big three (GM, Ford, and Chrysler) commanding 80 percent of the market. The natural forces of business consolidation prompted this inevitable process.
The oil industry provides another interesting comparison to the cannabis sector. In the late 1800s, few barriers to entering the oil business existed; drilling equipment cost less than $1,000, and oil land was abundant. Opportunist speculators came from all over to lease land and drill oil wells with dreams of making it rich. Some achieved the dream, but alongside the new millionaires of the moment were thousands of fortune hunters who failed.
Marvin Olasky, editor in chief at World and dean of the World Journalism Institute, wrote about the consolidation of the emerging oil industry: “The market system had to reward ruthlessly those who attained the greatest efficiency and cast on the scrap heap of production those who fell short.”
This pattern of growth and contraction is well illustrated in an article in Harvard Business Review that documented how industries go through four cycles: Opening, Scale, Focus, and Balance/Alliance.
Stage one, Opening, is dominated by entrepreneurs who innovate and grab market share. This was where the cannabis industry started just a few short years ago.
When an industry reaches stage two, or Scale, consolidation will begin and the top three players will own 15 percent to 45 percent of their market. The cannabis industry may be entering this phase now.
During stage three, Focus, the top three companies will control between 35 percent and 70 percent of the market, and the industry will have been winnowed down to only five to twelve major players.
By stage four, Balance/Alliance, “the titans of industry reign,” with the top three companies claiming as much as 70 percent to 90 percent of the market.
The cannabis industry will experience this time-tested pattern of growth and consolidation. That’s why I always urge cannabis businesses to build strong brands that can either survive as the market matures or be well-positioned for a lucrative buy-out or merger.
Ultimately, a company’s long-term success depends on how well it rides up the consolidation curve. Unfortunately, most companies simply won’t survive, even if they try to stay out of the last-business-standing contest. Whether or not you like it, the cannabis industry will progress along the same pathway as virtually every other sector that came before. A few strong companies will survive, and the rest will disappear.
Knowing this paradigm will help as you navigate the complex pathway to building your brand and your business.
Randall Huft is president and creative director at Innovation Agency, an advertising, branding, and public relations firm specializing in the cannabis industry. While working with blue-chip companies including AT&T, United Airlines, IBM, Walgreens, American Express, Toyota, and Disney, he discovered what works, what doesn’t, and how to gain market share.