Oligopolies Have No Place in the Cannabis Industry

     Cannabis is booming.  While the industry has always existed, the dark curtains of the black market shielded the production and distribution of marijuana.  And while the black market will never completely disappear, the legal shift is further lowering the curtain and pulling the marijuana industry into a legal market that can be taxed and regulated.  As states and municipalities look at how to regulate the production and distribution of marijuana there is a trend of trying to put the control of production and distribution into a few hands and creating oligopolies in new markets.
This was the case of Issue 3 in Ohio.  The creators of the proposal tried to pull the wool over Ohioans eyes and ride the wave of "legal weed hysteria" and push through a law that would have limited grow operations to a few firms.  Luckily, Ohioans saw past the smoke screens and voted the measure down.  And while the battle cry for voting down the measure was about not giving the market to the "corporate America", to me there are bigger fundamental reasons not to have oligopolies in the legal marijuana market.  First of all, what is an oligopoly?
     While not a common-place term, oligopolies are the ugly cousin of monopolies.  Monopolies are more common in conversation and occur when a single organization owns a market.  Without competition, monopolies control pricing and have no incentive to improve their products to meet customer demands.  Governments deter monopolies through antitrust laws and regulation because they lead to over-priced markets and lack of innovation, which, in the end, hurts all the stakeholders in an economy.  Oligopolies are very similar in effects but differentiate in that instead of only one firm, there may be just a few firms that control a market.  Cartels are sometimes used in place of oligopolies because they lead to price manipulation, quality management issues, supply shortages and violence.  But what are the risks to the marijuana industry if oligopolies are allowed to exist?
     The first is pricing.  As with any oligopoly, firms are more concerned with their "competitors" prices than pricing elasticity, or what the customers are willing to pay.  As in the case of OPEC, which is regarded as an oligopoly, the firms involved agree on pricing that all will follow.  And because the product has such high demand, the firms do not worry about what the consumers think because they ARE the supply.  This is great for the firm but not good for the consumer.  Where this impacts the legal marijuana market besides the obvious of price-fixing is how it will affect the movement of marijuana between states and the viability of the black market.  If prices in one market are too high, people have a tendency to either get their product from elsewhere which would either be from another state (road trip!!) or go back to the black market.  Either way, this is not beneficial to government tax revenue and the crime for that area.
     The second impact is quality management.  A great example of this is the meat industry.  Over the years, as margins have shrunk and conglomerates such as Tyson have strong-armed their way to owning the chicken meat market, the quality management of the output has been effected.  With the use of confined animal feeding operations this has led to breakouts in disease that have wiped out entire farms of chickens and pushing out tainted meat into our grocery stores.  How this is a lesson for the marijuana market is that marijuana has a tendency to be infected with molds, infested with insects and attract other plant diseases.  This is nothing new and anyone that has grown knows that a undetectable spider mite family can quickly spread through an entire crop in just a few days.  So when you concentrate grows to just a few there are quality management issues that can lead to massive spread of these issues.  And because so much is riding on each crop, there may be a tendency by growers to control or mask the diseases by strong pesticides and trimming out tainted areas.  So by concentrating grow operations the risk increases greatly for this scenario.  When grow operations are spread, so is the risk and likeliness that quality will be affected.
     The third issue is supply shortages, either by choice or bad choices.  The oil embargo of 1973 was a lesson of this scenario.  When a few players own a market or at least control a large portion, they have the power to control the supply.  As in this case, the OPEC participants rebelled against the U.S. involvement in Arab countries/Israeli and imposed an embargo.  The impact was crippling to the U.S. economy, which had become dependent on OPEC oil.  This lead to long lines at fuel stations and shortages at the pumps.  The marijuana industry should not forget this and avoid the possibility of supply shortages because that just drives marijuana traffic to either neighboring states or countries and to the black market.
     The last trend in oligopolies is violence.  When markets are owned by only a few players, disagreements between those players can elevate quickly if one or more of the participants is not willing to "play ball".  This has been noted in the illegal drug markets of the U.S., Mexico, Columbia and pretty much every country where oligopolies controlled markets.  While this is an outlier risk in the legal marijuana market, oligopolies are part of the foundation for past violence in markets and avoidance is the best policy.
     I commend Ohioans for seeing past the funny mascots and big promises of the last proposition but I don't think this is a trend that will be going away soon.  At the same time, the "no corporate America" battle cry is not the issue.  The issue is much larger than that and historical occurrences of oligopolies is enough evidence for the avoidance of the risks that are associated with giving too much power to a few participants in any market, including the new legal marijuana markets.

Keep growing,

Gib

To Launch or Not to Launch...? A Guide in Determining Feasibility of Your Next Big Idea.

     Ideas.  They are everything in today's "the world is flat" economy.  Our intellectual property is even more valuable than ever before but for all of those great ideas that end up on the market, over 95% never make it to the shelves.  In fact, studies show that the proportion of products that successfully survive the entire process from creation to successful product is only 4.75%.*  That is both a frightening and empowering statistic, meaning if you have a new product idea, the odds are against the success of that product but at the same time, if it is successful, you have beaten the odds.

     In my experience, the marijuana industry is full of dreamers.  This is not a negative connotation because if it was, I would be insulting myself, because I am myself a dreamer.  But I'm a dreamer that has had business experiences that has lead to this layman's "litmus test" of feasibility for products or the next "big idea". Just as important as it is to get new products and new technologies or methods to market, it's also important, and smart, to know when an idea should just remain a hobby or small-scale garage project.   So I share with you a basic guide to help with knowing and feeling confident about your next big idea.

     Determining a product success can be a bit arbitrary, especially in the marijuana industry where companies are not public, sales numbers are clandestine and only now are tax revenues starting to track sales.  At the same time, there are empirical consistencies across all industries that can be used to help determine product feasibility.  For instance, timeliness to market.  If you are 25th to market with your product, do not expect 50, 30 or even 20% of the market share.  More than likely, it will be closer to 5-8% of market share and your projected sales should reflect that.  But if you are first-to-market, you can expect to have over 50% of the market share just purely from the fact that you were first-to-market.  And other basics, which will be used can help estimate costs and other figures that will help you out.  But let's start with a basic question, is the product a "good product"?

     What determines a "good" product?  I like to look at the product quality, product definition and the time to market .  Product quality, while self-explanatory, is not only speaking of the quality of your product, but also the quality of your future competitors.  Customers eventually, in all industries, want the best for the best price, so where does yours stack up?
Product definition is answering the question of what your product does.  Does it solve a problem?  Is a big problem or minute?  What are the inputs into making the product, are they readily available, need to be manufactured specifically for this new product or crazy expensive?
And lastly, what does the playing field look like for this product?  Are there no competitors in a new industry, is this changing the industry or exceptionally different and if there are competitors, how many and how big are they?  Most products don't make it past this qualitative test, so if yours does, cool, let's move on.

     After you can say confidentially, yes I have a kick-ass product! Let's dig more and see how it will fair it might fair in the market.  These are just a few activities that help with determining marketability, or if it will sell.

• Initial screenings via surveys, focus groups and individual feedback.  Whichever method you use, the goal is to obtain empirical data that shows you have a winner in the eyes of soon-to-be customers.  At minimum, use surveys and speak to people you will be marketing to so you can receive feedback.  Sometimes there are small tweaks that are discovered that will help you.
• Market assessment and studies.  What you're trying to determine is if this market is too saturated, where are the hot-spots of activity, what are the cycles of the market, is it booming or diving, how does the economy affect this industry and any additional data that helps you form a picture of the industry and where the product would be best positioned for launch.
• Appraise your product.  What is the value i.e. what can you sell your product for?  $5.00, $9.99, $10,000?  The best and easiest method is check the online marketplace and see what similar products or products that solve similar problems sell for.  It's better to be conservative.
• Complete a quick SWOT analysis or risk analysis.  Here are a couple links to assist.
• SWOT http://deepingilbert.blogspot.com/2015/11/how-to-complete-swot-analysis.html
• Risk http://deepingilbert.blogspot.com/2015/10/a-diy-of-risk-management-i-promise-this.html
• Complete an initial financial analysis to see if the idea "pencils".  Here's where the rubber hits the road because numbers don't lie.  Here's the steps:
• Determine the margin or profitability of each unit sold.  Take the determined price point and subtract the direct costs or cost of goods sold (COGS).  The costs should include materials, packaging, labeling and shipping costs per unit.  Subtract that from the retail price and baam, write that number down, that is your gross profit per unit.
• Next, estimate the number of units to be sold.  Remember, stay conservative.  
• Now multiply the gross profit per unit to your number sold.  Hey, there's your gross profits!
• Next, calculate cost for research and development, consulting fees, legal costs including patent and trademark(s) and 20% for taxes.  Subtract that from the gross profit and now you have a net profit.  How's it look?  Scary, exciting...do tell!!!  Any room for advertising or salaries?  
• Trust your gut.  All of these numbers and data are only guides and not the final word.  Trust your instincts but don't lie to yourself at the same time.  Like old school, keep it real.

   So do you have a winner?  Time to go back to the drawing board?  Whatever the outcome, at least you will now have the confidence to either move forward or set this idea aside and work on another project.  But whatever you do, never give up and don't ever lose the faith.  Much love!

Keep growing,

Gib

Resources:

*Cooper, R.G. and Kleinschmidt, E.J. (1998), "Resources allocation in the new product development process", Industrial Marketing Management, Vol. 17, pp. 249-62.

How to Complete a SWOT Analysis

     A SWOT analysis is a brainstorm activity that requires an objective viewpoint that will be helpful with the business launch.  This helps the business members understand and aware of the strengths, weaknesses, opportunities and threats of the business and product(s).  It’s a good practice to do this exercise with each product if there is a major differentiation between products in your portfolio.  Here’s some further guidance on each aspect of a SWOT analysis:

·         Strengths- The strengths has more to do with the internal strengths of the business and products versus external strengths of the product(s).  Strengths can include superior product quality and price point compared to competitors, strengths relating to the leaders within the business and resources available.  Avoid vagueness or embellishment to keep this specific and realistic.

·         Weaknesses- Just as with strengths, weaknesses are relating to the internal threats to the business and product roll out.  This could include lack of resources in capital, marketing expertise or knowledge of the market the business is expanding into in the future. 

·         Opportunities- Opportunities are also external as in the business being first-to-market, new changes in regulation that open markets, technological advantages of product, marketing campaign capital or having a niche in current markets to exploit.

·         Threats-Threats are external.  These are threats for the business externally from other factors such as a saturated market, declining economy or new products that out-perform or are priced lower than the company’s product or service.