Future of cannabis – Cannabis Quarterly insights, Q2 2022
The cannabis industry is taking shape right before our eyes. What might be ahead in regulation, consolidation, new entrants to the market, and more? How can stakeholders best ride the wave of new technologies and data to business opportunity?
This quarter’s articles
Click one of the links below to skip to a specific article.
- When it comes to best practices in your CannaBusiness, read between the wines (5 lessons from the wine industry)
- From around the industry: Insights from MCBA and Davidson & Company LLP
These articles are part of CannaQuarterly, our new quarterly email newsletter for cannabis industry stakeholders, developed by a wide array of CohnReznick specialists plus contributors from around the industry. Subscribe now to make sure you receive future issues, and visit these pages to explore the other articles included in Q2 2022: Perspectives on Growth | Technically Speaking… (Tax and technical insights)
Chris D’Arduini, Amanda Goldston
Cannabis organizations can benefit in myriad ways from utilizing data. Operators should look to industries with similar market and operating characteristics to understand the most effective ways of capturing and effecting change based on data and a connected environment. The wine industry is a great place to start!
The cannabis and wine industries are at different levels of maturity, adoption, and acceptance, but ultimately their operators and producers have the same challenges in understanding what to make, and when, in order to capture long-term repeat purchases in a highly competitive market.
Below are 5 key takeaways from the wine industry that cannabis businesses – from newly established craft brands to multi-state operators – should incorporate into their go-to-market and operational strategies. The common denominator: data-driven decision-making.
Create trusted brands by understanding consumer needs
Like with CPG (consumer packaged goods), the average wine consumer has brands they trust and recognize, and a roster of go-to’s they expect will meet or exceed their desires.
Cannabis connections: As organizations continue to consolidate in cannabis, and more brands are made available across multiple markets, they will similarly curate high brand loyalty and be positioned to dominate the industry.
Notably, trusted brands in wine span various price points – consider an under-$10 Moscato versus a luxury Champagne. Both products can be top sellers in the market because both cater to different end consumers. The possibility of premiumization and niche products is evident in wine.
Cannabis, too, is starting to explore and support premiumization, as evidenced by an emerging interest in premium hand-trimmed flower and infused pre-roll products, and even strategic business acquisitions by larger MSOs to acquire premium-focused brands. While the core cannabis consumer is still price-conscious, research indicates that household incomes of cannabis purchasers can support higher price points.
Sustainability concerns and new consumers’ ever-growing desire to have trusted, sound products will further create opportunities to differentiate and sway consumer preference between brands. Like Organic or Biodynamic certifications in the wine industry, special cannabis cultivation techniques or practices can provide consumer segments with needed justification for their purchase.
The key is to match up market research with target consumer segments to understand which qualities are most important to ultimately drive sales.
Make data-driven business decisions on what to make, and when
Beyond understanding the consumer, CPG companies like those in the wine industry utilize data to drive sales and determine what to make, when to make it, and who to sell it to.
Cannabis connections: Winegrowers and cannabis cultivators both experience varying growing season times (as grapevines are perennials primarily grown and maintained outdoors, and cannabis plants are annuals grown in a combination of indoor and outdoor grow sites); the need to take cuttings and directly root or graft them as necessary to support production goals; and often finicky varietals (Pinot Noir) or strains (Amnesia Haze) that require special cultivation attention. They also both have the important decision of what final products to make given the capacity constraints of their winery or manufacturing sites.
This opens up a plethora of questions. Should wineries create blends with multiple varietals of wine? Or are single-varietal wines trending in the market? Should cannabis operators use trim to produce more distillate? Or would the trim create more opportunity for margin capture if used to make pre-rolls instead?
The answer is in accessing data and using the insights it can provide.
Connect systems to capture data and support costing analysis
Tracking costs from the start of the growing season or beginning of a batch all the way through to end bottling or packaging allows identification of which end products are producing the greatest value for the organization.
Cannabis connections: Analyzing key KPIs like labor hours required for harvest, time spent curing or vinifying, and the cost of end products’ packaging allows producers and operators to streamline the cultivation and production processes, identify which manufacturing lines are the most efficient, and find ways of reducing overall expenses.
In the event of an infestation event, such as nematodes, cultivators in both industries must execute mitigation measures with the potential to affect yield, labor and materials cost, and the quality of the end product. The ability to track how these infestation events and mitigations might impact the bottom line is an essential piece of the planning puzzle.
Costing data analytics can further help ensure that products are priced correctly on the shelves and capture margin as the wine or flower moves through distributors and on to the end consumer.
Enable production optimization with data analytics
The “processing” stage itself requires extra consideration and use of data to produce the correct end product.
Cannabis connections: In wine, the grapes undergo fermentation and the various organoleptic characteristics (alcohol content, acidity, sweetness, etc.) are either amplified or restrained based on the initial grapes and the winemakers’ understanding of how certain activities will impact the wine.
In cannabis, where extraction activities can highlight or subdue similar characteristics (terpene profiles, potency, etc.), lab technicians rely on data from previous strain batches to optimize distillate output and confirm they are producing the right product.
In both scenarios, data provides the answer to not only what should be produced, but also how to produce the desired end products to meet consumer demand and support an optimized production line.
Support future growth with data-driven planning
Besides planning out the immediate next grow, harvest, or product line to pursue, data should be used to prepare for the future.
Cannabis connections: As M&A activity continues in the cannabis industry and national brands get a stronger hold on the market, operators will need to evolve to continue penetrating and reaching new segments. The biggest wine brand conglomerates use market insights to better understand their customers and further tailor production planning and marketing outreach decisions. They even go so far as matching up consumer segments with expected flavor profile interests – as cannabis operators should be able to do with strains and their differing flavor and effect profiles.
In the event that the future of cannabis includes federal legalization and interstate commerce, new avenues for sale could follow, along with the potential to pivot to a primarily wholesale distribution-focused model, in alignment with wine industry counterparts. Operators that want to be part of any changed market landscape need to lay the groundwork today by establishing strong, scalable data capabilities that will allow them to communicate and collaborate with industry players across the country.
Here for the right Riesling
The data conversation is multilayered and may seem intimidating to approach. The good news is, cannabis operators already have valuable data at their fingertips. All that remains is learning how to best access and utilize this data for business decisions.
Chris D’Arduini, Senior Manager, Technology+
Amanda Goldston, Senior Consultant, Technology+
Advocacy leaders launch #SAFE4Equity campaign to educate, support passage of the SAFE Banking Act
The Minority Cannabis Business Association (MCBA) is teaming up with a number of other advocacy groups to provide timely education and updates on the SAFE Banking Act, which could help address one of the core barriers to entry for minority cannabis operators: funding. Read more about their campaign; plus, hear more about what the act would mean for the industry in our video interview with MCBA’s Precious Osagie-Erese.
Farmgate in Canada
Conversation is building in Canada around “farmgate,” a model similar to “farm-to-table” that allows license holders in certain provinces to sell their products on site and directly to customers. Read an overview from Davidson & Company LLP on farmgate’s potential benefits and challenges – then consider, could there be a future for this kind of direct-to-consumer approach in the U.S.? Right now there are limitations, but enterprises like consumption lounges and other retail environments are already headed in a similar direction. Would this be interesting to consumers within our market? While still governed state by state, would we need federal legalization like Canada has in order for this to be successful? Read article >
Cannabis Perspectives on Growth
Tax and Audit Insights for Cannabis
InsightCannabis SALT Shaker: State and local tax developments (Q3 2023)Krista Schipp, Cassandra Baubie, Jamie KellyRead about developments in cannabis tax rates and credits, state markets, Section 280E deductions, and more. In this issue: MN, TN, VT, MD, NY
InsightVideo: Receivership as a solution for struggling cannabis businessesJacques Santucci of Opus Consulting sheds light on how receivership works, including specific considerations and challenges for cannabis businesses. Watch now.
InsightRescheduling cannabis: Regulatory and tax perspectives on the road aheadHear insights on the HHS’s recommended move of cannabis to Schedule I of the Controlled Substances Act: Potential next steps, timing, impacts, and more.
InsightCannaQuarterly Q3 2023: Business strategies and trendsExplore video perspectives on potential rescheduling; state tax and market updates; and much more.
Press ReleaseHarlow to lead CohnReznick Cannabis practicePartner Michael Harlow will now lead CohnReznick’s Cannabis industry practice in addition to serving as Co-Practice Director – DC-Metro Tax for the firm.
InsightHow meaningful is the total tax expense for a cannabis company?Seth ShererRead how to interpret the income tax provision for a cannabis company that is subject to IRC 280E.