Viridian noted in a Chart of the Week published in November 2022 that more “consolidation is inevitable” in the cannabis industry. What do the latest data show?
The green bars in the chart show the BDSA data that Viridian presented at the Green Market Finance Summit at NECANN on March 22. The orange line is an alternative calculation based on the company’s financial statements. While both data sets show a higher level of concentration in 2023 compared to 2020, the recent direction is different. Which is the correct one and what is the likely future direction?
BDSA data shows the share of sales of the top 20 brands each year. Keep in mind that the top 20 may be different each year. BDSA aggregated all retail sales of brands associated with a brand. For example, all retail sales of Green Thumb brands are added, whether GTI retails at one of its dispensaries or someone else sells the product purchased from Green Thumbs on the wholesale market. This approach puts everything on a retail basis.
The financial statement calculation is simpler: aggregate the twenty highest company revenues each year divided by the total number of Statista retail sales. This approach, however, is biased downwards for two reasons. Each company’s total revenue is a combination of retail and wholesale revenue, and this approach neglects to include the retail margin on wholesale sales. The Viridian database also includes only public companies; big brands like Stiizy are not represented. We conclude that the BDSA approach is superior and that its demonstration of increased consolidation in recent years is likely accurate.
Further increases in concentration are likely. The beer industry is a good analogue. As with cannabis, there are over 10,000 small craft beer companies, but the top five account for over 60% of sales. Wine is another interesting example. There are over 1800 brands of wine sold in the United States. However, five companies (E&J Gallo, The Wine Group, Constellation Brands, Tranchero Family Estates and Treasury Wine Estates) own brands that make up more than 60% of sales.
Why have both wine and beer become so consolidated? Economies of scale in manufacturing, packaging, distribution and marketing have driven consolidation, and those same factors will drive consolidation in the cannabis industry.
As capital markets reopen after the reschedule, the largest and most liquid companies will be the first to benefit from incremental investment in the sector. Their cost of capital advantage will make it easier for them to grow compared to smaller competitors. Full legalization, when and if it occurs, will accelerate consolidation pressures. Larger regional cultivation and production facilities will likely emerge with significant cost benefits. Huge expenditures will be required to increase brand awareness and conduct nationwide advertising programs. The largest MSOs today are small companies in the American commerce landscape. They will either become much larger or be acquired by larger companies outside the industry. There will always be thousands of small cannabis companies, and those with superior marketing capabilities to establish niche positions with differentiated products will thrive, while those that don’t will disappear.
The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends from the Viridian Cannabis Deal Tracker.
The Viridian Cannabis Deal Tracker provides market intelligence that cannabis companies, investors and buyers use to make informed decisions regarding capital allocation and M&A strategy. Deal Tracker is a proprietary information service that tracks capital raising and M&A activity in the legal cannabis, CBD and psychedelic industries. Each week the Tracker aggregates and analyzes all closed deals and segments based on key metrics:
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Transactions by industry sector (to track capital flow and M&A transactions for one of 12 sectors: from cultivation to brands to software)
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Deal structure (equity/debt for capital raisings, cash/equity/earnout for M&A) Status of company announcing the transaction (public or private)
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Deal Principals (Issuer/Investor/Lender/Buyer) Key Deal Terms (Price and Valuation)
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Key Deal Terms (Deal Size, Valuation, Price, Warrants, Cost of Capital)
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Deals by Issuer/Buyer/Seller Location (to track capital flow and M&A deals by state and country)
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Credit ratings (leverage and liquidity ratios)
Since its inception in 2015, Viridian Cannabis Deal Tracker has tracked and analyzed more than 2,500 capital raises and 1,000 M&A transactions with a combined value of more than $50 billion.
The previous article comes from one of our external collaborators. It does not represent Benzinga’s opinion and has not been edited.