When setting up a commercial cannabis cultivation business, one has to ask: what kind of market am I going to target? All nuances and market segments aside, this decision mainly involves two market categories: the bulk market vs. branded products.
The bulk market
"The bulk market is largely a volatile commodity spot exchange," says Max Rudsten, chief revenue officer at Posibl, a cannabis company based in California. "The benefit of the bulk market is that growers get cash on delivery. This means growers struggling financially prefer the instant cash from bulk rather than building a brand channel." He further explains that the bulk market in California plays a large role in a cultivator's strategy, acting as a pressure release valve when growers need to pay bills. "However, you're concentrated in a commodity spot exchange, which can impact your margin quite severely. When a state opens up for recreational cannabis sales, there's initially more demand than supply. Organizations move quickly to set up cultivation operations to meet that demand, but then the supply/demand pendulum swings back the other way, and prices start to compress sometimes viciously. This is true for both bulk and branded channels. In California, the downward trend in bulk pricing started earlier than expected."
Max Rudsten, Chief Revenue Officer at Posibl
That doesn't necessarily mean that focusing on the bulk market is a failed strategy from the outset. "It can be done, but to be a bulk supplier, you need to be extraordinarily efficient in your daily operations. Mainly, you need money and scale. After all, even though cannabis is part of the wellness industry, it's still agriculture. In agriculture, the more you can scale, the more you can spread costs and lower your cost per pound. For instance, Grown Rogue – another cannabis company – is a beacon of operational efficiency in cultivation. They've managed to stay profitable in a challenging market like Oregon and are starting to replicate that success in New Jersey where the regulatory framework is more favorable."
Branded products
Then there's the other side of the coin: branded products. "The benefits of branded products, however, are not without risks," Max explains. "Building long-term brand equity and loyalty creates consistency in your price per pound. Additionally, branded products are less susceptible to large market fluctuations compared to the bulk market. If a grower invests in intellectual property, even in the face of general price compression, they can maintain more consistent margins." In other words, Max suggests that growers should consider branded products to achieve more stable margins and revenue. However, as the saying goes, if it sounds too good to be true, it probably is. "The risk is entering an extended cash cycle. That's why you need working capital to establish branded products. Without it, building a brand can be very challenging."
Max, a self-described "brand guy," is a strong advocate for diversifying a cannabis company into branded products. This is exactly what he did at Posibl, which operates in both bulk and branded markets. "It's important to always calibrate based on what's happening in the market and diversify," he points out. "As a grower, you have the data to analyze your net profit against the bulk spot market. When growers don't have that data, they may feel they're better off selling in the bulk market."
The bulk market remains a profitable endeavor, and a well-thought-out diversification strategy can help improve a company's bottom line. Max expanded Posibl's business in the branded products segment. "It's an asset allocation strategy," he explains. "You don't want to go all-in on one thing. You need to understand what the right mix of branded and bulk products is for your company."
For more information:
Posibl
posiblproject.com