PART TWO: The Bad

This is part two of a three part series on how to survive and thrive in cannabis 2022. Following the theme and characterizations of the classic 1966 western, The Good, The Bad, and The Ugly, we first introduced the Ugly and are now moving on to The Bad.

In Part One of this series we explored some of the recent “ugly” aspects of the cannabis industry. Specifically, the decline in legacy markets, the red ink across the public companies that don’t subscribe to or flamed out on the acquisition growth model, and how the mainstream media have reported both ugly facts about the industry (e.g., teen abuse) and ugly realities about the oppressive regulatory and tax laws the industry is subjected to.

All of this ugliness brings us to the Bad, played in the movie by Lee Van Cleef. It’s clear when he appears onscreen that he is smart, ruthless, slick, and deadly. Wallach’s character refers to him as “Angel Eyes”. And the nickname fits. Van Cleef’s character smiles confidently as he pulls the hammer back and drops three rounds from his revolver right through a victim’s chest.

The bad for cannabis is similar. It’s right in front of everyone’s eyes, doesn’t look like anything serious to those who haven’t figured it out yet, and will be lethal if it’s not dealt with.

The Plague of Complexity Hampers Efficiency and Growth

“The cannabis industry is hard!” can be heard anywhere cannabis industry leaders meet. But some of that difficulty is actually self-imposed or, sometimes, foolishly or selfishly imposed by regulators.

One of the prevailing business models in the industry is what’s known as “vertical integration”. Nearly all of the multi-state operators (MSO’s) do it. But the complexity that model introduces into a new, already complex industry is simply unsustainable; its benefits illusory. Other than in those states in which it is imposed on operators by regulators deathly afraid of diversion, it is self-imposed by cannabis operators who either believe they need to control everything, or who fear quality issues if they don’t.

A 1983 Harvard Business Review article analyzed vertical integration to determine if it truly resulted in greater business results. They concluded that the more complex the industry, the worse results vertical integration would produce. The core problem is where to intelligently invest capital to drive continuous growth. In a highly complex industry, determining where capital was most needed was found to be practically impossible. Every department needs it, and in a new industry that need is a nearly constant drumbeat.

Cannabis is crazy complex. For perspective, in order for the current pharmaceutical industry to more closely match the complexity of the cannabis industry, the pharma companies would need to own and operate their own opium poppy fields as well as owning at least a few of their own pharmacies. Imagine if CVS not only sold prescription medications, it also made those medications in a factory and grew all of the raw ingredients that went into them. Or, to analogize with the auto industry, it would be like Ford Motor Company owning its own cattle ranches in Wyoming to make sure the leather on their dashboards and seats was truly top quality.

I need point no further than Forbes August cover model, Berner, to rest my case on this. His company’s success is built on the simplicity of staying focused on the brand. Specialization has to happen in cannabis in order for companies to be able to perfect their businesses. Cultivators need to stay focused and maintain laser focused investment in improving cultivation methods and driving crop results. Manufacturers need to stay focused on how to maximize the extraction of critical ingredients from the cannabis plant and the formulation, manufacture, packaging and even distribution of their products. Retail needs to stay focused on the customer. Trying to do all three well is a recipe for choking all three to death.

One last analogy to drive the point home for God-fearing readers: To properly invest capital in a vertically integrated cannabis company, you would need to figure out how Jesus split up the loaves and the fishes to feed the masses on the mount. If your mind immediately went to the word “miracle”, you get the point.

Regulation Isn’t Going to Get Easier

As I was preparing this article, President Biden pardoned federal marijuana possession prisoners, encouraged state governors to follow suit, and ordered the review of how cannabis is scheduled for the Controlled Substances Act. It produced an immediate spike in cannabis company stock values and a similar kind of euphoric glad-handing that followed the Berner cover on Forbes. While it’s a very positive development (especially for the folks being pardoned), it hides the Bad that regulation of this industry has developed backwards and will therefore continue to offer its own complexity challenges.

Legalization started in the states, not at the federal level. That has created market barriers and inconsistencies that will not go away overnight, if at all. Anyone watching the recent fight over standardization of the charger ports for smartphones in Europe should understand what is going to have to happen in order for even legalization by the Federal Government to have any kind of impact. And the reality is that the incongruity between the states will continue longer than what would be best for the industry.

For cannabis companies, this means that having a strong compliance partner will continue to be critical to ongoing operations. Working with a law firm that actively tracks legislative changes across various states or specializes in the laws of the one state that a company operates in, is going to continue to be a necessity for cannabis companies. Regulation in and of itself is not necessarily bad. But when that regulation is inconsistent and often unnecessarily complex in some areas while being practically laissez faire in others, it can be very hard for an operator to efficiently scale operations, especially across multiple states.

Progress at the federal level will absolutely help in one key regard: the dormant commerce clause of the Constitution will prevent state level protectionism. That will mean that cannabis strains will quickly become cultivated in the places where they are best grown. It also means that businesses will be able to transport products to other markets, and manufacturing operations that lack manufacturing partners in other states will no longer be artificially restricted to their home market. It will create more competition and less constriction for brands owned by companies that actually produce their own products.

But while the recent actions of the Biden Administration indicate a thawing at the executive level, any legislation anyone might hope for out of our dysfunctionally and, at least on this issue, irrationally tribal Congress will continue to take more time than it should.

The User Adoption Chasm

This brings us to what I consider the “big Bad”. The concept that is out there but operators either deny, think it doesn’t apply to them, or are just plain ignorant about it. That concept is what I refer to as the “User Adoption Chasm”. It has parallels in other industries and, while legalization will provide ways to avoid it or dismiss it as a factor near term, it is absolutely a problem the industry has to deal with.

The concept of a user adoption chasm has its roots in a 1990’s marketing treatise for the technology industry penned by Geoffrey Moore entitled Crossing the Chasm. That book broke down the market for the tech industry into five different market segments with early, mainstream, and late markets, and explained why it was difficult for technology companies to reach mainstream market customers. It also covered how technology companies would need to overcome the chasm in order to achieve the revenue and long term success that results from reaching the mainstream market.

Cannabis is still firmly in the early market stage and struggles to get to the wider audience in the mainstream market – the portion of the market where firms will start to increase revenues even more exponentially than before. The way in which the numbers have started to turn “ugly” in the “legacy” markets (see part one of this series) point strongly to a similar user chasm issue in the cannabis industry.

I’ll put it simply: Not everyone wants or likes to smoke. Some people absolutely shouldn’t. With edibles or drinks, there are still issues with consistency and there are no set guidelines for how much of a single gummy to eat, or a single beverage to drink. Uncertainty about what to take, when or how often to take it, and problems with product dose consistency within products all make it difficult for mainstream customers to get comfortable with trying “something new”.

As Moore explains in his book for the technology crowd, mainstream customers want certainty. They want standards. They want to know that they are paying the right price and getting product from not just a reputable company, but one of the leaders. For cannabis products, they want the same kind of certainty as they get with a product like Tylenol: take two pills every 6 to 8 hours and no more than 6 in any 24-hour period.

Cannabis isn’t even close to that. Instead, it forces customers to rely on the representations of budtenders who generally recommend the products they’re familiar with (read: have tried themselves). And even then, the testing standards and the variability of test results from samples off of even the same plant, makes for a very uncertain experience.

This is a serious blind spot for the cannabis industry in particular. Ask anyone who uses cannabis on a regular basis and you will find two fairly common traits: (1) the near deification of “the plant” that makes it almost impossible for them to understand anyone that might be skeptical, and (2) the belief in the culture that says that experimentation is part of the process and you should be okay with that.

Consider the woman in Colorado who thought it should be perfectly fine to spike every piece of food and drink at her wedding reception with cannabis extracts. It happened in Florida as well. What could possibly go wrong? Right? And that, by the way, is another piece of ugly press that can be used to paint cannabis users and advocates as detached or even arrogant about the acceptability and universality of cannabis products.

Add to that, the mainstream market isn’t okay with it. They may increasingly understand that it no longer makes sense to criminalize it, but they are not totally fine with the uncertainty. And people who have tried once or twice and have not had the experience or gotten the results that they were looking for and maybe even had a negative experience? They’re not coming back for more. The negative press that casts doubt on the products (teen overdosing – two bads in two words in a single article – and drugging your entire wedding party), and the industry (regulated and taxed to the brink of failure), both make the choice to go try cannabis very un-appealing for the more conservative mainstreamers.

In short, until the industry figures out how to overcome the big bad of user adoption, there will be issues. Federal legalization will open the door to additional funding and research that will assist with this. But in the meantime, growth will continue to be limited to those newer markets where the early adopters are still anxious for their first opportunity to buy cannabis products legally. In mature or “legacy” markets, existing players will have to fight over what is essentially just the early market.


In part three of this series we’ll shift gears to what can lighten the tale of gloom that the Ugly and the Bad have painted. Stay tuned for Clint Eastwood’s “Good” to show the way to success.