Contrary to popular belief, the legacy cannabis market presents a wealth of opportunities for strategic investors, particularly in independent retail. With valuations at an all-time low and businesses seeking creative ways to make deals, this may be the ideal moment to invest or acquire within these markets.
This is an opportunity not to be missed from highly profitable operators seeking retirement to those just one step away from financial stability.
This is an opportunity not to be missed from highly profitable operators seeking retirement to those just one step away from financial stability.
Independent retail operators in legacy markets face significant challenges in today's economy, including oversupply of flower and biomass, commoditization, peak saturation, and harsh tax regimes that have resulted in significant margin erosion. These conditions make it difficult for individual operators to succeed and profitability can only be achieved through aggressive cost management and close collaboration with suppliers to reset trade terms. Despite these efforts, there is only so much an individual operator can do alone.
This is where portfolio accretion comes into play. By integrating a standalone retail business into a larger portfolio, significant improvements can be made immediately. Upstream vertical operators, such as cultivators, manufacturers, and distributors, can remove friction and reduce variable expenses like COGs and taxes. Furthermore, operators with larger portfolios have the ability to centralize fixed costs through a shared services model, reducing overhead costs by as much as 50%.
Independent retailers stand to benefit the most from this strategy, as SG&A and COGs typically account for 50-70% of their total expenses. Portfolio buyers, also known as "rollups," are capitalizing on this trend and are structuring acquisitions to occur immediately or over time in multiple steps. This allows sellers to monetize their hard work upfront while spreading purchase risk over time. Buyers and sellers have never been more willing to share risk in the legacy market.
The future of the legacy cannabis market looks bright, with potential improvements in state regulations and taxes, more municipalities opting in to retail, and the possibility of regional and eventually federal legalization. These developments will create new value and credibility for the industry, making it an exciting time to invest in the legacy cannabis market.
In conclusion, despite the challenges faced by independent retail operators in legacy markets, there is a path to growth and prosperity through portfolio accretion. With favorable conditions for buyers and sellers, this is an opportunity not to be missed for those looking to invest in the cannabis industry.
