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Sir Isaac Newton famously said, “If I have seen further, it is by standing on the shoulders of giants.” This sentiment rings especially true in cannabis, where too often we find ourselves needing to build from scratch. Federal prohibition blocks the cannabis industry from tapping traditional tools like banks, financing and technology, requiring us to forge our own path forward.
Building from the ground up is no small task, as anyone in the space knows. We’ve made incredible progress and the industry has grown tremendously both in terms of size and sophistication. The problems, however, are going to continue to get more complex. Rather than going through painful learning, we have a natural second-mover advantage that allows us to learn from and tailor best practices from more mature industries. These, in turn, empower operational effectiveness, eliminate waste, free up capital and push our industry forward.
I’ve had the opportunity to share my views on the importance of trust in our industry, both with consumers so they understand the benefit of buying from the legal market, and amongst ourselves. I’ve also talked about how we need to embed data into our key decisions and processes.
Today, we’ll take these conversations and apply them to foundational best practices we see in other industries, such as consumer packaged goods (CPG), big-box retail and grocery. In examining these industries, we can pull out learnings directly applicable to cannabis and adapt them to serve our industry’s nuances.
I’ve worked at retail behemoths such as Amazon and Walmart while also having the chance to analyze retail, wholesale and manufacturing supply chains across CPG, apparel and grocery as a consultant. These experiences helped me understand how critical it is to optimize the supply chain to maximize operating profits and cash flow. What I’ve found is much of these companies’ success is built on their deep collaboration with supply chain partners, from wholesale suppliers to transportation providers. Integrated planning, detailed analytics and aligned incentive structures separate the winning CPG and retailers from the rest.
In reality, most big box stores don’t pay for the products on their shelves until those products are sold. Instead, they utilize data to forecast demand, understand customer segmentation and optimize price points. With the proper tools and this critical information, they set terms that ensure the product is sold well before they have to pay for it, ultimately mitigating working capital requirements and days of inventory on hand (DIO).
Most cannabis retailers are simply unable to pay their suppliers because their working capital is tied up in inventory. This is rarely due to mal-intent and is often because cannabis is nascent and the market unpredictable. Coupled with a lack of proper business tools, this has contributed to a massive $3.8 billion delinquent payment problem across the industry, according to a recent Whitney Economics report. That amounts to more than 1.5 months’ worth of all U.S. cannabis retail sales.
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The situation is preventing cannabis retailers from investing in and growing their businesses, and it’s pushing cultivators and processors to the brink of, or even into, bankruptcy. LeafLink, my company, has felt this firsthand with retail partners that couldn’t keep up with invoices. When retailers can’t pay their suppliers, it breeds distrust among operating partners, further limiting the ability to solve the root cause.
Large CPGs and retailers have extensive data and collaborate with their supply chain partners to dial in their forecasting, but they also have large teams that develop, analyze, refine and execute on these models. These powerful forecasting tools become a large part of their moat because the capital expenditure is not feasible for smaller-scale operators. Instead of these tools being owned by individual operators, cannabis entrepreneurs must lean on technology providers to build solutions that leverage the scale of the industry to justify the investment.
Some companies already recognized the need for cannabis tools derived from mature markets and built them. CASA, with which LeafLink entered a strategic partnership, is exploring solutions by providing professional services to retailers with real-time, actionable data to help them make purchasing and pricing decisions. These mimic tools that are commonplace in other industries and have a proven track record for helping businesses run their operation more efficiently.
We must also leverage known solutions that are sensitive to the industry’s specific nuances. In discussing the challenges of the space with our customers, we’ve found forecasting (e.g., high SKU turnover, nascent brands and inconsistent supply chains) is a root cause of working capital issues and gross margin maximization. To solve the direct pain points around forecasting, incentives and working capital, we launched PoST, or Payment on Sell Through. With PoST, retailers and brands collaborate on their orders based on actual sell-through. Further, it sets a dynamic payment term tied to the actual sell-through of the product.
This frees up cash for other investments and lowers the risk of trying out new products. It also automates the accounts payable process, ensuring payment flows from retailer to seller, ending the delinquent payments problem and the mistrust it breeds. For sellers, this means more frequent, guaranteed payments and a window into how products are moving, helping them better understand where to invest their cultivation and processing efforts to create efficiencies.
The end result is a more collaborative partnership between brands and retailers, with aligned incentives, where they’re working together to optimize product sell-through and give consumers what they want.
Still, in the shadow of federal prohibition, we’ll need to continue to think broadly about how the cannabis industry can build its own solutions to mirror those that work in mature industries. Cannabis will always be a unique industry and while we can take lessons from mature markets, they’ll need to be adapted to match that uniqueness. However, with every new solution that’s created, we move the industry forward and better serve customers.
“}]] Cannabis will always be a unique industry and while we can take lessons from mature markets, they’ll need to be adapted to match that uniqueness. Read More