How Canada’s drinking problem can help the cannabis industry

For some reason, the universe seems to be provoking me.  I had laid to rest the topic of disruption as a component of strategy development.  In particular, my argument was that profound cultural change happens at its own pace, and cannabis industry efforts to accelerate consumer acceptance of pot, as a recreational alternative to alcohol, won’t be triggered by legalization.  The whole idea of a sudden disruption, an event or process that would encourage retailers and consumers to divert shelf space and purchasing power from alcohol to pot, was more of a hope than a plan.

Whether or not I’ve read the tea leaves right, the whole topic became impossible to resist last week when a friend met me for coffee after a job interview with one of the big cannabis companies.  While I waited for her at my favorite cafe, I scanned the papers and leaned that:

Incredibly, all of these stories were scattered through the papers within a day of my friend's job interview.  Of course, she already had her own perspective on the pace of the industry’s maturation, having worked for about a year with an executive of a European cannabis start-up, with interests in all aspects of the business, from growers to retailers.

While she was naturally optimistic about the pace and direction of the final regulatory framework, and about a clear path from market capitalization through to production and sale, she didn’t disagree with my general observation about the pace of cultural or social acceptance, as reflected in retail and consumer behavior.

Nor did she disagree with my contention that disruption, as a strategic or tactical measure, was more a hope than an intention, and is generally recognized after the fact rather than in advance, when plans are normally made.  However, being extremely clever and well-informed, she reserved judgement on whether an unforeseen miracle was in the offing – something that would liberate some space on store shelves normally occupied by liquor bottles, or loosen up some consumer dollars normally spent on favourite brands of beer, wine, or spirits.

The hope is understandable.  The company she was joining has billions of investor dollars weighting its balance sheet.  In a mature industry, strong market capitalization is regarded as an advantage, provided the company has a use for all that money, and that its use will provide a reasonable expectation of a return over a reasonable period of time.  In fact, a full war chest of capital can make a company more agile, more able to seize opportunities than rivals who lack the resources or are encumbered with debt.

This is true, to some degree, for cannabis companies; however, the advantage it confers on them is lessened by the fact that their competitors have also banked loads of investor cash, and by the fact that government decisions will determine whether or not sufficient returns will be generated within a reasonable period of time.  Slow, restrictive, and uncertain implementation of regulations might delay the anticipated explosion in sales necessary to reward investors for their early and generous investments in production capacity.  Not all investors are in it for the long haul, or are interested only in share value.

If this happens, the business media may start to talk about the industry as if the bursting vaults of other people’s money has migrated from the “asset” to the “liability” column of the balance sheet.  A prolonged period of forestalled revenue expectations can make share value become a major distraction from the real business of competitive positioning in a period of uncertainty about what the government will do, what it will allow, and how far or how fast it will permit the achievement of company growth objectives.

It’s a bit like packing way too much gunpowder into a cannon.  There is an optimal balance between the range of target, weight of shot, and quantity of propellant.  This is especially concerning since multiple layers of government agencies will determine when and how detonation will occur.  If too much time passes before they get to blow their wads, these companies will have a harder time hitting their targets.

They all know this and have a variety of contingency plans to deal with this uncertainty.  Still, it must create a lot of anxiety not knowing the likelihood that their Plan A, which is their promise to investors, might be in tatters before the battle begins, and indeed, and that they might be reduced to implementing plans B, C, or D before it’s all over.

No wonder Mark Zekulin, president of Canopy Growth Corporation, spoke so hopefully about the prospect of a social disruption at The Walrus Talks late last year (which I have discussed in more detail here).  Everything would have been solved, and Plan A would be firmly in place, if such a disruption was imminent.  But I didn’t hear any clear idea of what, other than divine intervention, might effect such a sudden and profound change in the market.

None of this leads me to despair for these companies because the consultant in me would urge them to seize on the factors they can control, and, rather than subject their fortunes to the whims of government, aggressively drive policy in a more favourable direction.  While that can be a scary proposition, everyone in the cannabis industry knows what the final outcome will be, if not the pace, of the change.

If, as the Canopy executive opined, some market share must be transferred from alcohol to cannabis retail, in various product forms, in various wholesale and retail environments, and this transfer is favoured by the comparably benign effects of cannabis, then why not employ strategies that make the alcohol producers and retailers more accountable for the damaging effects of their products?  There are plenty of advocates in our communities for reduction of the harms of alcohol abuse, and many more that might be animated with the right inducements in the college of physicians, first responders, the insurance industry, the judiciary, and academia.  Why has the cannabis industry not brought pressure to bear on the alcohol industry and on government regulators, to reduce alcohol’s overwhelming advantages at the retail end of the business?

I would suggest that this hasn’t happened in a sufficiently aggressive and coordinated manner for two reasons.  One is that the cannabis industry feels that it’s operating from a weak position as a business that is still, in statute at least, illegal.  The second reason is that it still relates to government as a supplicant, seeking not to challenge the authority and wisdom of the people who are effectively controlling the scale of commerce and the rate of growth for these companies during a delicate phase of their development.

This is understandable, given the prohibition mentality left over since the criminalization of cannabis in 1923 and the vulnerability of a fledgling industry to government fiat.  However, it doesn’t reflect the current reality.

It should also be recognized that governments have become addicted to the tariffs and taxes they collect on the sale of alcohol.  Naturally they would prefer to avoid disturbing the comfortable and lucrative relationships they’ve developed with that industry through their own marketing agencies, like the LCBO and Brewers Retail in Ontario.  Even if cannabis can equal or surpass the percentage government takes from every alcohol transaction, from import to retail, government is already invested in a tried and true revenue generator, built on a complex framework of reliable business relationships.  Aversion to change is understandably strong.

The government is already committed to legalization and there are powerful arguments for this decision that the cannabis industry should employ to make the public and legislators more willing to accelerate the acceptance of pot as a consumer choice, on an equal footing with booze.  It will incapacitate or kill fewer people, and it will reduce the cost and harm of needless policing and incarceration.

Government has already made the calculation that the public is coming to the same conclusion.  Push the arguments a bit farther and the retarded implementation of change will be seen as the affront to reason and decency that it actually is.

If we can all agree that it shouldn’t be a crime to use cannabis, then many will agree that it is wrong for people to be convicted and punished for it, as we have done and selectively do still.  Likewise, it is indecent that people can’t buy pot as easily as they buy booze when the latter causes unacceptable rates of colon cancer and liver damage, among other things, when the former does not.

Here’s a good example of what’s possible, drawn again from the papers that morning: the government is being urged to put product warning labels on alcohol containers, similar to the graphic health warnings emblazoned on every cigarette package sold in Canada now.  That may seem insignificant, but mobilization of the groups backing that measure would create a very public dialogue about the unacknowledged risks of alcohol consumption and would open a gap in the national agenda for consideration of pot’s relatively slight health consequences.  What better way to deromanticize a martini than to see it being mixed from bottles labelled with photographs of scorched livers or lesioned intestines!  It creates a point of product comparison that raises questions about government’s powerful role in the promotion of alcohol consumption and its late, slow, and inhibited role in allowing access to marijuana as an alternative.

My point is that the supplicating relationship between the cannabis industry and the government can be corrected by shifting the perception of criminality all the way over from the past prohibition of cannabis to the government’s slow, incremental approach to decriminalization.  Just as cannabis use was once seen as crime, the conditions exist to make the public and their political leadership recognize that it’s a crime to inhibit change and marginalize cannabis in the market place.

This bold strategy might actually produce the disruptive effect that the cannabis industry seeks.  It would be intentional, not a post-facto explanation of something that occurred at the government’s pace.

Back to a strategist’s perspective, the time is right to pressure government indirectly, by using some of those investor billions in a campaign that mobilizes informed and influential groups in society – doctors, emergency medical workers, lawyers, judges, and other pro-cannabis or anti-alcohol activists - to pound home the message that the real crime was never the possession, consumption, production, or sale of cannabis.  The real crime is that it took 95 years for government to cease punishing citizens for it, while hypocritically investing in the tacit promotion of alcohol consumption.

The effect of that campaign would constitute disruption as an intentional element of strategy.  Hand-wringing about hope that such a disruption will arise elsewhere, led by others, is leaving a critical success factor to chance.  That is the opposite of business strategy, which by definition seeks to create and exploit advantage over rivals.

Perhaps the problem is disunity within a young industry.  Maybe a really strong, well-funded trade association is required organize and resource all the logical advocates for change.  However, this too is a strategic consideration.  Right now, the most damaging competition for a company like Canopy isn’t another cannabis company, it’s the old alliance between government and the liquor industry.  Drive a wedge between them, and space will be made for more rapid introduction of cannabis products on retail shelves in the various outlets being considered by regulators.  That, in turn, will accelerate sales revenue, which will help to satisfy the investors currently piling on to the biggest producers.  Production is critical, of course, but in proportion to sales, which is where the greatest uncertainly currently lies, their expectations can only be met by ensuring that government treats cannabis and alcohol with some equanimity.


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