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How Traditional Retail & Leapfrogging Affect Growth in the Cannabis Industry

In the early days of cannabis retail, there was no true “commerce.” Data, in the sense that we understand it today, was non-existent.

 

Product diversity was low, strain names were applied haphazardly, and brands in the traditional sense did not exist.

 

Cannabis growth and sales had to be hidden. That early illegitimacy made it difficult to build successful, sophisticated operations.  

 

Recent legal shifts have resulted in massive growth in the cannabis industry. The cannabis industry presents an interesting conflict - on one hand, it is an old industry, having been around for centuries. However, it is coming of age during an incredible technological age.

 

What does that mean for investors? How will that affect what strategies will be effective for growth? First, it is important to look at the challenges specific to the cannabis industry, including:

 

  • lack of customer data
  • lack of consistency in products
  • tax liabilities, specifically 280e
  • capital constraints
  • unrealistic expectations from lawmakers and consumers
  • providing consumers with a consistent product quality and experience

 

Most of these challenges are currently very specific to the cannabis industry, but they are not completely unique throughout history. What is different, however, is the access to technology.

 

“Poseidon recognized these challenges when we launched our fund back in 2013. We saw the lack of technology, infrastructure, and general ‘picks and shovels’ as investment opportunities. We find this part of the industry to be very attractive from an investment perspective as these are highly scalable businesses that are critical to support the industry’s very fragmented yet rapid growth,” says co-founder and Managing Director, Morgan Paxhia.

 

Technology & Growing Industries

Technology has a massive effect on emerging industries and markets.

 

Take, for example, China where consumers went from shopping at local markets to e-commerce shopping - essentially leapfrogging the big box stores of the Western world.

 

“Consumers have embraced technology here much faster than their counterparts in other parts of the world,” says Wan Ling Martello, head of Asia for Nestlé. “E-commerce is bigger in China than in the U.S. and Europe combined.”

 

Similarly, the cannabis industry is poised to leapfrog the traditional retail model in favor of online and e-commerce sales.

 

What is Leapfrogging?

Leapfrogging is a theory of development in which an emerging market's development is accelerated by skipping inferior technologies and moving directly to more advanced ones.

 

In developing countries, the mobile phone is an example of a “leapfrog” technology. It has enabled consumers to skip the fixed-line technology of the 20th century and move straight to the mobile technology of the 21st century.

 

In the case of cannabis, this means skipping over traditional selling and agricultural practices and moving straight to the most efficient and most profitable practices.  

 

How Do Traditional Retailers and Agriculture Grow? 

Traditional retail stores started by using simple pen and paper to track sales, credit, and inventory. Many of those early stores stumbled when technology brought POS systems, data integration, marketing, and online sales.

 

Today, big box stores like Walmart and Target had to master the e-commerce world to survive.

 

Traditional agriculture was a commodity industry which demands incredible efficiencies and scales to survive. As the industry moved away from small family farms, there was a massive upheaval through the creation of Big-Ag – turning agriculture into a manufacturing process. Recently, Agtech came on the scene as one of the first viable investment and growth opportunities for the agricultural industry.

 

What Impact Does Leapfrogging Have In The Cannabis Industry? 

The cannabis industry has the opportunity to learn from the growing pains of the retail and agricultural industries and launch straight into the online retail and streamlined agricultural space.

 

Unlike most traditional retailers who have adopted bits and pieces of new technology over the past 40 years, dispensaries are opening new shops in a new industry with the added benefit of having access to the latest technology.

 

For retail, this means building on real-time data and making decisions on what’s happening today, not months ago. Newer technologies allow product manufacturers to identify opportunities based on market data. Retailers are able to optimize their inventory, sales, and staff.

 

“Being able to benchmark your retail business in real-time ensures that you stay ahead of trends as they happen instead of after they happen.” says Headset’s Co-founder and CEO, Cy Scott. “In this fast moving and rapidly changing market, getting access to data in a timely manner can be a true differentiator for a business.”

 

In the area of marketing communication, the cannabis industry has focused heavily on SMS versus email. Stores are prioritizing loyalty and e-commerce sales. Retailers are unable to use Instagram or Facebook to retarget customers and instead leverage a cannabis-specific CRM software, such as Baker, to grow their business.

 

As the industry grows, current cultivation methods are needing to be disrupted in order to keep up with rising demand. This disruption is coming not only from Big-Ag, but also by the same techniques that are currently disrupting Big-Ag itself; namely advanced vertical farming technology.

 

“It’s exciting that there is an opportunity for the industry to leapfrog traditional Big-Ag techniques such as greenhouses,” says TriGrow Systems Co-founder and CEO, Nicholas Cooper. “When you look at the data, it’s clear that this leads to a higher quality product, at a lower cost of production, and provides a level of consistency and scale that is currently missing from the industry.”

 

Commercial scale operators can immediately begin seeking efficiencies and embracing compliance. This has follow-on effects for retailers and end-consumers as product consistency enables a standardized brand experience.

 

Final Thoughts on the Growth of the Cannabis Retail Industry

Moving forward, expect to see a wave of innovation driving the industry forward in all aspects including cultivation, automation, and integration.

 

In addition, expect to see a lower barrier to entry as the stigma around the cannabis industry disappears. As the industry grows and becomes more successful, more people will enter bringing new ideas and capital further pushing growth.

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