What Can Cannabis Operators Do to Impact Profitability?

By: Jay Czarkowski, Founding Partner, Canna Advisors

The news is currently saturated with stories about unprofitable cannabis businesses. However, compared to other industries, cannabis is eking out slightly more profits than the average U.S. business.

Regardless, every business owner could stand to improve profits. Many analyses focus on standard cost issues related to cannabis businesses such as 280E tax implications and inefficiencies from the prohibition of interstate commerce. No doubt, these are real issues and are an onerous financial burden. But, until legalization gets sorted out at the federal level, there’s not much business owners/operators can do about these burdens.

Let’s focus on what they CAN impact: People

For all parts of the supply chain – profitability comes down to two things: people and scale. The scale of experienced, proven talent has not kept up with the growth of the industry. There is a small and rare subset of talent that has been continually successful at scale in cannabis operations.

A recent Leafly report showed 107,000 new cannabis jobs in 2021. That is a staggering 33% increase year-over-year and equal to 280 new jobs every day, without the soon-to-be operational and sizeable markets in the Northeast. Based on my experience in other states, we could see 1,500 additional retailers in New York and New Jersey in the next 24 months.

So the industry is faced with a people problem. There are simply not enough people with proven success under their cannabis belt to occupy these roles.

How to Address this Gap: Dispensaries

First make sure your org chart has the correct roles. Don’t skimp. Don’t combine unmatched skills or experience into one monster role. Set up your operation – and your team – for success by first knowing the key roles that drive profitability.

Hire for these roles first: retail directors, inventory managers, and buyers (and let them build out their teams). Build these roles into your business plan and financial model. Raise the capital to cover the salaries at the right level. Then, commit to rigorous standards when filling each role.

These roles will help mitigate the top 2 profitability mistakes for dispensaries: product menu and curation (what to buy) and inventory management (how much to buy).

They will also mitigate the other five mistakes commonly made in retail cannabis: vendor relations and negotiations; ordering and intake processes; POS and inventory management systems; forecasting, reporting, and pricing; and, margin and promotion strategies.

How to Address this Gap: Processors & Wholesale

We’ve all seen top brands lose market share over time. What may not be clear on the surface of these failures is one commonality: lack of experienced sales leaders to build, scale, and cement their position in the market.

There will be cannabis brands that become lasting icons. To do that profitably, building a sales-driven organization is imperative. As with dispensaries, making sure that key roles are identified and properly funded is the goal.

From there, the challenge is finding experienced sales leaders who have built and led top cannabis brands, had successful exits, and have repeated that same process on multiple occasions. Do what it takes to hire the best sales executives with a proven track record of industry-specific, sales-specific success.

Get creative. Take it in phases. Consider fractional or shared services or outsource proven talent to fill your Chief Revenue Officer and SVP of Sales roles. Don’t skimp here. These roles are the foundation of your profitability.

For phases, think about hiring and planning in the pre-operational phase with a separate phase for after you win your license. The pre-operational phase is the time to build out sales strategies to enter the market with a bang. Plan an inescapable launch and hire an unstoppable sales force. Once you get the licenses, implement the plan you just built.

And, you will need to build-in scalability and continually revamp sales strategies. Consider ways to cement your position in the market to stay fresh, relevant, and at the top as market conditions change – both on the consumer side and the competitor side.

Federal legalization could be a while. In the meantime, plan for scalability, manage critical roles, and hire experienced people to improve profitability.