Scaling a business is always a high-stakes endeavor, but the risks are magnified in the legal cannabis space, where every business is in perpetual startup mode and regulations vary from state to state, week to week.
Just because it’s difficult doesn’t mean it can’t be done.
Having served at the helm of a multibillion-dollar retail grocery company during a period of corporate soul-searching and restructuring—and having successfully steered the nation’s second-largest supermarket chain onto a stable growth trajectory—I know firsthand that successfully scaling a business, even in cannabis, comes down to crafting a revenue growth strategy around a few core tenets.
Master your space first
Coach Bob Knight claimed, “The key is not the will to win. Everybody has that. It is the will to prepare to win that is important.” These words apply to business as aptly as basketball. In this case, preparing to dominate your local market is the essential first step. Successful scaling starts with mastering your backyard before expanding to others.
What goes into mastering your backyard? Things like establishing a solid business model, taking the time to understand your customer base, and staying on pace with your capital structure.
Your business must be profitable before you attempt to scale it.
That’s something Albertsons Inc. learned the hard way when it found itself heavily overextended in the early 2000s, saddled with massive debt and a number of assets that meshed poorly with the company’s core structure and customer base.
I was part of an investment consortium that in 2006 acquired more than 600 Albertsons stores and several distribution centers after the retailer was broken into separate entities. To rebuild market share and set ourselves on solid footing, we deliberately downscaled by closing low-performing grocery stores and halting online delivery until we had restored our core business to profitability. Within three years, Albertsons’ sales rebounded, growing from approximately $10 billion to more than $60 billion.
Cash never goes out of style
Indeed, profitability is essential. Your business must be profitable before you attempt to scale it, or you’re looking at a lot of pain. We’ve seen this repeatedly in the past year of cannabis industry turmoil, where companies’ revenue hasn’t caught up with operating costs and cash has dried up.
For many cannabis businesses, part of mastering a local market and establishing profitability involves vertical integration within that market. Controlling your own supply chain, which often best can be achieved through strategic acquisitions, boosts profits and access to consumers in a market. Brand building also is an important part of the equation. Understanding retail, pricing, and product mix to develop and launch new branded products boosts output and further expands your customer base as general brand awareness increases.
Again, mastering your backyard is key.
Get people and culture right
Building an all-star team is essential to any business’s success. When it comes to cannabis—where every business is a startup—finding employees who can thrive amid the shifts and pivots of startup life is critical. A diversified talent pool is crucial. In a rapidly advancing sector like the cannabis industry, balancing your company’s plant-centered knowledge base with experts in areas such as finance, technology, and consumer packaged goods is invaluable.
Don’t underestimate the power of company culture, the best of which is rooted in corporate social responsibility and good community stewardship. Ethical sourcing, sustainable production, showing appreciation for hard work—these practices aren’t just good for your corporate karma and employee morale. Such facets of your company culture are key to building the goodwill you will need to scale in highly regulated environments.
Buttoned-up for the big leagues
Once you’ve mastered your backyard with a solid business structure propelled by the right employees and company culture, you’re ready to expand strategically. When you do, steady growth is the name of the game.
You’ll need access to capital to begin scaling into new markets through strategic mergers and acquisitions, synergies, and product differentiation. Because traditional bank loans remain rare in the cannabis industry, private-equity funding is the main avenue. That’s why it’s imperative to prove your business model early on. Risk-averse investors will make decisions based on your profitability index, and cash flow and profits are a large part of that.
My advice to cannabis entrepreneurs and executives looking to scale is this: Don’t try to reinvent the wheel. Take a few key pages from a more traditional corporation playbook by prioritizing a solid foundation over lightspeed growth and learning from the successes and failures of other companies that have attempted to build economies of scale.
