How to Ensure your Cannabis or Hemp Extraction Business Survives 2020
The year 2020 is one that will go down in history as one of the most challenging in most peoples’ lives. And not just for the inconveniences of the seemingly never-ending pandemic, but also for the very serious challenges caused by the worst economic contraction in the last 100 years. And yet in the midst of these challenges, the cannabis and hemp retail markets are experiencing healthy growth that would allow some to feel cautious optimism.
The medical and adult use (recreational) market growth has been much better than expected in the first half of 2020. Retail sales in the US are forecasted to eclipse $15.5 billion by the end of 2020. Overall, this is an increase of approximately 40% over 2019 sales ($10.6B), according to the Marijuana Business Factbook.
While the long-term future looks promising for the industry, in order to ensure the growth of your business you need to meet consumer demand by focusing on end-products that consumers are demanding the most and change and adapt your extraction business accordingly. The fact that we cannot only survive but thrive by producing the products that people are seeking the most seems obvious to some but bears calling out for the people in the back. Why? Because we all get stuck in our little ruts and sometimes forget to keep our finger on the pulse of market research and waxing trends.
So How Do You “Future Proof” Your Extraction Business?
First, don’t be romantic about which extraction method or technology (ethanol vs. butane vs. CO2 etc.) is your weapon of choice. If you invest exclusively in one particular method or technology, you may lose everything when the market shifts. No one wants to end up with a warehouse full of obsolete equipment.
Second, don’t be too attached to the type of products or derivative you produce, whether that be the cannabinoid you’re chasing, a specific derivative form, or an end-product.
This lesson is illustrated by the huge CBD price drop in 2019. Over the course of 45 days in May 2019, the average cost of CBD dropped 30%. Now, a year later, the cost for CBD distillate has dropped from $7,500 per liter to about $700 per liter. Too many producers lost everything by creating business models that focused on CBD alone.
The trick to surviving a massive shift like this is to diversify—develop secondary and tertiary revenue streams to protect your initial plan against market fluctuations. If everyone is getting on the bandwagon then you’re probably already too late! Do something different. Forecast where the consumer demand is heading and, most importantly, get there before your competitors.
The trick to surviving a massive shift like this is to diversify—develop secondary and tertiary revenue streams to protect your initial plan against market fluctuations. If everyone is getting on the bandwagon then you’re probably already too late! Do something different. Forecast where the consumer demand is heading and, most importantly, get there before your competitors.
In such a volatile and fast moving industry it pays to be agile and adaptable to ensure that your extraction business is in it for the long haul. Consumer trends come and go, so doing your homework and staying attuned to consumer demands now and in the future is critical for business success.
CBD vs. THC is Old Hat: It’s Now All About Cannabinoid Manufacturing
You don’t have to go too far back in time to remember when all everyone talked about was CBD vs. THC, or adult use (recreational) vs. medical, as if these were simple “either/or” choices.
The future of the industry was, and is, far more complex than those conversations convey. You have to be prepared for the evolution of the industry to ensure that you can meet demand for a wide variety of cannabinoid derivative forms and end-products
What a lot of people don’t understand is it’s not just about producing vape cartridges or producing “full spectrum”, terpene-rich oil or distillate. At the end of the day, it’s about using various cannabinoids derivatives to make a wide variety of end-products.
As the cannabis and hemp extraction industry hurtles forward, most manufacturers are focused on growing as large as possible in the THC and CBD spaces. Processors and retailers, on the other hand, are finding that a more nuanced approach is required for successful cannabinoid manufacturing. Focusing solely on THC and CBD could be a myopic approach as consumers demand new “cutting edge”cannabinoids like CBG, CBN, and Δ8-THC.
So, it pays to ask yourself: “What is the hot cannabinoid right now and how can I capitalize on it?”
As an extractor—or rather a cannabinoid manufacturer—you have to stay agile, smart, and in-tune with the market. Your end-product will often define your business model, but you have to be flexible enough to change direction when consumer demand shifts.
Stay Agile and Extraction-Agnostic to Market-Specific Needs
In the cannabis and hemp industry, adapting to market trends means being flexible.
Just take look at successful MSOs (multistate operators). Most successful MSOs are not overly attached to a specific technology, an extraction or refinement method, or even to an end-product. Instead, they remain agnostic to extraction methods, and flexible and open-minded about outputs.
Being agnostic to extraction methodology means you have the flexibility to meet consumer demand when it shifts.
At Apeks Supercritical, we’ve been educating our team on an extraction-agnostic approach for the last year at least. To really be able to dial in on a CO2 platform, an ethanol extractor, a hydrocarbon system, or any combination of these at a moment’s notice. That sort of flexibility allows you to capitalize on market trends, making multiple SKUs, and really get your brand out there. It’s the key to running a successful cannabinoid manufacturing business.
But you don’t have to be an MSO to be successful in the “green rush.” Instead, your passion may be in wanting to make small batches of a high-quality connoisseur product rather than trying to be everything to everyone. And this is a valid niche to aim for.
Most big MSOs are only focused on making distillate and isolate they’re missing a huge market opportunity. The majority of the money in both the white and black markets is being made through various different concentrates like dabs, sauce, diamonds and other derivatives. These types of “niche” or “craft” products may be the perfect opportunity for smaller extraction businesses to capitalize on.
Regardless of whether you’re starting a small business or an MSO, the key to success is the same: stay flexible and adapt to the prevailing winds. This means:
- Understanding and staying informed of the current state of your market
- Prioritizing the consumer and their demands
- Preparing for up-and-coming cannabinoid derivatives and their end-products
- Having processes and technologies in place to accommodate shifting needs
- Anticipating the next legislative changes for your state
If you build a business that considers all of these factors, you’ll have a competitive advantage over inflexible and hyper-specific processors. Ultimately, it comes down to understanding what the market needs and using that understanding to work backwards while still playing the long game.
Navigating Market-Specific Extraction and Processing Solutions
All of the above sounds simple, right? But how do you navigate market-specific extraction and processing solutions for your business without wasting money on equipment or technologies you may not end up needing?
This is really only a question you can answer. Ultimately it depends on your state’s rules and regulations. So do your homework before putting money down.
Start by asking yourself some critical questions:
- Have you done your market research? What are the popular skews in my market? What’s the best extraction method to produce those?
- How am I going to build a small platform for each of these different extraction methods? Remember: you need to be agile so you can move with the market.
- What are my state’s policies/regulations for hemp/cannabis extraction and processing today?
- What extraction methods are allowed, which are not?
- How likely is it that my state flips to full adult use in the near future?
- What’s my niche? Is it full-spectrum extracts or isolated cannabinoids?
- Are you launching your own B2C consumer brand or are you satisfied with selling your product wholesale (white labelling)?
- What is the anticipated biomass availability to ensure that you meet demand?
As you’re planning your cannabinoid manufacturing business it’s wise to embrace an organic growth strategy with your production focused on what you are legally allowed to make now (re: state policy specifics). At the same time you should ensure that you don’t overproduce derivatives to avoid the risk of end-products that won’t move due to market saturation.
Pivoting from “Medical” to Full Adult / Recreational Use
With the US election in early November, we had another 5 states either to full adult use, medical or a combination of both:
- Arizona – recreational
- Mississippi – medical
- Montana – recreational
- New Jersey – recreational
- South Dakota – medical and recreational
And, so far, this has been the pattern in the US. The state will dip its toe in the water by going medical first and then transition to full adult/recreation use.
As cannabinoid manufacturers, we need to be adaptable to these sudden changes and evolve along with the industry. A smart—and ultimately successful—extraction business will have a plan in place for if, and when, their state transitions to ensure they’re at the starting line when the floodgates open.
For example, if you want to start out as a hemp extractor focused solely on producing CBD products with less than 0.3% THC, consider building the infrastructure necessary to comply with common THC regulations. That way when policy change allows for medical or adult-use THC sales you’re ready to capitalize on a new market before a majority of the competition.
Making sure you can meet demand is only half the battle when your state flips from medical to adult use. Branding and marketing is the other half. It almost doesn’t matter what your brand is in an emerging medical market, because only a set number of licenses are released by each state government. This means if you can get your products to a dispensary they will sell.
But when your state flips to adult use, all of a sudden the dispensary is flooded with already existing out-of-state brands that have had years to build a following. The game becomes highly competitive. How do you navigate that highly competitivelandscape? With outstanding brand marketing that’s how.
Just like any other industry, if you want to build a successful business, your brand and its marketing becomes a critical factor in its success.
A good comparison to the evolution of the cannabis industry is the microbrewingindustry for craft beer. Small companies thrive in their local areas because the locals want to support their local microbrewer. The same approach works for cannabis. Consumers want to buy locally–made and sourced cannabinoid derivatives and can take advantage of a “local” approach with marketing and branding by pushing their local heritage and culture.
Ultimately, there’s a cliche about tough times that bears repeating: there’sopportunity in adversity. While everything we aim to do is about gleaning valuable cannabinoid extracts from this wonderfully complex plant, it’s not a bad idea to diversify your approach in these unprecedented times and hedge your bets.