Similarities between the cannabis and wine industries:
- Terroir: We have heard many guests speak of the terroir of their vineyard (be it the unique geography, the biodynamic techniques, etc). Cannabis growers also find importance in the soil and land in which they grow. Unique landscapes and soilscapes lend to different tastes, smells, effects, and experiences.
- Fragmentation: Neither the wine nor the cannabis industries are winner-take-all markets. There is room, and profit, to be had for small individual vineyards/farms that operate on a smaller scale. There are advantages and disadvantages to being a smaller operator. One is unable to leverage economies of scale; but, smaller scale operations appeal to more evangelical consumers.
- Geography: North of San Francisco is known for two crops: grapes and cannabis. The 'Emerald Triangle' consists of Mendocino, Humboldt, and Trinity County and is the largest producing geography of cannabis in the United States. Similarly, Napa and Sonoma are the most well known wine regions in the US. It is no accident that these two geographies are so well known.
Differences between the cannabis and wine industries:
- Consolidation: As we've observed in several cases, there are large wine conglomerates. Be it a large alcoholic beverage player, or a family-business that owns a suite of offerings, horizontal consolidation does exist in the wine industry. In the cannabis industry, due to regulatory and capital constraints, consolidation has not yet occurred.
- Branding: In my opinion, cannabis cultivators will eventually be commoditized and will have difficult generating profits unless they operate on enormous economies of scale. The winners in this space will be those business's that generate significant brand loyalty. However, to date, in the wine business, there is brand recognition (although certainly not as loyal as in other alcohol verticals). In the cannabis space, this brand recognition doesn't yet exist. There are some brands that are starting to break away (Bhang chocolates for example); however, the winners and losers haven't yet truly been established.
- Interstate Commerce: In the wine business, despite heavy and complex regulatory restrictions, cross-state commerce is possible. The three-tiered system is difficult, but it does create quite nice barriers to entry for new entrants. In the cannabis space, inter-state commerce is a death knell and explicitly forbidden.
There are many opportunities to compare and contrast these two similar, but different, industries. Interesting times ahead for cannabis indeed!
Very interesting george! A question I had in my mind when comparing wine vs. cannabis is whether there are strong distinctions within the supply chain? For example winemakers purchase grapes from other vineyards for blending - is there a similar dynamic with cannabis? Or is it more like what is grown is sold?
ReplyDeleteGreat post, George. On geography and branding, I read a book a while back called Too High to Fail, written by a journalist who spends a growing season together with cultivators in Mendocino county. He describes how they were trying to create a brand for Mendocino Grown cannabis similar to the brand for Napa Valley wines. They emphasized the organic growing process, superior quality, yatta yatta yatta. There are some brands (e.g. Flow Kana) that try to capitalize on that distinction, with cute little labels that talk about how they were sustainably grown, etc. On the other hand, I agree with you 100% that the product is at heart a commodity; much of the perceived quality of a brand like Flow Kana has to do with the sexy packaging they use.
ReplyDeleteThis made me wonder whether cannabis growers were using similar category signaling strategies as the wine industry. It looks like there are at least a few cannabis growers certified as biodynamic, but the USDA makes it impossible for a cannabis farm to be certified as organic (although 1 hemp farm in Colorado looks to have succeeded in obtaining USDA organic certification). Interestingly, third parties have popped up in the space to try to create their own certification programs. So it seems there is an awareness here around the potential commoditized nature of cannabis, but it remains to be seen whether these categories actually make a difference to the cannabis consumer.
DeleteLove this post, George. I'm not in your class (took it last year), but I'm super interested and have worked in the cannabis space and enjoyed your breakdown. As you mention, the power of the regulatory limitations and differences between states can't be understated. I'm biased given I worked on the regulatory side, but it will be interesting to watch how it unfolds over time and across states as the industry continues to develop. Interestingly, we had lobbyists come to our office to try and create a licensing structure for distributors to directly mirror the alcohol industry. And obviously Washington began its system in an attempt to match the three tier system but changed tack some months later. We also had these third party certification programs come and lobby the office, and we wanted to laugh them out of the room. From a branding perspective, I'm most intrigued by the opportunities upmarket and particularly in edibles.
ReplyDeleteAs to the terroir component, I think it's interesting and certainly valid to comment on the unique "tastes, smells, effects, and experiences", but a concern I find unique to the cannabis space is that it's really hard to control for effect/experiences. Whereas wine will differ from year to year in terms of flavor and quality, the effect of wine remains the same. Where cannabis brands will face difficulty is that differences year to year or batch to batch in their input product have much broader consequences. If customers cannot count on consistency over time in a product when it comes to effect, and effect consistency is impossible also across customers, I think it presents a unique branding challenge. Also, will the quality of the trim that's put into edibles continue to matter, or is processing going to become the differentiator as it has in different types of creative winemaking styles? I have oh so many questions :)