Marijuana industry optimism fueled by operational upgrades

With recent reports that the U.S. Drug Enforcement Administration intends to reschedule marijuana, operators feel tremendous anticipation for significant, near-term cannabis industry reforms.

Whether it is rescheduling, the adult-use ballot initiative in Florida, recreational sales in Ohio or advancement of the SAFER Banking Act, the cannabis industry is buzzing with excitement for important catalysts to come to fruition – and rightfully so.

While caught up in discussions about the next big announcement, the cannabis industry has overlooked the impressive work marijuana operators did in 2023 to improve operating performance and efficiency.

For many companies, this progress established their ability to survive and even thrive in a world without incremental reform.

High points of 2023

What stands out when you look back at full-year 2023 results, especially the fourth quarter?

Perhaps it’s the cannabis industry’s remarkable resilience in overcoming daunting obstacles such as inflation, price compression, lack of capital and depressed revenue.

While some operators failed or required reorganization under receivership, the majority responded admirably to such challenges.

Companies prioritized generating free cash flow, improving margins, reducing corporate expenses and maintaining discipline in capital expenditures.

Many leaders made tough choices – including reducing head count – to streamline operations, enhance efficiency and address margin pressure from inflation and pricing competition.

Companies not only reduced costs but also honed their cultivation techniques, refined output and optimized processes.

These boosts in operational efficiency are poised to benefit the sector in the long term.

Looking at the cannabis industry landscape, it’s easy to see how businesses will make further efficiency enhancements as they continue to mature.

Also noteworthy: The cannabis industry successfully managed significant debt maturities in the past year.

During 2023, there was very little access to equity capital to help address those maturities, and thus, the industry largely had to work with debt investors to extend those maturities, creating additional runway for refinance or payoff.

While these extensions sometimes led to dilution for equity investors, they were successfully completed.

Strong position for cannabis operators

These actions have positioned operators to continue building cash flow and, in many cases, take advantage of upcoming adult-use conversions to strengthen sales and cash flow.

While regulatory catalysts such as reclassifying marijuana from Schedule 1 to Schedule 3 and advancements in banking practices would undoubtedly provide relief and tailwinds to the sector, they’re no longer viewed as essential for the industry’s survival.

Both publicly traded and privately owned companies have proved their ability to weather extremely challenging environments.

Some have even displayed an ability to thrive – irrespective of regulatory reforms.

These businesses have demonstrated resilience, adaptability and an unwavering commitment to excellence, and their achievements should be acknowledged, even celebrated.

Drive for efficiency

Looking to the future, businesses should continue exhibiting the characteristics that have led to success rather than ruminating about reform.

During 2024, cannabis companies should continue to achieve gains in efficiency, albeit at a slower pace than 2023.

For companies with exposure to Connecticut and Ohio, a focus on outsized growth in those markets will be tempered by a drive for efficiency and cash flow.

Likewise, operators in Florida will largely be cautious in assuming passage of Amendment 3, Florida’s recreational cannabis ballot measure.

But they will be quick to prepare for a May 2025 rollout, should the measure pass at the ballot box this November.

While the investor community obsesses over Schedule 3, SAFER Banking, Amendment 3 and other macro-catalysts, the fortitude and grit of the industry’s leaders will continue to drive progress during 2024 and push this industry forward.

Anthony Coniglio is the president, CEO and board member of Connecticut-based NewLake Capital Partners, which provides real estate capital to state-licensed marijuana operators. He can be reached at aconiglio@newlake.com.

To be considered for publication as a guest columnist, please submit your request here.