As the cannabis industry grows, so too does its level of professionalism. Cannabis consumers and medical patients are looking more than ever to branded infused products, and these manufacturers are beginning to look more like traditional consumer goods companies than onlookers would expect from the marijuana industry. As manufacturers build their business models though, they need to make a decision – should they keep a tight focus on a single product type or develop a diversified portfolio of brands and line extensions that touch many different product categories?
The leading brands of chocolate, baked goods, and sugar candies – the most important categories within California’s edible cannabis market – all come from specialized companies that focus on being the best in one niche of the market. These companies – Cheeba Chews in sugar candy, Kiva in chocolate, and Korova in baked goods – are also the only ones to have accumulated market share of 5% or more in the California’s edibles space. To top it off, great distribution allows each of them to dominate their subcategory in each of California’s main metropolitan markets.
Given these strong examples of how to build a leading edibles brand, why would any company diversify away from its core product? For companies that remain specialized, their growth is limited to the strength of their brand and distribution within the state. Once they have a strong presence throughout the state, and a dominant position in their product niche, they can only expect to grow so much more. Of course, California is a massive market and there is still much potential to be tapped in terms of distribution and loyalty, particularly with the possible legalization of recreational cannabis, and those that have fully tapped California’s potential can turn their focus to other states.
However, building a strong distribution network in the highly fragmented cannabis industry is difficult, time consuming and expensive. Many companies have chosen another route; rather than competing on distribution through the state, they are building up sales through a more diversified product portfolio. They don’t dominate any important subcategories of California’s market, but they have carved out strong competitive positions second only to the specialized leaders we met in the opening paragraph. Indeed, when you look past Cheeba, Kiva, and Korova (the “Big 3”), only six other edibles brands exceed 2% market share in California. Four of them are diversified companies that compete in a range of edibles subcategories.
The blue bars represent diversified companies. They trail the Big 3 brands in market share, but they tower over the rest of the market – which is not included on this graph, but does not include any brands with more than 1% market share.
The specialization strategy has clearly been powerful for the Big 3 leading edibles brands. But diversification has also allowed some important companies to break out of the pack and accumulate far more market share than the average edibles brand (remember, over 500 brands have less than 1% market share), and leaves the door open for massive expansion opportunities and the ability to dominate up and coming product categories.
It is worth noting that too great a degree of diversification can be distracting. Two of the diversified companies highlighted in this post, Bhang and G FarmaLabs, compete in multiple product categories. Both have seen their non-edible product lines lose ground since the beginning of 2016 – G FarmaLabs in pre-rolled flower products and Bhang in concentrated cartridge products. Their share of the California edibles market has remained relatively constant in the same time period. Both companies are heavily engaged in pursuing operations in other states, so their pursuit of national branding may be taking a toll on operations within California. In this nascent stage of the industry, there is room for brands with both strategies but as competition heats up in coming years, companies who focus on diversifying without effectively building their brand and loyal customer base are sure to lag behind.
To read more about what makes customers loyal read our Top 5 Takeaways for Customer Loyalty & Insights for Dispensaries: How to Build Customer Loyalty.
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