Home Field Advantage

Imagine if Jim Beam sold 10 times better in Kentucky than in any other state? What if Coke’s revenue per population were markedly superior in the state of Georgia than anywhere else? While different geographies surely have varying preferences, the success of a product shouldn’t be solely based on the location of its corporate headquarters. So what gives in cannabis?

GTI, Cresco, Verano in Illinois, Trulieve in Florida, Harvest in Arizona, Cannex in Washington, the list goes on and on - and let it be noted that all the above examples are very strong companies with footprints all over the country - but their home states are typically their most impactful and efficient operations by a comfortable margin. Admittedly, some of this can be chalked up to being in the right place at the right time, as these markets evolved with medical and adult-use activations.

But things get more interesting when you look within a single large state like California. Even though operators are free to do business throughout the entire state, there are very clear geographic strengths and weaknesses for the larger players within the different regions (Norcal, Central Coast, LA, Inland Empire, etc.). The areas of most strength almost exclusively correlate with where each company has the most employee headcount. Leaning into one of our favorite sports analytics’ concepts, there’s a strong gravity to the corporate HQ.

So what is it that makes this phenomenon keep popping up over and over again? In our opinion, there are a couple factors that all stem from the local connectivity that companies only get when they live and breathe a singular market.

1. Supply Chain - It’s common knowledge that supply chains are immature everywhere in the industry. It’s hard enough in mature states like CO, WA, CA and OR, where there are real supply chains. But try navigating the byzantine maze of producers, distributors, and manufacturers if you’re from out of town and then layer in nuanced regulatory structures that favor different approaches. Not to say it’s  impossible - it's just much harder from the outside looking in than the other way around.  
2. Sales Contacts - Retail stores in cannabis are a highly fragmented business. There is no retail “kingmaker” like there is in traditional CPG (Whole Foods, Target, etc.) that can run a regional test for your products and then roll it out over their whole platform if it catches on. As each market grows more competitive, every door that you sell your product through in cannabis becomes a knife fight of hyper local relationship management (think the knife fight in Michael Jackson's seminal music video "Beat It" and you have the right idea). These are oftentimes long standing relationships between close friends and operators that are hard to break into from the outside. Oftentimes these relationships aren't just based on friendship or even on price, but on repeated reliable performance and a willingness to be adaptive to each others' needs - something an outsider has difficulty proving.  
3. Distributed Decision Making - Imagine you’re building a house in the same neighborhood you currently live in. It’s by no means an easy proposition on its own but if there are any items to be picked up or decisions to be made you can walk over to the house, look the contractor in the eye and see the situation first hand and quickly do what needs to be done. How would that process change if the house wasn’t in your neighborhood but rather across the country? Think of how much money and time you save being close to the decision itself. It’s hard to trust decisions of such magnitude to teams that are across the country and don’t have the same skin in the game as you.  Even worse is that the real authority rests with an HQ that may be a time zone or two away. The result is often paralysis in decision making that hinders the team in both time and reaching an optimal conclusion.
4. Regulatory - Cannabis isn’t just a local business - it's hyper local. Knowing the mayors, the sheriff, the zoning board, etc. is often essential. Locals get things done in a much more efficient manner because they know all the secrets and how to unlock them. The outside players have to hire local representatives to fight for their causes as it is - the operators playing “at home” already know all the right people on an intimate level that is very difficult (and costly) to duplicate. Again, this is not just because the "game" is rigged, but oftentimes because there is an efficiency of trust between people who have known each other and worked together for a long period of time and happen to call the same place home.  

So what might this all mean? In our opinion, we think there are a group of local “Scrappy Operators” who may not get the headlines or attract the capital of the larger players, but who run extremely resilient, battle-tested businesses that will be tough to beat on the local level (within our Bengal family, we refer to this as our Scrappy Operator Club - SOC). Efficiencies of scale can certainly exist in cannabis, but much less than they do in almost any other industry, due to the regulatory complexity and the fact that you can’t ship products over state boundaries.

What matters more than efficiency is the hyper local knowledge of the customer, the supply chain, the regulatory landscape, and the retailers which equates to a massive home field advantage to companies around their home turf. Some of this will most likely change over time, but we see the market potentially evolving in a way most like how the craft beer industry did in the US. The local players were by no means eliminated just because Budweiser or Miller came into town. Authentic, scrappy, local operators will always be hard to unseat. Just ask the big players - in many cases they still do their best work on their “home field.”

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