Viridian Capital Chart of the Week: Cannabis Industry Consolidation: Opportunity, Threat, or Inevitability?

• The five largest U.S. MSOs combined accounted for approximately $4.8B (12%) of cannabis industry revenue in 2024. No single competitor represented more than 5% of the total. This share is down from 17% in 2021, as large private companies and small public companies have together increased their share by 8%.
• Approximately 30,000 small companies with average revenues of around $0.7M accounted for about 64% of the total 2021 industry sales.
• In contrast, the 9,800 U.S. craft beer companies in 2024 represented only 21% of beer revenues, while the top five accounted for 79% (compared to 73% in 2021).
• Is consolidation an opportunity, threat, or inevitability? Our recent work on return on investment (ROIC) demonstrated that cannabis industry ROIC lags that of most industries it is compared to, including alcoholic beverages. Consolidation will boost ROIC in several ways: a more oligopolistic industry will finally gain some control over pricing, aiding margins. Similarly, eventual interstate commerce will offer opportunities for significant economies of scale in cultivation and distribution, further boosting margins while also reducing the capital intensity of the industry. Many observers view this as a threat to the viability of smaller competitors. But the beer and wine industries tell a different story. There are thousands of small breweries and vineyards, and many do quite well by specializing in the premium end of the market, even though the larger concerns produce the vast majority of volume. There is likely to continue to be many thousands of small craft cannabis producers and thousands of retailers.
• Substantial consolidation is practically inevitable. As cannabis approaches legalization, the necessary scale of businesses will increase. The industry is capital-intensive, and considerable investments will be required to establish national brands, develop distribution systems, and establish centralized production facilities.
• Another powerful driver of consolidation is the cost of capital. The table’s rightmost column displays the 2024 EV-to-revenue multiples for the market cap brackets. The average valuation multiple for the largest MSOs is significantly higher than that of their smaller competitors, implying a substantial cost of capital advantage that makes it much more difficult for the smaller companies to maintain growth.
• Moreover, the size of likely new entrants to the industry dwarfs current competitors. The average enterprise value of the top 5 alcoholic beverage companies is approximately $19 billion, more than nine times the size of the largest MSO. Similarly, the smallest of the big three tobacco companies has an enterprise value of more than three times as large as all cannabis companies combined.
• As the industry gets closer to federal legalization, we anticipate a wave of consolidation as companies seek to position themselves to achieve economies of scale in production, marketing, and logistics that are not yet available in the state regulatory regimes.
• As in the beer industry, there will always be thousands of craft cannabis companies, but the share of revenues earned by the largest competitors is likely to double over the next five years.

*Note: all Data in the above chart is based on year end 2024 values