BDSA CEO talks market research, cannabis investing, challenges, opportunities and more
In this edition of "Rising High," The Fly conducted an exclusive interview with Micah Tapman, chief executive officer of BDSA, a Colorado-based cannabinoid market intelligence and consumer research firm. Here are some of the highlights:
CANNABINOID MARKET RESEARCH: BDSA was formed in 2015 and provides retailers, manufacturers, brands, wholesalers and investors with understanding of the cannabis market by generating insights from point-of-sale data, consumer research and market-wide industry projections. “I was one of the initial investors who got the company up and running and the idea was to create the premier market research firm for the cannabinoid industry,” Tapman said. “The reason that I invested in the company to start was because I didn’t have any data on the cannabis industry to make investment decisions.” He said the company is focused on providing third-party agnostic data about the state of the market and started off with a lot of trend analysis and understanding of market share. “It started with market research around Colorado and rapidly expanded to now have global coverage of the cannabinoid market on both the THC/marijuana side and the CBD side,” he said. “We cover 40 plus countries with market forecasts looking out about five years into the future. We also have consumer research which really lends a lot of context to what consumers are looking for, their attitudes and their behaviors of how they think about cannabis and how they use cannabis.”
CANNABIS INVESTORS: Investors interested in getting into the cannabis space really need to understand that it is a very fragmented market, Tapman said. “Every state in the U.S. is at least its own market and frankly a state might be two different markets,” he said. “It’s really critical to understand the maturity of the market that you’re looking at and of course whether or not the company you’re talking with can operate in different markets.” The CEO noted that Canadian licensed producers are not typically allowed to operate in the U.S. under Toronto Stock Exchange rules, but companies like Trulieve (TCNNF), coming out of Florida, have a different listing that allows them to operate across the U.S. states. “It basically changes their addressable market and that’s a very basic first level analysis that an investor can do to understand the markets that the company is really planning to operate in and can legally operate in,” he said.
Tapman said population is also an important factor in determining total addressable market but math can get a little wonky in thinking about the availability of products under the regulatory scheme of a particular state. “If a state opens up sales of cannabis and has a very laisse faire approach to the regulatory structure, meaning basically anybody can open a dispensary and product is readily available, the population of the state will probably translate pretty quickly over to good sales,” he said, “In another state, for example that has a very tight regulatory policy, you may find that the availability of product is severely limited because of local ordinances or state regulations so despite the population being quite high, you’ll actually see suppressed sales because of the regulatory structure.” The CEO said investors should also look out for a large number of SKUs at a company, which could be a red flag as every SKU has some overhead cost. “That’s a cost concern for any investor looking to get involved is essentially just spending too much money on too many different products,” he said. “The other cost is really almost an opportunity cost where there’s that paradox of choice issue for consumers.” The CEO said when a shopper sees 17 different flavors of the same vape pen and doesn’t necessarily know which one they want, they might actually end up going with a competitor who only has three different options. “These companies that overdiversify their SKUs can sometimes find themselves really just cannibalizing sales or creating that paradox of choice,” he said. “You contrast that with companies that tend to be a bit more focused, who are really trying to build up their SKUs to appeal to different consumer segments and different types of shoppers without cannibalizing their own sales.”
LEGALIZATION: When asked about the potential federal legalization of cannabis in the U.S., the CEO said BDSA anticipates legalization of some sort in 2022/2023, but notes national commerce is expected to take a bit longer. “We can see the federal government legalizing cannabis but there being a regulatory structure in place that really keeps it as a state-by-state market for some period of time,” he said. “The big change that will come with federal legalization is the opening up of the financial system to support the cannabis market.” Tapman said the inability to have normal treasury services has been a major impediment to cannabis investors and companies seeking a return on investment and operators have spent an inordinate amount of time making sure they have backup plans in case they get shut down by their bank. “That is directly related to the U.S. Government’s federal position with cannabis as an illegal substance,” he said. "As soon as the government changes that, I think we anticipate sometime in the next 2022/2023 seeing that initiative pass, that will change the banking regulations.” The CEO added interstate commerce will take time due to the fragmented state-by-state market, but it will completely upend the cannabis industry when it takes place.
CORONAVIRUS: The coronavirus pandemic has impacted many companies globally and Tapman said he has seen certain effects in different areas for the cannabis industry. On the financial side, the pandemic has created crisis for almost every state government, he said. “This will lead to a drive towards tax revenue from cannabis sales,” Tapman said. “Shifting cannabis sales from the black market to the legal market, I think will be a very high priority for governments around the country.” He added that dispensaries were also deemed essential businesses during the pandemic, increasing awareness of the space. “That reiterated the importance of the cannabis ecosystems and economy,” he said. “Particularly, people recognized that there is a real medical use of cannabis, there are a lot of patients using cannabis, so the stores are very much essential to those patients.” The CEO also highlighted the transition towards pre-order systems and delivery. “We expect this to sustain and we’ve seen in the data at BDSA, particularly in delivery, the percentage of fulfillment by delivery rose significantly during the pandemic,” he said. “It’s maintained over time. We believe that is because the shoppers are already on the platforms and they are going to continue using those platforms that they now have accounts with and are comfortable using.”
CHALLENGES: When asked about the biggest challenges facing the industry, the CEO said the largest hurdle is the lack of infrastructure in the space. “If you’re running a brand in the cannabis sector figuring out distribution of your product is a major, major challenge,” he said. “This is very different than a lot of other more established industries where distribution is a pretty well-oiled machine.” Tapman noted the logistics of the alcohol distribution network are very well established, making it easy for someone to figure out how to enter that network. “You look at the cannabis industry and you realize all of sudden, I don’t know how this is supposed to work because it is still being figured out,” he said. “We’ve seen that with California or Colorado, distribution has often had to be handled individually by a company. We’re really just starting to see the consolidation of distribution of the larger companies.” The CEO added that from an investor point of view, the lack of infrastructure dramatically slows down the rate of expansion of a company as they are busy dealing with the logistics of distribution.
OPPORTUNITIES: As the cannabis space develops, Tapman said he sees both short-term and long-term opportunities in competing in the market. “There’s a little bit of a short-term opportunity concept to think about and we’re seeing that in the limited license states like Florida and Ohio, where there is terrific opportunity to make great returns in some of those limited license or emerging markets,” he said. “That contrasts with some of the largest opportunities, which are in places like California, which is highly competitive, very challenging to work with but will be by far the largest cannabis market in the world for the foreseeable future.” The CEO said companies and investors will have to ask themselves whether to chase the shorter-term returns in a state like Ohio or pursue the massive opportunity of states like California. “Those are the two different big types of opportunities that I see,” Tapman said, noting that Wyld and Trulieve are two companies that appear to be doing well with completely opposite approaches.
CANNABIS STOCKS: Other publicly-traded companies in the space include Acreage (ACRGF), Akerna (KERN), Aleafia (ALEAF), Aphria (APHA), Aurora Cannabis (ACB), Auxly Cannabis (CBWTF), CannTrust (CTST), Canopy Growth (CGC), Canopy Rivers (CNPOF), CordovaCann (LVRLF), Cresco Labs (CRLBF), Cronos Group (CRON), CV Sciences (CVSI), CURE Pharmaceutical (CURR), Delta 9 (VRNDF), Emerald Health (EMHTF), FluroTech (FLURF), General Cannabis (CANN), Greenlane (GNLN), Green Thumb Industries (GTBIF), GrowGeneration (GRWG), Harborside (HBORF), Hemp (HEMP), HEXO (HEXO), IM Cannabis (IMCC), India Globalization Capital (IGC), Indiva (NDVAF), Indus Holdings (INDXF), Inner Spirit (INSHF), Innovative Industrial Properties (IIPR), Khiron Life Sciences (KHRNF), Liberty Health Sciences (LHSIF), MediPharm Labs (MEDIF), MedMen Enterprises (MMNFF), MJardin Group (MJARF), Neptune Wellness (NEPT), Omnicanna (ENDO), Organigram (OGI), Planet 13 (PLNHF), Sproutly (SRUTF), Stem Holdings (STMH), Sunniva (SNNVF), Supreme Cannabis (SPRWF), Valens (VLNCF), TerrAscend (TRSSF), Tetra Bio-Pharma (TBPMF), Tilray (TLRY), Trulieve (TCNNF), Village Farms (VFF), Vireo Health (VREOF), WeedMD (WDDMF), Wildflower Brands (WLDFF), YSS Corp. (YSSCF), Zynerba (ZYNE) and 4Front Ventures (FFNTF).