As recreational markets mature, “house brands” are starting to lose share. What is the importance of branded cannabis flowers in this context? What are the macro trends that drive the evolution of the flower category? How does market segmentation impact this category and how do regulations affect market share across states?
Cantor Fitzgerald analyst Pablo Zuanic offered an industry report that evaluates the performance of branded flower lines in key markets, focusing on Massachusetts.
House Brands Are Losing Share In Massachusetts
Zuanic explained how house brand shares differ from state to state. House brands are owned by the retailer. In some cases, the retailer may also be the grower and in other cases, the retailer may be buying them from a grower selling on a white-label basis.
In Massachusetts, the house-brand share of flowers has gone from 90% in 2019 to 67% in 2022; over the past two years in Colorado, house brands went from 73% to 58% in flowers, 6% in California and 16% in Michigan, where house brands have much less share of flower.
“House-brand share remains high in Massachusetts and Colorado, but the trends are encouraging. That said, the fragmentation in flower share (only four brands in MA have a 2% share or more), share turnover, as well as the shift to value, are all of the concern,” Zuanic said.
As more stores have opened in the state, says Zuanic, many of the owners do not have their own cultivation (a capital-intensive endeavor), “brands are gaining at retail.”
“House brand share in MA at almost 70% is still high (in line with CO), but as the market has grown, so has the “branded wholesale” market, Zuanic said. As per the official state data, total cannabis sales in Massachusetts amounted to $195 million in the first quarter of 2020 (11% branded wholesale share) and reached $437 million in the second quarter of 2022 (31%).
“In that period, the branded wholesale market grew from $21Mn to $135Mn,” Zuanic said. “MA’s flower market remains fragmented, though: We would say the above is good news for the MSOs, as they would typically have the ability to supply the flower wholesale market (although they have a 100K sq ft canopy cap), as opposed to smaller operators.”
But what does this mean for brands?
Wholesale Market Is Quite Fragmented
Only four brands garner more than 2% of total flower share (11 only more than 1%):
- Cresco’s High Supply is 3.5%,
- Bountiful Farms (independent) 2.2%,
- Green Thumb’s Rythm 2.1%,
- and MariMed’s Nature’s Heritage 2.1%.
Share Of Branded Wholesale (As Opposed To The Total Market)
Although this is the part of the market that is growing, “the market still looks fragmented with 10 brands having more than 4% share,” Zuanic said.
- Cresco’s High Supply 10.6%;
- Bountiful Farms 6.8%;
- Green Thumb’s Rythm 6.4%;
- MariMed’s Nature’s Heritage 6.2%;
- Natural Selections 5% (independent);
- INSA 4.6% (independent);
- Ascend’s Simply Herb 4.5%;
- Mile 62 4.5% (independent);
- Curaleaf’s Grassroots 4.4%;
- Tilt’s Old Pal (4.2%).
Cresco’s Shift To Value
Although Cresco leads in wholesale with >10% share (High Supply brand), Zuanic notes the company has lost share on the Cresco brand and gained on High Supply, “for a minimal net share gain (this may change once it introduces its more premium FloraCal brand, now available in IL/MI).” “High Supply is a lower-price brand; 1/8 oz of Bubble Bath strain under High Supply sells for $35 (Sunnyside Framingham) compared with $45 for the same strain under the Cresco brand,” he explained.
Brand turnover
Of the top 10 brands (share of branded wholesale in 3Q22), six had a 0% share in the second quarter of 2021 (High Supply; Bountiful Farms, Natural Selections, Simply Herb, Grassroots) which combined represent a share of 31%. “The other four brands (among the top 10 in Massachusetts in the third quarter of 2022), lost a significant share of branded wholesale,” Zuanic said.
Vertical Integration Trends
The analyst noted that various operators have said “verticalization” is a trend in Pennsylvania, Massachusetts, and other states, “as companies try to adapt to heightened competition, “which has resulted in lower prices, hurting margins, and market slowdown.” Zuanic explained this means retailers acquiring their own cultivation and/or selling more of their own brands through their own stores.
What Is Next?
According to Zuanic, as recreational markets mature, and more store licenses are issued, “brands should gain a share from house brands in the wholesale flower market. However (...) it remains unclear if this will lead to brand concentration over time.”
For example, in California house brands only had a 6% share of total flower sales in the second quarter of 2022, but only six brands have a 2% share or more. In the same period in Colorado, house brands had 58% flower share and only two brands had above 1.5% flower share.
“While flower brand fragmentation is concerning, we see a trend for house brands losing share over time: in Michigan, house brands went from 39% in the first quarter of 2020 to 16% in the second quarter of 2022; during the same period, in CO, house-brand flower share dropped from 73% to 58%. As of 2Q22, house brand flower share in other states was as follows: NV 21%; OR 12%; WA 2%,” concluded Zuanic.
Photo by Venti Views on Unsplash.
