Winning Strategies for MSOs: Navigating Growth, Innovation and Regulatory Challenges

By Lexie Barton, Director of Client Strategy, BDSA

The cannabis industry has faced significant challenges in the past year, though shifting macro-environmental factors indicate a promising outlook. Multi-state operators (MSOs) are particularly well-positioned to succeed, with anticipated growth driven by the opening of new adult-use markets in states such as Florida, Ohio and Pennsylvania. New York’s adult-use legalization is also expected to have a significant impact in the coming years.

To capitalize on this growth and succeed in this rapidly changing industry, MSOs must navigate the competition, refine pricing strategies and develop strong wholesale channels while staying up-to-date on shifting market dynamics and consumer preferences. A possible rescheduling decision this year would elevate the industry further. Rescheduling remains a top priority for many, with significant support for full legalization from both industry leaders and key political allies.

State of the Cannabis Industry

Price compression continues to mitigate further growth in MSO-dominant markets, such as key adult-use markets like Illinois, Maryland, Massachusetts and New Jersey, where MSOs own over 60% of brands. As more businesses prioritize third-party expansion opportunities, there is an opportunity to optimize promotional investments for increased growth. Retailers and manufacturers should consider slightly reduced discounting for brands and products that are less price-sensitive.

Price compression has also highlighted new product opportunities in the market, and value-focused categories like shake/trim/lite have experienced an increase in dollar share. Although price compression continues to affect sales growth in key markets, MSOs are well-positioned to introduce new products that meet consumer needs while further developing their premium product portfolio to capitalize on the growing premium market.

For many years, MSOs have prioritized internal brands on the shelf to drive more substantial margins. However, many MSOs are now facing license caps in the market and growth solely from retail expansion is becoming less feasible. In mature markets like Colorado, assortment is a key driver for consumers when selecting a shopping location, and the wholesale channel offers a primary avenue for growth.

Market Trends and Challenges

Some mature cannabis markets are experiencing a downturn. California, the largest cannabis market globally, is driving much of the decline in the total U.S. market due to its size. However, BDSA’s latest market forecast suggests a potential return to growth for California, dependent on anticipated retail expansion and successful regulatory efforts to control unregulated competition. Sales in Colorado are also decreasing, driven by a decrease in pack units. Oregon, which stands out as the only mature market experiencing growth, has softened declines by implementing a license moratorium.

In growth markets like Michigan and Missouri, single-state operators (SSOs) predominantly control the market, owning approximately 50% of brands, particularly in key volume-driving categories like flower and vape. While this presents a competitive landscape for MSOs, Florida, with its potential for adult-use legalization, is a market ripe for opportunity. Despite current constraints due to the lack of an adult-use industry and high retail saturation, adult-use legalization in this market could unlock additional growth opportunities and new consumer segments.

Brand Differentiation in a Competitive Market

Effectively building and differentiating your brand in competitive markets requires a deep understanding of your consumers and your company’s ability to efficiently produce high-volume items for profit. A concentrated strategy is crucial as markets and consumer preferences continue to evolve. MSOs that successfully launched brands in 2023 focused on innovation and consumer value, steadily expanding distribution throughout the year. This strategic approach will continue to drive success throughout the remainder of 2024.

Many successful brands offer tiered product portfolios. MSOs can benefit from premium pricing strategies in new adult-use markets with high prices, as observed in New Jersey and, to some extent, Maryland. Conversely, mature markets with intense competition favor large, value-focused products such as shake/trim/lite and disposable vapes. To capture incremental growth, brands can build recognition through flavor-forward strains or those with legacy roots. Unique strains tend to experience significant growth before multiple brands begin selling them, while new strains drive trial volume.

Successful Expansion into New Markets

Brand expansion depends mainly on a brand’s ability to scale quickly and efficiently. Specific categories serve as strong volume drivers in both new and mature markets. Flower, for example, is typically a trip-driving category that offers brands a chance to build familiarity despite being a highly competitive and saturated market segment. Some brands have successfully driven volume through a single product format, such as infused pre-rolls or gummy edibles, but strong brand houses and distribution strategies often support these successes. Developing a portfolio that includes both a trip-driver category like flower and a basket-building category like pre-rolls has proven successful. Competitive pricing is also crucial in the cannabis industry, as low prices continue to be a top consideration for consumers in the U.S. Pricing competitively within each price band is essential for securing consumer trial and purchase, especially in highly competitive markets.

While the cannabis industry continues to navigate headwinds, there remains significant potential for growth, particularly for MSOs. Effective brand differentiation and expansion into new markets will require a deep understanding of consumer preferences and efficient production strategies. MSOs that focus on innovation, consumer value and strategic distribution will continue to thrive, positioning themselves as industry leaders and capitalizing on the promising future of the cannabis industry.