Cowen’s SXSW Wrap-Up

In the fifth episode of The Growth Chamber, Cannabis, Beverages, & Tobacco Analyst Vivien Azer offers a summary of the perspectives coming out of the conference following her conversations with industry leaders at SXSW’s Cannabis Industry Evolution Summit.

The podcast also focuses on regulatory and operating landscapes discussed during the conference as Cowen looks ahead to the remainder of 2022. Press play to listen to the podcast.

Transcript

Speaker 1:

Welcome to Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.

Vivien Azer:

Hi, I’m Vivien Azer, Cowen’s beverages, tobacco and cannabis analyst. This year. I was delighted to attend SXSW for the first time as I presented on a panel with a number of esteemed industry colleagues, but also attended a number of other industry panels, industry cocktails, fundraisers, and dinner. I was very impressed by the Folsom programming that what we saw for cannabis. And there was clearly a lot of interest in the space. As I reflect back on the conversations that we had, that we’ve already released via a podcast, I think there were some very interesting takeaways. Certainly cannabis remains incredibly topical, but also highly debated given the uncertainty around the regulatory landscape. And we got terrific perspective from David Culver, who’s the head of government relations at Canopy Growth. He spoke on our panel and then we also did record the podcast. So I would reference you to that.

Vivien Azer:

But it is clear that expectations coming out of the 2020 election were very high in particular with the Democrats having secured a very thin majority in the Senate, out of the January special election from Georgia. While it was clear to us and our policy team, including my colleague Jaret Seiberg, who wrote extensively on this, that cannabis was not going to be a 2021 priority for Capitol Hill. That was not very well understood by retail investors. And so what we’ve really contended with is a fair amount of stock price deflation really reflecting the lack of regulatory progress. And while it makes perfect that 2021s legislative agenda featured COVID relief for sure first, then it took many months to get infrastructure done. Now, all eyes really are on the second year of the 117th Congress. While there are a number of pieces of legislation that continue to grab headlines, most recently the House taking up the MORE Act again, we are encouraged to see that it seems like there is more alignment from an industry perspective around support of the SAFE Banking Act.

Vivien Azer:

That is certainly my colleague Jaret’s view of the opportunities legislatively, because fundamentally it does come down to the Senate. The House has passed a number of pieces of cannabis legislation, but ultimately it does come down to that very thin democratic majority. And so from David’s perspective, his organization, USCC is very focused on that and really creating a consensus around all of the interested parties that are looking to move cannabis legislation forward. I think that consensus approach has been lacking and certainly David articulated that in our conversation.

Vivien Azer:

And so I think it’s really encouraging to see that at least the industry is trying to find some alignment in terms of their policy priorities, but it’s still early in the legislative calendar. There are a number of things that the Senate is focused on. Certainly US Supreme Court confirmations. We have a war in Ukraine that is certainly taking up some oxygen in the room. So we continue to look to the SAFE Banking Act possibly as late as the lame-duck session for legislative progress there. But in the meantime, 4-20 is just around the corner. Senate, majority of leader, Chuck Schumer has legislation that surely he will be visible on. So it’ll be interesting to see how much attention the Senate is willing to give to that legislation.

Vivien Azer:

Just to better understand priorities across Capitol Hill. From an operator standpoint where obviously regulatory change matters a lot, we had the chief operating officer from Verano Holdings and what Darren and I talked about was really kind of the challenges and opportunities in the cannabis landscape today. Having just come out of fourth quarter 21 earning season, the messaging was pretty consistent that operators are looking for scale, but price deflation is a reality. And we reflect back on the US retail cannabis models evolution over the last two years with COVID. It is clear to us and certainly Darren echoed this, that there are some very challenging comps embedded in the broader revenue profile of the US legal market today.

Vivien Azer:

COVID stimulus was certainly a help, but where the consumer sits today, they’re lapping that’s stimulus. So that’s obviously challenging and they’re facing record inflation. And that’s not just gas prices. Across my untraditional consumer package goods coverage, we offered a report articulating just how strong the of pricing power has been in categories like carbonated soft drinks and potato chips. And the reality is while wages are going up, inflation is going up faster. So you are finding that consumers are starting to have to make choices. The cannabis industry is helping in that regard because the other dynamic that Darren and I talked about was priced deflation. That is a reality.

Vivien Azer:

It seems to be pretty broad based at this point as more and more capacity has come online. And so what operators like Verano are focused on is number one, building out scale, and two leveraging vertical integration. When you are producing the cannabis, manufacturing it into a finished good, wholesaling it and then ultimately in part selling it through your own retail doors, that is how you’re going to maximize your gross margin. So we’ve seen a big emphasis on that.

Vivien Azer:

And the last important point is innovation. Innovation continues to be very important in terms of driving continued consumer interest and engagement in the space in particular, in the face of a deflationary backdrop. And the reason for that is as more illicit cannabis remains available on the marketplace and that’s certainly been true since very strong illicit croptober in 2021, the legal marketplace has to compete more effectively with the illicit marketplace and bringing newness to the category, both in terms of strains and then from a value added standpoint, in terms of form factors really helps continue to drive that consumer engagement in retail channels where pricing can be higher than in the illicit market. Those conversations all really were so well complimented by our discussions with New Frontier Data, where we talked to their chief data officer. And what John and I talked about was really the long term potential of US cannabis engagement.

Vivien Azer:

One of the insights that he and I share is just the importance of looking at consumer data on a long term basis, and then understanding underlying shifts in consumer preference. When we first authored our very first initiation in cannabis in 2016, a lot of the work that we did was informed by multiyear, multi decade data that was coming from US government sources like the NSDUH, which is a national survey of close to 70,000 consumers. While cannabis is a tough thing to survey on from a US government perspective, because not every consumer is willing to admit that they’re using a schedule one controlled substance, the underlying trend is clear. There is a response bias that is rolling off, but it seems also true that newer laps consumers continue to engage with the category. And that’s certainly been proven out by some of the independent data work that New Frontier has done.

Vivien Azer:

So we love that point of validation. Interestingly, they’ve also done a lot of work unpacking underlying consumer trends. And the outsize growth that we continue to see from older consumers, we think continues to be very encouraging as well as the consumer’s interest in migrating beyond the core flower opportunity. So those are both medium term trends to watch.

Vivien Azer:

And then lastly, on a very nuanced consumer trend John and I on our panel spent a fair amount of time talking about the opportunity for beverages. We’ve laid out this case, close to eight years ago that we are very constructive on beverages. And we think that’s where the cannabis industry can really find opportunity in dislocating that marginal alcohol unit. We think that opportunity very much remains intact.

Vivien Azer:

And then of course you can’t have a conversation on cannabis without talking about social equity and the role that all of us play as industry participants and being support of remedying all the wrongs from the failed war on drugs. And we were delighted to speak with the executive chairman of the Last Prisoner Project Mary Bailey. LPP is doing phenomenal work in addressing the over 40,000 inmates that are still incarcerated in our prison system for nonviolent cannabis offenses. They continue to have great success in terms of prisoner release, family support, as well as reintegration into society, which are the three main pillars of the nonprofit’s platform as well we were really encouraged to hear about the support that they’re getting from the US MSOs either in terms of matching or in store visibility around the importance of LPP.

Vivien Azer:

And so as partners to LPP at Cowen, we are glad to support their efforts and continue to be very impressed by the good work that they’re doing on the ground. So that’s the summary of my very first SXSW. I had a lot of cannabis content there, which we are excited to share with you in summary fashion. I’m Vivien Azer, Cowen’s beverages, tobacco and cannabis analyst.

Speaker 1:

Thanks for joining us. Stay tuned for the next episode of Cowen Insights.

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