PBS recently aired an episode of Frontline, titled “Amazon Empire: The Rise and Reign of Jeff Bezos.” The Frontline investigation examined how the Amazon CEO built the company, as well as how it achieved rapid success and its global impact.
The program references Amazon’s “Gazelle Project.” As an Amazon executive explained in the PBS episode, “Bezos wanted staff to pursue publishers the way a cheetah pursues a sickly gazelle.” The executive quotes Bezos as saying, “The cheetah looks for the weak, looks for the sick, looks for the small.”
“That’s what you go for,” the executive added. “So, don’t start with [the] No. 1 publisher. Start with No. 7, and then No. 6 publisher, and then by the time you get to No. 3, 2 and 1, the noise has gotten back to them. They’re going to know this is coming, and chances are you may be able to settle that without a full-on war.”
The goal was to lure smaller publishers with Amazon’s vast distribution network, and then slowly change the terms to some that were more favorable to Amazon, which they called “Pay to Play.” Examples of this include Amazon receiving a higher share of the sale proceeds and having the ability to set pricing.
As a personal example of Amazon’s reach: I am not an Amazon member, and never have been in any fashion. I’ve never purchased from the company, never received a package, nor watched a program on Amazon Prime Video services. Yet, I’m forced to pay Amazon, as it takes a cut of profit from every physical sale or Kindle sale of my book, over which I have absolutely no say other than to refuse to sell through Amazon.
The consequences of that decision would be a massive loss of sales. In essence, one is forced to capitulate or suffer retaliation, like an offer you can’t refuse.
Cannabis Gazelles and Cheetahs
The reason for this Amazon perspective is primarily for comparison, in that the cannabis industry’s trajectory is eerily similar. There has been a flurry of merger-and-acquisition activity in the cannabis industry in recent months, with a handful of portfolio companies trying to control entire supply chains and multistate operators (MSOs) acquiring assets across the hemp and cannabis industries. Investors who pursue distressed assets, often referred to as vulture investors, are taking more prominence in the cannabis space, as well, reinforcing this “cheetahs vs. gazelles” analogy.
A combination of factors defines a gazelle. Burning through cash at a rapid clip without having the income to justify expenses sets up a company for a takedown by a better-funded cheetah, or, worse yet, a vulture investor. (See the sidebar below for more on vulture investing.) Gazelles also struggle with product quality and consistency, leaving them without a solid strategic advantage to compete in the marketplace. This lack of quality is either due to not prioritizing producing quality products or from an inability to do so.
Cheetahs, on the other hand, are very well-capitalized organizations that make strategic decisions on how to spend that capital. Their revenue is either generated from even better-funded investors who believe in the company’s vision, from strong sales revenues, or a combination thereof. Cheetahs can produce quality cannabis products and command a higher price from consumers.
I’ve seen many companies make purchasing or strategic decisions with the intent of positioning themselves as cheetahs that completely backfired, leaving them cash-strapped and limping. For example, a company I once contracted with purchased more than $100,000 worth of induction lighting for all three stages of growth, which was a wrong decision that had to be rectified. Then, the company spent early capital to order custom catwalks at a cost of $650,000, not realizing that the catwalks were useless and would never be utilized in growing cannabis.
That company, which shall remain nameless, was recently acquired by an MSO in an all-stock deal despite having multiple licenses in the state it operated in and having invested millions into the project over five years. And so a gazelle falls.
Canadian LP Canopy Growth was another company that came out of the gate looking like a cheetah: The company was expanding in multiple international markets, often through the hemp/CBD side of the industry, and at one time boasted the largest market cap in the world. However, this rapid expansion led to the publicly traded company over-extending itself to the point where it was posting massive losses quarter after quarter. That made Canopy a target for Constellation Brands, an actual cheetah that has since gone on to double down on its investment and replace former CEO Bruce Linton with David Klein, a former Constellation Brands team member.
Since taking the reins, Klein began the work of a cheetah: He liquidated unproductive assets in Canada and in international markets, letting go of hundreds of employees in the process, bringing to light Constellation Brands’ vision for its investment.
The Future of the Cannabis Kingdom
Many cannabis businesses, especially those without strong financial backers or strategic advantages, have been struggling to keep the doors open. The COVID-19 pandemic compounds these challenges, which might accelerate the rate of cannabis gazelles falling. That means holding companies, vulture investors and large MSOs can have their pick of the litter.
All of this conglomeration may not seem like much now, but if current trends persist, the industry as a whole could end up being controlled by a few well-funded cheetahs.
Therefore, I ask myself what happens if 10 publicly traded companies control a majority of the cannabis market 10 years from now? Will brands keep up appearances as independent brands similar to how things operate in the beer industry (like with Blue Moon, which once was a small craft operator but now is owned by Anheuser-Busch)? In other words, will craft producers be absorbed into the mass production model (by cheetahs), while giving a facade appearance that it is still a craft product? In the end, will customers’ options be limited to only what the cheetahs produce?
I don’t believe so, because the cannabis industry, just like the animal kingdom, is filled with more than cheetahs and gazelles, and not every gazelle is limping. If businesses can’t be cheetahs, at least they can work to not be sickly gazelles.