Competitive Rivalry: A Race to the Bottom

Cannabis is, at its core, a commodity. Consumer behavior makes this undeniable: most buyers shop by price and potency, not brand story. Unlike craft beer, which built genuine affinity around brewers and origin stories, cannabis has struggled to generate the kind of loyalty that protects pricing power.

The structural conditions driving this rivalry are severe. Cannabis is perishable—operators cannot stockpile inventory to smooth pricing cycles or ride out market dips. Indoor cultivation carries enormous fixed costs: HVAC systems, lighting, labor and an ever-expanding compliance burden. High fixed costs meet perishable inventory: the worst combination in business. Producers keep running even as margins turn negative, chronically flooding the market with product they cannot afford to hold.

Exit barriers compound the mess. Cultivation facilities are highly specialized assets. When economics sour, there are few buyers for a purpose-built grow. Weak players stay in the game because leaving is too costly—and in doing so, they keep competitive pressure alive for everyone else.

State-by-state licensing adds a final twist. Rather than allowing operators to build national scale—which might create cost advantages that stabilize competition—regulation fragments the market into local fiefdoms where economies of scale are extraordinarily difficult to capture.

New Entrants and Substitutes: Pressure From Every Direction

If the rivalry within legal markets is brutal, the forces surrounding them are no less hostile. The threat of new entrants remains persistently high: every legislative session in a new state opens a fresh market, seeding fresh competition virtually overnight. Multistate operators move quickly, but so do hundreds of smaller players chasing the same usually finite licenses.

The threat of substitutes is arguably more dangerous still, because it comes from an unexpected adversary: the very market that legalization was meant to displace. The illicit market offers the same product with no tax burden, convenient delivery and pricing that undercuts legal dispensaries at every turn. Legalization promised to starve the black market. In many jurisdictions, it has instead created a two-tier system where price-sensitive consumers can simply shop down the street.

Jason Ambrosino, founder and CEO of Veterans Holdings a New York cannabis manufacturer, distributor and cultivator, puts it plainly via email "Legal operators are not competing solely against one another. We are competing against an entrenched illicit market that pays no excise tax, carries little regulatory burden and often operates with lower costs. In many ways, the illicit market establishes the baseline against which every legal operator is measured."

Hemp-derived THC products—delta-8, delta-9 and THCA flower—have added an entirely new dimension. Nationally distributed, they now sit on gas station shelves at price points that legal cannabis operators struggle to match. Beyond cannabis itself, alcohol and pharmaceuticals compete for the same discretionary dollar, further diluting the addressable market.

The Buyer and Supplier Problem — With a Capital Twist

Buyer power is high and rising. Consumers in mature markets are price-sensitive and brand-agnostic—they will drive to the next dispensary, or call their legacy contact, without a second thought. As dispensary chains consolidate, they accumulate leverage over cultivators and brands, squeezing margins further upstream.

This is why brand building matters more than many realize. Rob McPherson, a retired former President of Bacardi Canada with over 25 years in consumer packaged goods who has experience in the cannabis sector, argues via email that most entrants misread the landscape from the outset “If you decide to enter the legal recreational cannabis industry, understand you are entering the consumer packaged goods industry," Success depends on identifying a target consumer and building a product proposition that resonates more compellingly than the alternatives—not simply growing good flower.

On the supplier side, the dynamic shifts as the operator base contracts. As businesses fail or consolidate, the remaining buyers gain negotiating power—but this is cold comfort in an industry where contraction reflects structural distress rather than healthy maturation.

All of this without accounting for another force that Porter’s model does not name: federal illegality. Cannabis remains federally prohibited, which means issues with banking, taxes, cost of capital, etc. This burden—which no other legal industry bears—amplifies every force in Porter’s framework, turning thin margins into existential crises and making even modest missteps fatal.

The Verdict — and What the Framework Cannot See

Porter's framework delivers a clear verdict: cannabis scores poorly on almost every structural dimension. Intense rivalry. Low differentiation. Near-perfect substitutes. High fixed and exit costs. Brand-agnostic buyers with no switching costs. Add punishing tax treatment and capital constraints, and the case against entry seems overwhelming.

But this is not a framework problem—it is a structural reality that operators must reckon with honestly. Ambrosino, who has seen the industry from the inside, is candid: "Cannabis is not an easy business. For most entrepreneurs, I would advise against entering it." Yet he stops short of a blanket dismissal. The companies that do survive, he argues, share a common trait—they are not cannabis enthusiasts who learned to run a business. They are operators who learned cannabis. "The industry has produced a lot of cannabis enthusiasts, but not enough operators. The companies that survive tend to excel at manufacturing, logistics, inventory management, compliance and capital allocation. They understand systems."

That insight cuts to what Porter's model, for all its clarity, cannot fully capture. The Five Forces framework is static—it takes a snapshot at a moment in time. Cannabis is not stable. It is a federally prohibited market in the early stages of a multi-decade regulatory transition.

So why do people keep entering? The answer is part psychology, part timing. Many entrants are not evaluating structural returns—they are buying a lottery ticket on licensing arbitrage, hoping to flip their permit before the market matures. Others come from adjacent industries—tobacco, alcohol, pharma—treating cannabis as a strategic hedge against their core markets' decline. But the largest group is simply early: they believe they are positioning for the post-prohibition landscape, accepting today's pain for tomorrow's prize. In their view, the current dysfunction is not a permanent condition. It is a phase to outlast.

McPherson’s counsel is equally forward-looking. His advice to prospective entrants: “wait and watch - see what is working and what’s not…”, then build a stronger offering once there is a more predictable path forward in your chosen market. Consumers and customers, he notes, will switch—which is both the industry's curse and, eventually, its opportunity.

The operators who survive this structural gauntlet may find themselves on the other side of a very different landscape. But that future is not uniformly bright. Rescheduling and eventually federal legalization and interstate commerce could bring expanded banking access and marketing freedom—but they could also wipe out high-cost local producers overnight, exposing them to competition from large-scale growers in low-cost states. The normalization that everyone awaits is a double-edged sword.

The structural case against cannabis today is strong. But the structural case for cannabis as a normalized consumer goods category—with all the institutional advantages that normalization brings—is equally compelling. The tragedy, and the opportunity, is that both can be true at the same time.

Porter gave us the tools to understand why this industry is so difficult. He did not give us the tools to predict when it stops being.

As Ambrosino puts it: "The winners won't necessarily grow the best cannabis. They'll build the best systems."