By Alex Carchidi – Feb 27, 2023 at 6:00AM
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Changes will likely start to happen sometime soon, and margins could rise as a result.
With an ever-growing abundance of easy-to-use artificial intelligence (AI) tools for business exploding onto the scene in late 2022, the AI revolution is in full swing, and it won't leave many sections of the economy untouched. But the cannabis industry isn't an obvious candidate for disruption by AI software tools. Most of the cultivation, manufacturing, and retail processes are based on lots of manual labor and plenty of customer-facing staff.
Still, AI will come to the cannabis business sooner or later. When it does, it will likely reshape the industry in at least two important ways that investors should understand.
1. It could reduce retail-labor costs
The most significant way that AI might alter the cannabis industry is by curbing the need for retail staff to help guide customers to the appropriate products.
Most marijuana dispensaries operate with a "budtender" model, in which customers talk with an employee who analyzes their preferences and proposes different strains and formats of cannabis. This personalized approach means that customers are more likely to have their needs catered to. And positive interactions with staff could also help build customer loyalty.
AI isn't going to replace all budtenders anytime soon, but it could easily reduce the number of employee hours devoted to matching customers to products. For example, a modern AI-powered chatbot along the lines of OpenAI's ChatGPT could be programmed to understand a company's products and how each one creates certain results. That would mean customers wouldn't even need to go to a dispensary to order a cannabis product that's right for them, which would free up staff to work on something else. And with budtenders making between $25,917 and $36,000 per year on average, and each dispensary requiring at least a few working on each shift, the potential reduction in a company's labor costs would be low in the short term, but likely greater in the long term.
No major marijuana companies have claimed to be investing in AI for this or any other purpose as of yet. But the players with the largest retail footprints and the most staff will benefit the most from doing so, and it would give them a competitive advantage with lower-cost operations.
In the U.S., that means businesses like Curaleaf (CURLF 0.55%), which has 147 retail locations and more than 5,500 employees, and Green Thumb Industries (GTBIF 1.95%), with 77 locations and about 3,800 employees, could see the largest improvements to their bottom line from AI.
2. It could lower the cost of building brands
A second way that AI could disrupt the marijuana industry is by dramatically slashing the costs of some marketing and advertising tasks. For reference, Green Thumb spent 31.5% of its quarterly revenue on selling, general, and administrative expenses in the most recent quarter, whereas Curaleaf spent 32.4%. So marketing is a significant expense for cannabis businesses.
Rather than spending labor hours on brand aesthetics, product photography, and advertising copy, companies could use AI text generation or image generation with models like Stable Diffusion, which is already powerful enough to perform these tasks quickly and cheaply.
Making cannabis marketing materials could eventually become a matter of entering a prompt into an AI system, which would then return a full set of photorealistic images and product descriptions for a company's wares.
Since established competitors are more likely to have the resources to do extensive human-driven branding work, it's likely that using AI in this capacity will be an advantage primarily for smaller and newer businesses.
So reducing the costs of brand-building will complicate things for bigger players, which are struggling to differentiate their products from the competition to protect their market share -- even without the potential impact of AI.
Changes will take time to percolate through the industry
The changes that AI might bring to the cannabis business in the near term won't transform the industry into something unrecognizable. Instead, the technology will help businesses save money, helping them to grow faster or to eventually return more capital to shareholders. For investors, the issue of AI is one that's largely theoretical for the moment.
But watch for players that formulate an explicit AI strategy over the next year or so. The first movers in an industry are likely to reap the rewards of automation sooner, and be better investments as a result.
