The 2018 Farm Bill legalizing hemp across the U.S. spawned a fiercely competitive market for CBD products.

But the market looks much different today than it did even 1 ½ years ago.

Many smaller brands have dropped out of the space, while several startups and entrepreneurs never moved “out of first gear,” according to Bethany Gomez, managing director of Brightfield Group, which tracks sales in the CBD market. Others that experimented with CBD line extensions, she noted, have shuttered the portfolios.

The industry has shrunk to around 2,000 brands, Gomez said, down from a peak of 3,500 at the end of 2019. Several CBD brands are eying acquisition targets in a move that will lead to further consolidation of the market.

For example:

Analysts expect more merger and acquisition activity in the coming months in the hemp-based CBD market. Many companies are “cash-starved,” and “it’s a good time to go shopping,” Gomez said in an interview.

By and large, 2020 wasn’t kind to the American CBD sector. The pandemic resulted in closures of retail stores, driving consumers online and away from natural food stores where hemp-CBD sales once proliferated.

Gomez said firms also faced challenges obtaining assets and capital.

Meanwhile, U.S. regulators did not offer guidance or rules for CBD ingestible products—limiting growth in the sector and keeping CPG brands on the sidelines, analysts and executives said.

Several public companies faced financial headwinds that may be representative of struggles affecting the broader CBD market. Hemp-based CBD sales grew to $4.6 billion in 2020 from $4.2 billion in 2019, according to Brightfield Group. But growth in the CBD category plunged to just 11% in 2020, compared to 560% in 2019, Gomez reported.

Brightfield Group forecasts the CBD market will grow 15% in 2021 to $5.3 billion—and an increasingly smaller number of brands are poised to control the market.

This is no surprise to Jason Mitchell, co-founder and CEO of HempFusion, a public company whose shares are traded in Canada on the Toronto Stock Exchange (TSX) and over the counter (CBDHF) in the U.S.

In a recent interview, Mitchell said he conveyed a message to his team and board of directors in Jan 2020: Consolidation was inevitable.

After sharing the message with his team, Abacus Health Products Inc. announced an agreement in February 2020 to acquire a CBD topicals brand, Harmony Health. Soon thereafter, Charlotte’s Web Holdings Inc. disclosed a deal to acquire Abacus.

HempFusion is no stranger to acquisitions. The company in 2019 acquired Probulin, which sells probiotic supplements, reflecting a move to diversify beyond the cannabinoid space.

This year has been a frenzied one for Mitchell and his team. HempFusion in January completed an initial public offering and subsequently announced separate deals to acquire Apothecanna and Sagely Naturals.

Citing IRI data, HempFusion reported Sagely Naturals maintains the No. 1 position in CBD topicals.

The Sagely Naturals deal, Mitchell shared, “won’t be our last.”

Any further consolidation in the space may help to stabilize a fragmented market.

“Thirty-five-hundred brands cannot be supported—period—in this industry,” Mitchell concluded, commenting on Brightfield Group’s recent data disclosing the number of brands has diminished to 2,000. “There just isn’t enough consumer interest. It just doesn’t make sense at all.”