The legal cannabis industry has blown up since 2020, and many investors are starting to notice. Several states voted in 2020 to legalize both medical and recreational consumption of cannabis in the 2020 elections. And many players in the cannabis market understood that regardless of the outcome, 2020 was going to be a significant year for the cannabis industry.
Brian Burchell, head trader at Farmstead Capital Management, echoed this sentiment above, saying, “Investors who truly understand the space and the growth opportunity weren’t particularly concerned with how the balance of power played out in the U.S. Senate.”
“We understood just how pivotal 2020 was, and one way or another, 2021 would see more positive developments unfold. The fact that the Democrats will control the Senate now just expedites important legislation — the very top of that list being the SAFE Banking Act.”
What is the overlooked concern for business owners?
While predictions about 2021 came to pass and the industry is one of the fastest-growing in 2022, there are a few kinks in the supply chain that need to be ironed out before cannabis can take its place as one of the biggest industries in the US. One of these kinks is distribution.
While many are focused heavily on the legalization efforts for both medical and recreational cannabis in the United States, distribution is critical for all the players in the cannabis industry.
This was never more evident than during the pandemic when local and global supply chains were disrupted, causing an artificial scarcity in the market. This disruption put many cannabis dispensaries out of business, even though cannabis was designated an essential industry during the pandemic. So let’s explore why distribution is vital to the cannabis industry.
Why is distribution important in the cannabis industry?
Distribution is essential in every industry. In most cases, the success of a product is heavily reliant on the distribution model of that product. “In any other industry, distribution is a vital component,” said Lucas Seymour, co-founder of Old Kai, a California distributor that serves about 250 dispensaries. “Whether you’re selling neckties or beer, your distribution is critical.”
As vital as distribution is in most industries, it is even more critical in the cannabis industry. Distribution can make or break a cannabis company, regardless of whether it is a grower or a retail dispensary. With federal laws restricting cross-border trade of cannabis, the distribution of the product is trickier than it would be for most other industries that can transfer their economies of scale across state lines to benefit from other markets in other states.
The restrictions on the distribution of cannabis across different states mean that many states’ economies have to be self-sustaining. Each state where cannabis business is legal has to have its own growers, dispensaries as well as distribution networks.
While this autonomous model worked before, the lockdown of 2020 due to the pandemic showed how unreliable the distribution network was. Many suppliers couldn’t deliver products to their intended destination. As a result, many retailers had to close, not because they had no customers or products, but because their supply chains were severely disrupted.
“Over the last 6-9 months, dispensaries are understanding the value of working with a distributor, having one receipt for 10-12 products and one delivery driver. We saw it as needed, especially for small-time cultivators and manufacturers,” Seymour said.
What is the case of California?
With over forty million people and a market size of over five billion dollars in 2019, California is the biggest cannabis market in the US. As a result, there is a lot we can learn from the state’s cannabis distribution models as we prepare for the expansion of the industry.
The success of the industry in California is down to the independent distributors that neither grow nor retail products themselves but supply from farm to dispenser. The distribution licenses given to entities in distribution make these independent distributors possible.
Under the MAUCRSA legislation introduced in 2017, one of the most impactful changes to California’s cannabis industry is that distributors are no longer required to be separately owned entities from cultivators and manufacturers. However, recreational and medical cannabis must go through a licensed distributor to get to the market.
This legislation paved the way for deals like the $1.1bn acquisition of Origin House. And as legalization of cannabis draws even closer, we can expect more states to follow this exclusive distributorship model setup by California and that investors are going to start directing their capital towards companies and states with clear distribution legislation and channels.
Gerald Ainomugisha is a freelance Content Solutions Provider (CSP) offering both content and copy writing services for businesses of all kinds, especially in the niches of management, marketing and technology.