Cannabis companies shouldn’t rely too heavily on limited licenses to restrict competition…
The forces of choice and competition wield tremendous power.
They decide which products win or lose. They build fortunes as well as banish companies into the dustbin of history.
They even – eventually – make law.
The era of marijuana prohibition is coming to an end because people want it to. Voters want the choice to consume marijuana, and despite the initial reluctance of legislators, they are beginning to accept the will of the people.
In a free market, companies will compete in a variety of ways to give consumers the cannabis products they want at the lowest price possible. Some will grow the highest quality cannabis, while others will be the most efficient processors.
Some will be the retail outlet of choice.
The U.S. cannabis market has moved on to the hyper-growth “Scale” phase, so the competition right now is all about claiming as much of the game field as they can.
But as the repeal of marijuana prohibition advances to the national level, the focus of competition could shift dramatically. When it does, profits will flow to those companies nimble enough to adapt.
Vertical Versus Outsourced Business Models
Patchwork and varied legalization from one state to another is forcing some businesses to do everything involved with selling marijuana.
Growing it. Selling it. The whole shebang.
Owning every step of the process from planting cannabis to selling it on shelves is called vertical integration. The term isn’t unique to the cannabis industry, but it’s an important aspect of how cannabis businesses operate today.
Marijuana products can’t be shipped across state lines, so supplies for any single store have to be sourced entirely within the state. To make sure those supplies are secure, many developers of cannabis products grow their own product rather than buying it from wholesale markets.
They choose to be vertically integrated because management views it as a lower risk business model. The industry is new in most states, and growing and processing capacity isn’t robust enough to handle bursts in demand, shortages from crop failures, or failed safety tests.
In a few states, regulators require that a company control the entire process. This is the case in Florida, where a company has to be able to grow, process, and run the retail outlet to win a license. They also can’t carry other products in their stores.
To Florida regulators, this is the solution to managing accountability around the supply chain.
States like California, on the other hand, sell licenses specific to function. There are at least seven different types of licenses. A few large operators, like MedMen Enterprises Inc. CSE: MMEN, OTC: MMNFF), acquire licenses to cultivate, process, ship, and sell marijuana, but most focus on where they can add the most value.
In the Golden State, distributors play a key role in securing the supply chain and ensuring the product gets tested.
In a mature, competitive market, you usually don’t see much vertical integration. A company making products will outsource supply, processing, shipping, and sell through other retailers. Ford doesn’t make every part in its pickup trucks. In fact, it pretty much just assembles a truck made from parts supplied by other companies.
And a recent challenge to the way licenses are handled in Florida shines a light on the tension between consumer-friendly competitive markets and restricted, monopolistic markets.
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Legal Challenges to Marijuana Monopolies
The Florida courts have ruled that requiring vertically integrated licenses is unconstitutional. That’s because it limits competition, limits choice, and, ultimately, keeps prices higher for consumers.
In other words, it creates monopolies.
But the court ruling threatens incumbent operators in the state that have already obtained those licenses. Because the supply of licenses are limited, they are expensive. MedMen’s Florida cannabis license cost it about $54 million dollars.
Obviously, big Florida cannabis operators like MedMen, Trulieve (CSE: TRUL, OTC: TCNNF), and Liberty Health Sciences Inc. (CES: LHS, OTC: LHSIF) aren’t too happy about this prospect. And they certainly have the lobbyists working overtime to keep this change in regulation at bay.
Now, MedMen and Trulieve are multi-state operators (MSOs), and their long-term profitability is highly dependent on the territories these companies have carved out in one state. On a national level, they effectively have to compete with everyone, so these companies will be able to adapt as necessary.
But, over the long term, laws should favor competition – and the Florida courts just struck a blow in competition’s favor.
Marijuana will be trucked across state lines, and economic forces will favor businesses models that focus on certain aspects of the cannabis industry.
Five years down the road, the cannabis industry will look very different than it does today.
And profiting from the changes means understanding what business model will win.
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Executive Director, National Institute for Cannabis Investors
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5 responses to “Shifting Legal Landscape Forces Cannabis Business Model Evolution”
September 13 2019