Cannabis producers in California must send their products to independent labs to ensure they comply with state testing standards for contaminants, potency and other critical factors. When the state’s Phase 3 testing regulations came into effect in December 2018, many of these labs closed down or became backlogged as they upgraded systems, which created testing bottlenecks and product delivery delays.
The situation left me wondering, “How could producers overcome these challenges if they had unlimited funds?”
My answer would simply be to approach the testing lab and propose that I purchase a “platinum package” that would ensure it always tested my products first. Products without this “platinum package” would be set back and not tested until mine were completed, thus giving my company a first-to-market advantage over competitors.
It’s a practice that would be considered legal behavior for all parties involved because there are no laws against paying for expedited services. Shipping companies do this every day.
Expanding on the scenario further, I asked myself, “What if those companies that chose aggressive strategies began paying distribution companies a royalty or percentage of sales in the form of incentives to distribute and push one product over a competitor’s or pay a distributor to not carry a competitor’s products?”
This is another common strategy performed by corporations every day. For example, soft drink producers often have exclusivity agreements with restaurants or retailers to only sell their brands. It’s the reason why you might only see Coca-Cola or PepsiCo products at a particular establishment. These are not considered predatory practices but rather are tactics used to gain and measure market share.
Exclusivity deals to carry certain brands or product lines are becoming more frequent in the cannabis industry, especially with the rise in celebrity-supported brands. But exclusivity often goes both ways: A retailer signing a deal to carry an exclusive brand may be prevented from carrying other brands outside of that distributor’s network.
How can a cannabis company operate, let alone survive, when it is at the mercy of a distributor?
A Look at Other Industries
Again, aggressive distribution strategies are not uncommon outside of the cannabis industry. Take the Luxottica Group, an innocuous enough sounding name that few have heard of, yet many people use their products regularly. They own sunglass brands such as Ray-Ban, Oakley and Persol, among a host of other well-known names. In the past three decades, Luxottica also acquired major eyewear retailers such as Sunglass Hut, Target Optical and Pearle Vision. Its wholesale distribution network, which also includes LensCrafters and EyeMed in North America, “covers more than 150 countries across five continents,” according to the company’s website.
If you are an independent sunglass manufacturer attempting to ask Sunglass Hut to carry and sell your product, you would receive a “no” because it only distributes its own products. The same goes for independent stores and distributors that have a relationship with Luxottica because, just like with sodas, most independent retailers are forbidden from selling a competitor’s products lest they lose the right to sell Luxottica’s products. Simple, legal, strong-arm tactics.
This is how I expect most publicly traded cannabis companies to operate. Let’s not forget that most of those companies are owned and run by business executives who worked for corporations where such practices were just considered “smart business.”
What does all of this mean for cannabis retailers or dispensaries? What would prevent a billion-dollar producer from paying or incentivizing a seller to push its product and provide preferential shelf space? What will happen to smaller companies that have limited market access and longer lead times for lab results? How can one small company compete against such tactics?
Grow Up the Chain
I fear smaller companies can’t compete in this environment without trying to vertically integrate their operations as much as possible. Having a distribution permit will allow a grower to distribute its own products. Some states allow producers to have ownership in retail operations, but this is not realistic for many.
Ultimately, it is the wish of those who desire to control as much of the market as possible—or at the very least all things concerning their products and profits—that the industry play out this way. Their goal is to generate millions of dollars from initial public offerings, which many are already doing successfully. They intend to use these funds to purchase existing cultivation facilities and dispensaries in multimillion-dollar deals. In fact, many major cannabis companies have already successfully vertically integrated their businesses wherever it’s legal. (For instance, the largest dispensary in California during the past two years is producing cannabis in its own greenhouses.) In states or countries where it isn’t allowed, some have diversified and separated their corporations, so one entity owns one segment of the supply chain, and others own the rest.
There are incentives for businesses to sell self-produced products over third-party products, the first being access to their own product for a lower cost as opposed to purchasing from an outside entity.
Companies that produce and sell their own products also eliminate purchasing costs, including labor and man-hours to sell, log and track such purchases. This model of operations will become more prevalent as larger companies purchase and absorb smaller companies that are struggling to compete, or that hold incredible potential for the purchasing company’s plans, all of which is currently taking place very successfully.
When I mentioned this topic to a friend, he stated the future is rife with doom and gloom. I asked if he would prefer a head-in-the-sand approach or to know of and anticipate current and potential market shifts prior to them being beyond his control. Smaller companies that have some sort of vested interest in all aspects of the business from production to sale—whether it’s a contract with a lab for fast testing or having part ownership in a facility where it’s legally allowed—will improve their chances in an increasingly competitive market.