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A Budding Industry: Recreational Marijuana is California's Newest Supply Chain

Posted by Janie Ryan | January 15, 2018

California’s Prop 64 marks a sea change in the effort to bring an entire industry out of the shadows, and everyone from pharmaceutical companies to big investment firms and app developers has been racing to cash in. Twenty-nine US states have already legalized the drug in some form. However, as the sixth largest economy in the world and the country’s cannabis capital, California is in many ways poised to lead the development of the burgeoning legal industry, with expected sales of over $5B by 2019.

With the country’s marijuana epicenter now allowing recreational use, the so-called “green rush” is in full swing. What kind of supply chain re-organization is needed to turn an illicit patchwork of growers and dealers (it’s estimated that fewer than 1% of current marijuana sales in California are legal) into a legitimate business that looks like a traditional consumer industry?  

 

Building a Supply Chain to Support a Rapidly Growing Industry

Because recreational marijuana sales are unprecedented in California, the legal supply chain through which product will reach customers is also unfixed. Many of its parts must now be brought out of the black market where they can be regulated and taxed. The Adult Use of Marijuana Act includes guiding frameworks for the market but it is still largely up to those in the industry to determine how their supply chains will run.  

Many smaller farmers advocate for a hands-off approach that will allow them to continue supplying directly to stores as they always have, sans a middleman. In the words of one dispensary manager: “We grow it, so we know it.” Under current regulations cannabis products are not technically required to pass through distributors, so it’s likely that many small operators will continue with business as usual and manage licensing, testing, and transportation themselves in an effort to maintain sovereignty over their operations and to capture as much profit as they can.

However, industry and state officials warn that California’s marijuana industry should not underestimate the benefits of working with a distributor. Some have pointed to Colorado as an example of this. When the state legalized, there were no stipulations that producers had to work with distributors and they were thus allowed to remain largely independent in their operations. Because of this, producers with more initial capital were able to scale their business much faster than those with less, servicing their entire supply chain — from production to distribution — themselves. The playing field became tilted against smaller operators who didn’t have the resources for this kind of scaling, and Colorado’s marijuana market was dominated by companies that did.

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Empowering Distributors in the Market

Colorado’s model had a missing link in its supply chain that, in California, will likely be filled by independent distributors. Much like they do in the alcohol industry, marijuana distributors will serve a variety of functions for the producers they work with, while also exercising a degree of control over the entire supply chain. Industry experts, dispensaries, and labor coalitions like the United Food and Commercial Workers are generally favorable towards the independent distribution model. Not only would it allow producers to outsource much of their operations — it would also give them access to a larger market. Because producers are limited to regional licensing laws, distributors have more flexibility to work state-wide with certain vendors and nurture relationships with retail chains.   

There are 30,000 to 50,000 marijuana producers in California. These small and mid-size companies will most likely end up falling under the operations of a handful of brand-name distribution juggernauts like Denver-based Organa Brands. Cultivation, manufacturing, and extraction will continue to be controlled by single operators, who are licensed to test their own product under the current law. The distributors they partner with will act as sales and marketing engines, facilitate seamless transportation of product, and leverage their muscle to provide security during storage and transit. In their close relationship with cultivators and retailers they will also have the authority to collect taxes on behalf of the government, make sure that producers adhere to new testing and packaging compliances, and oversee quality control. As keepers of the supply chain, good distributors will ultimately help the suppliers they work with maintain consistency in quality, availability, and delivery.  


Conclusion

2018 will see the continued development of two types of emergent marijuana supply chains. Small businesses who can pass licensing requirements will try to harness their own production, marketing, and distribution. Other cultivators will opt for the ease of working with large distributors, who will in turn become their own highly profitable sector. Already a prominent (if controversial) element of California’s culture, marijuana is set to blaze a trail as the newest brand name consumer good.