⛓ Ball and (supply) chain

Because we live in Bizarro World and cannabis is still federally illegal, the supply chain remains a funky, siloed mess.

For example, it’s tough for a brand to expand nationally, because you can’t distribute across state lines (so cultivation and manufacturing usually have to occur within the same state as finished product retail sales).

For another example, testing and reporting procedures are different state to state - meaning your team has to be compliance experts >35x over to operate in each legal market.

🍻 Talk to me about beer and wine, pls

Okay, I will.

Cannabis is (very) loosely based (in most states) on the three tier system that regulates the alcohol supply chain. Which looks like this:

After we repealed prohibition in 1933, states wanted to set up an efficient way to levy and collect taxes on alcohol producers. And, frankly, there was some anti-competitive nonsense from the brewers when they were allowed to own the whole supply chain (e.g. putting only certain products on shelves at retail), so this was the solution.

This is why producers/distributors make the product, distributors/wholesalers store and ship it, and retailers sells it to the end user.

Think about the big Miller Coors or Bud buildings off the side of major freeways - those are big, regional breweries:

Then think about the big buildings with lots of trucks:

Then think about all the places you’ve ever purchased alcohol - hundreds of thousands of ‘points of distribution’ (PODs), including off-premise (e.g. stores like Kroger or Costco), and on-premise (Buffalo Wild Wings, bars). Those are the retailers.

Ignoring the nuances in some states (there are a lot), this is a relatively simple setup. Someone makes the beer, someone ships the beer, someone sells the beer. Or wine, or vodka, or Fireball. Or whatever George Clooney dreamed up last year.

Now, switching gears back to cannabis…

🍃 Cannabis considerations

The general idea of the three tier system - e.g. implementing tiers in order to 1) avoid anti-competitive nonsense and 2) levy and collect taxes somewhat efficiently was embraced in most states’ cannabis legislation.

Here’s a graphic of how the California supply chain works:

We have taken a relatively simple idea and created some interesting opportunities along the way.

• Manufacturers (or processors) can inject themselves in the equation, to take raw material and turn it into a product

• Testing facilities are a must-have, and must be dealt with by manufacturers or distributors

• 3rd party contractors get in on the game to destroy product that doesn’t pass the human consumption test

Acquire adjacent businesses

The thing is - it’s not that a certain company is necessarily forbidden from moving up or down the supply chain nodes in every market - in most states, they just need a different license for each node.

SPARC in California is a great example of a vertically-integrated player in a market that allows, but does not dictate, that setup. SPARC has 450 acres of grow space in Sonoma County; they have manufacturing and distribution facilities; they have popular retail; and they actively acquire brands.

You know how they did it? They deliberately and thoughtfully acquired licenses up and down the supply chain, increasing efficiencies (and margin) throughout the process.

This flexibility around license holding - or, in some states, the mandate that an operator must control each node in the supply chain - necessarily favors well-funded organizations. Not a value judgment. Just a fact.

📚 tl;dr

• Alcohol gave us the three tier system: brewer —> distributor —> retailer

• The cannabis supply chain is loosely based on that setup, though some states require vertical integration and some states outright reject it

• The group that holds the most licenses will realize efficiencies along the supply chain - and getting licenses requires money

• Like everything else in the cannabis industry, the ol’ supply chain favors the well-funded

• It is Thursday