Does Vertical Integration Hurt Cannabis Dispensaries?

Vertical Integration

National cannabis legalization is coming. And that means it’s time to talk about vertical integration.

Why? Of all the questions swirling around about how the US should move forward with legalization, the debate around vertical integration may be the one with the greatest potential to shape the industry.

While a dozen states currently require vertical integration for medical cannabis, a growing chorus of advocates is lobbying to end the arrangement for good. Here’s where the debate currently stands.

Vertical Integration: An Attempt to Control Cannabis’ Spread

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The term “vertical integration” refers to a business structure in which a single entity owns and operates every link in the value chain. In the case of cannabis, for instance, that means that a single company grows, processes, packages, transports, and sells its products.

Just as vertical integration requirements for the liquor industry were an effort to limit a potential flood of alcohol from hitting the market, vertical integration can be interpreted as an attempt to essentially limit the spread of cannabis. And there are certainly rationales for implementing it. Among other things, one can argue that vertical integration affords companies a better way to handle quality control and product safety. And from an operations perspective, vertically integrated companies have greater flexibility to enact the most productive and cost-saving measures.

What’s more, they can exercise more accurate control over the product tracking process (a special concern with a controlled substance such as cannabis). Last but far from least, vertically integrated companies find greater relief from aspects of the federal tax code that would otherwise prohibit them from deducting normal business expenses.

But as a post in the Cannabis Law Journal points out, vertical integration in the liquor industry was enacted in large part to combat monopolies that discouraged competition (and dispensed products of dubious quality and safety to consumers). Due to stringent cannabis laws, that’s by and large not an issue in the industry. As last year’s outbreak of vaping-related illnesses demonstrated, the black market is a far greater threat in this department. And ironically, vertical integration may be a factor driving those who would otherwise be above-board cannabis entrepreneurs back underground. Here’s why.

Vertical Integration: Stifling Entrepreneurs and Innovation?

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We’ve discussed a few of the potential upsides of vertical integration. Now let’s look at some of the drawbacks.

In light of our point about the black market a moment ago, one of the chief issues with vertical integration in cannabis is that it requires an enormous investment of capital to pull off. As a recent article in Ganjapreneur points out, in vertically integrated Florida, some four years after 71.3% of Floridians voted to legalize medical cannabis, only 13 of its 22 licensees are currently producing and dispensing cannabis medicine. What was supposed to be a boon for the state’s disproportionately aged population has instead led to shortages, the slow rollout of delivery, and a generalized lack of availability. Why? The costs of getting a vertically integrated company up and running are simply too onerous.

What’s more, in an industry built on the labors of small-time growers, producers, and artisans, the high buy-in demanded by vertical integration has barred the vast majority of them from reaping the rewards of legal cannabis. Particularly for entrepreneurs of color—or those otherwise locked out of traditional capital-raising endeavors—this issue presents a steep and often insurmountable challenge.

As we’ve written before, the issue of social equity in cannabis is especially relevant today. Because the Nixon-era War on Drugs fell on communities of color with disproportionate force, many feel that the “Green Wave” is a golden opportunity to help right historic wrongs. In making sure that all business people are invited to the table, it’s a historic chance to ensure that cannabis remains a force for social good in the United States.

Looking Ahead to a More Diverse Cannabis Industry

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What might a safe, legal, and aboveground national cannabis industry look like? As a recent article in Green Entrepreneur suggests, the horticultural industry might offer some clues.

In commercial horticulture, different aspects of the growing process are dispersed among many specialists. In fact, it’s quite likely that the lovely potted flowers you see at a local nursery spent time at many different facilities—from stock plant to rooted cutting to vegetative stage—on its way to market. Especially in such an artisanal industry, this high degree of specialization is the norm. In addition to fostering a marketplace in which the highest-quality products will rise to the top, it allows entrepreneurs and enterprising enthusiasts to enter the industry without massive outlays of capital.

It’s too soon to speculate whether or not vertical integration will fade away or become the way of the future. Currently, the only states that prohibit vertical integration in cannabis are Washington and Louisiana. But we’re fairly sure that once federal cannabis legalization is finally on the table, there will be a chorus of voices—those of small business people, entrepreneurs of color, and the many artisans who have brought the cannabis industry so far already—demanding that our national policy follow any other model than this one.