Letter From The Team – October 2021 Cannabinoid Monthly Playbook

Cannabis is a state-led story. Each U.S. state has different rules dictating how Cannabis must operate within its borders. One of the biggest variables in this state-led story is Vertical Integration. Vertical integration, in its truest form, means owning every aspect of the supply chain. Given cannabis’ complexity and the sheer cost for operating, owning every level of the supply chain in key states is necessary but extremely expensive for operators.

In comparison to outside industries,
manufacturing can be done out-of-state
and supplies can be transported across
state lines to help keep costs down and take
advantage of economies of scale. Cannabis,
as always, operates differently–more
costly and, of course, more challenging.
The details of the industry become even more
challenging when you evaluate states on an
economic level.

For this article, we will just look at the
economics lens on vertical integration as
operationally it is a completely different, yet
challenging battle. In some states, vertical
integration is allowed but not required.
Owning every part of the supply chain has its
advantages but is nearly impossible for some
of the smaller operators to have the funds to
build out these massive operations. Each new
market requires a unique approach tailored

around the operator’s core competencies. The risk analogy of large Cannabis operators battling for positioning in attractive markets continues to be the cleanest reference point to understanding how complex of a strategic approach is necessary when growing business. Florida is a key battleground state; and no I’m not connecting politics. According to Forbes “The Sunshine State, which legalized medical marijuana in 2014, is the third-largest cannabis market in the country by annual sales, behind only California and Colorado, which generated nearly $4 billion and $2 billion in annual sales last year, respectively.”

Florida’s unique rules require vertical integration, along with a limited number of licenses that can be dispersed to operators. All of this shapes up for a battle of the biggest titans for positioning within the market. As industry leaders jockey over market share to attract medical consumers to build brand loyalty, they use a common technique to attract newer customers– price. This is where owning every aspect of the supply chain makes this battle even more unique. In the outside industry, when you purchase products from outside vendors, you typically purchase at wholesale cost. Working with outside vendors is necessary for purchasing raw ingredients to turn into a finished product to sell to the end customer.

Editors’ Note: This is an excerpt from our Monthly Playbook. If you would like to read the full monthly playbook and join the thousands of others you can sign up below.

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