What Is Cannabis Vertical Integration?

Posted by Mark Mariotti on May 22, 2019

Should a cannabis business pursue vertical integration?

Vertical integration is one company buying or partnering with other companies that handle different stages of production. This brings the end-to-end process in-house. For the cannabis industry, vertical integration consists of production (growers), processing (processors), and dispensing (sellers) together within a company.

What would a vertical integration look like? Will it increase profits?

Two Scenarios

In the first scenario, an employee with a company called FourTwoZero plants, harvests and cures the products. FourTwoZero does the growing, but it does not have a license to process cannabis. So, it works with another company that specializes in processing and has the proper licensing. The processor does its part and packages the cannabis for sale.

The processor does not have a license to sell products. What the processor does is sell the product for wholesale to dispensaries. Furthermore, the product will compete against other cannabis products on the dispensaries' shelves.

Meanwhile, High Life bought two companies to take control of the entire cannabis process from seed to sale. When the product moves from growers to processors, operational costs are lower since everything stays under one roof. Plus, there's no selling at wholesale rates. They have the power to push their own product in their dispensaries and increase sales. This is cannabis vertical integration.

Because the company manages everything, they have greater quality control. It's easier for them to tweak their production and supply lines based on current market conditions. This is especially true in the ever-changing cannabis industry landscape. They save on costs while improving efficiency. Vertically integrated companies don't have the costs associated with third parties.

What's more is that High Life will be in a good position to research and innovate. This helps them get ahead of their competitors who only handle a piece of the cannabis pie.

Advantages and Disadvantages of Cannabis Vertical Integration

Is a vertically integrated approach the right move or not? There are no clear answers. Some states may require separate licenses for each of the stages. That's one reason why a cannabis company would specialize in one stage of the production process. Vertical integration won't be possible in all jurisdictions. Quebec has province-managed retail and distribution systems, for example.

On the other hand, the state of Maine requires vertical integration, but that may change according to Maine State Senator Roger Katz in Cannabis Business Times. In the article, Brian Vicente, a Colorado attorney, points out a downside of vertical integration. It essentially turns farmers into retailers and vice versa. Each requires specific skills to succeed. Vicente believes any state with mandated vertical integration will eventually remove the requirement.

Of course, it's challenging to set up vertical integration. First, it requires far more capital than a business focused on one stage of the process. Secondly, the operation becomes more complex and needs greater oversight as it deals with more industry regulations and licenses than a business focused on one aspect of the process.

However, this complexity creates another benefit. The company knows what the market demands and can satisfy that. Their cannabis dispensaries have a POS to tell them which products move well, and which don't. This gives them the information they can share with their own growers and processors. Make more of this and less of that.

If they systemize it with cannabis technologies, they may not need to communicate at all. The growers and processors can check the system to find out what to produce. They won't have to jump through hoops.

Moving toward complete vertical integration supplies the company with big resources. Those with enough working capital to make it happen will most likely dominate the industry.

Vertically integrated or not, a cannabis business must have remote video monitoring to comply with strict cannabis security requirements. It's important to partner with a company that has worked with cannabis dispensaries in the U.S. and Canada because they can ensure compliance. Contact us to learn about customized proactive cannabis security solutions.

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