California marijuana retailers charge product suppliers for shelf space, creating friction in the industry

A growing trend among California cannabis retailers to charge brands for shelf space – and, thus, access to customers – has some in the industry decrying the practice as “pay-to-play” that threatens to crowd out smaller companies from the market.

According to several industry sources, the practice first cropped up in early 2018 and quickly caught on among California retailers, many of whom are desperate for any income stream because the illicit market is undercutting legal shops.

Some retailers in San Diego and Los Angeles, according to several sources, are asking anywhere from $1,000 to $50,000 a month from brands, depending on how much shelf space they want and in how many stores.

The most common fee request identified by sources was an average of $5,000-$10,000 a month for prime real estate inside shops, with the highest fees reserved for space in retail chains with multiple storefronts.

“We first encountered it last summer,” said Karli Warner, co-founder of Garden Society, a boutique edibles and pre-roll brand based in Sonoma County. “Over the last year, it’s really taken off.”

Warner said her company can’t afford to pay thousands of dollars a month to get their product into Southern California shops, where such fees are more common than in Northern California.

Warner noted the trend is tilting the playing field in favor of larger companies attempting to buy up as much market share and brand loyalty as possible, while smaller companies like hers are limited to shops that don’t charge such fees.

“In a new burgeoning industry, the fact that there’s already this sort of creep of brands that are able to pay these high prices to buy shelf space – it’s setting the industry up for bad business practices,” Warner said.

“It’s going to be the demise of the craft brand, frankly.”

Legal murkiness

Known in other industries as “slotting fees,” the practice is common in mainstream grocery and department stores but is largely banned in the liquor industry. It remains a gray area under California cannabis law.

“In about 10 years of practice, this is the first time I’ve seen this crop up, and crop up so voluminously,” said Hilary Bricken, a Los Angeles marijuana attorney who wrote a blog post about the practice in December because she had clients who were negotiating slotting fees.

Several cannabis manufacturers suggested to Marijuana Business Daily the practice could be illegal under state law that prohibits unfair business practices. (See code citations here and here.) But Bricken said there’s no clear-cut answer.

Rather, the legality of slotting fees will likely have to be determined on a case-by-case basis, given how vague California state law is around anti-competitive marijuana business practices, she said.

Cannabis industry attorney Khurshid Khoja also noted that California liquor laws prohibit slotting fees and pointed out that one of the state’s top marijuana regulators, Bureau of Cannabis Control chief Lori Ajax, previously was a deputy with the Department of Alcohol Beverage Control.

A primary question with regard to slotting fees could be whether California wants to pattern its marijuana regulations after either the grocery or liquor models, Khoja said.

“It’s likely a ripe issue” for litigation or regulation, Khoja said.

Alex Traverso, a spokesman for the Bureau of Cannabis Control, wrote in an email to MJBizDaily that his agency “hasn’t heard much about this,” and none of the industry sources for this story said they had filed complaints with regulators over the practice.

Bricken, however, said she believes it’ll take a lawsuit to get some legal clarity for cannabis companies when it comes to slotting fees.

However, neither she nor Khoja expect a suit anytime soon because of the hefty legal fees it would take to support such a case. And the stakeholders hit hardest by the slotting fee practice are small companies that are already struggling financially.

Cost of doing business?

Though multiple executives in the California supply chain slammed the practice as a “cash grab” or “pay-to-play,” others defended it and said it’s just part of doing business.

“This was always going to happen. I don’t see this as retailers gouging their manufacturers or their product providers,” said Adrian Sedlin, the CEO of Canndescent, a large-scale cultivator in Southern California. “You don’t think Procter & Gamble isn’t paying for shelf space?”

Sedlin said the cost of paying for shelf space is built into his company’s marketing budget, and the hurdle for other companies is to calculate the return on investment from slotting fees.

Jerred Kiloh, the owner of The Higher Path in Los Angeles, also said he charges some brands $1,000 a month for space in his shop, and a big motivator for his retail colleagues is financial survival.

“The parity between legal and illegal is so far apart that we don’t have a way to compete with these illicit retailers, so if brands are trying to get their products to the top of the shelf, that’s a business decision,” Kiloh said.

Kiloh and others also said the practice began last year when some manufacturers started offering payments to retailers in exchange for the best real estate inside shops.

“It’s not like retailers created this trend. The manufacturers and the brands did. And I think it’s trickling down to brands that can’t necessarily afford it,” he said.

Bryce Berryessa, who sees both sides of the issue as both a manufacturer and retailer in Santa Cruz, said his shop also tacks on slotting fees, but he maintains it’s not hard to structure such agreements in ways that bolster marketing and brand exposure for small companies.

“If it’s not a win-win, if they have generated more sales and revenue through the shop in the program, we failed them,” Berryessa said. He also said some retailers have definitely adopted “predatory” slotting fees.

But Chris Coulombe, CEO of Santa Rosa-based distributor Pacific Expeditors, predicted “a large-scale problem in the industry if it continues.”

“Now it’s a capital arms race,” he said. “Whoever can buy the most space for the longest period of time, they can effectively choke out the smaller brands who are not as well capitalized and deny access to other brands that precludes anybody else from stepping in.”

John Schroyer can be reached at [email protected]

12 comments on “California marijuana retailers charge product suppliers for shelf space, creating friction in the industry
  1. DONALD ROBERTS II on

    Absolutely absurd! Cannabis falls under the same category as alcohol in regards to a mind altering substances not groceries. It may be survival for the retailer but I can assure you it wont be for the farmer. Retailers should bone up on their marketing practices vs charging the supplier insane fees to build revenue. It kind of like saying “if I cant make money retailing the product, I’ll make it from the farmers. We are a state licensed grower in Michigan and we will never pay the retailer for slotting fees. We already pay for testing, transport, marketing, and staffing!

    Reply
  2. Ken Groth on

    I don’t see anything wrong with the practice. Retailers have a big investment in their businesses and they have to deal with a lot more regulations than growers & processors do.
    Like the article points out, it’s standard practice with in a lot of other industries.
    Being in a State that has only had medical cannabis for about a year, I’m tired of Growers charging $2,500 to more than $3k a pound for product, especially product that only tests out at 15% THC.

    Reply
    • jesse stills on

      “Retailers have a big investment in their businesses and they have to deal with a lot more regulations than growers & processors do.” That’s just incorrect! Have you seen what it takes to license a farm or manufacturer in California?

      Reply
    • Chad Steelman on

      You are obviously not familiar with the California market and therefore should not comment. Every license in the California, over regulated, special interest market (not the legal market) have substantial regulations. In fact the retailers are the ones marking the products up sometimes over 3 times what they pay the growers. The retailers are only taxed 15% on a 60% markup of the wholesale price, they then double that and charge the customer, therefore making a 100% profit on the 15% excise tax. The growers pay a $148 per lbs cultivation tax plus anywhere from $1-$15 per sq./ft. , square footage tax to their county.

      Reply
  3. erik on

    If some retailers don’t want craft quality, then sure…. it’s their shop.

    however the best quality is from the smaller growers who can’t or won’t pay these.
    and there is plenty of demand for good Herb that does not look like the mass produced identical looking Herb out there.
    Market will sort this out.

    Reply
  4. Mike on

    Well duh, not only has the gov’s ineptitude in creating a workable legal system in these past years since voters approved pot, but now the legal industry has begun infighting. All along the gov has been dragging their feet while creating an overburdening restrictive system with the goal of crowding out the small enterprises which will leave only the big money corps to able to comply. They have purposely delayed knowing that the longer they take to make clear rules that can be depended upon, the more small people will have to drop out. So the underground thrives. The big losers are those in medical need that will not participate in the underground and are awaiting a clear legal system that can be accessed everywhere and not in just those few locations that allow sales.

    Reply
  5. Rex H on

    I have represented many different manufacturers in retailers for 20+ yrs. Buying end cap space and paying for displays, prime shelf space etc. is standard operating procedure for many different vendors that sell to retailers. Hey, if cannabis vendors don’t want to “pay to play” they don’t have to have those retailers as customers. Produce a superior product, Get positive reviews on that product, Market that product properly and you may not have to “pay to play.” Welcome to the real world of vendor retailer relationships cannabis vendors. Your little cottage industry isn’t little any more. Honestly it’s a sign of good, positive growth, and category maturation. Yes, it’s also the kind of Growing Pains a new industry has to experience.
    Welcome to retail 2019, cannabis.

    Reply
    • CannaEntr on

      We can’t advertise like non cannabis businesses do, we can’t get bank accounts or traditional financing, we can’t take normal federal business tax deductions (lookup 280E)… there is no comparison for the unique challenges LEGAL small cannabis startups face growing our businesses vs your 20 yrs of expedience buying endcaps in regular retail spaces with all options for growth strategies accessible to you.

      Reply
  6. Pat on

    [ Known in other industries as “slotting fees,” the practice is common in mainstream grocery and department stores but is largely banned in the liquor industry. It remains a gray area under California cannabis law. ]

    State of Ca.: “Do as say, not as I do. We can be grey, but if you’re on the other side and grey; be prepared to pay. Dearly.” Good luck w/that one. State of Ca. is tripling down. How low can you go…

    Reply
  7. Pat on

    Ok. Where does the “social equity” notion jump into the equation?!? Obviously, not at this juncture. Too much special interest pressure on the legislature. And, the legislature and the regulators are just fine w/it. So long as that artificial tax revenue stays artificially jacked up. But, at whose expense? And, is it worth the expense? Who is not asking these questions? And getting reasonable answers?

    The state is heading down a warpath against many of the “righteously” unlicensed people. And it’s going to be a disaster for everyone. But, so long as the state employees get their paychecks and beny’s…It’s aawwlll good. And, with the caveat that when they’re done screwing over the vast majority of licensees and near-participant that had their opportunities ripped away from them, just to keep the dough rolling in for the cartels ( and the like ); just watch where these state employee’s career’s go when they’ve completed their tenure w/the state. They’ll be joining the ranks of these cartels whose interests they’ve been protecting ( as a reward ). All to pad their careers. All on the tax payer’s tab. Isn’t that just nice. Who isn’t paying attention?

    Reply
  8. Lloyd on

    Those who complain about unfair practices and fair competition need to quit. If you got fire it moves if your selling bunk well the market is flooded with millions of pounds of bunk oregon, washington, california, colorado all oversupplied with crap weed. Stop growing crap stop pretending to be a dealer or supplier just quit. Its not a weed you can through in the ground and get good thats just weed. You want fire you prep the ground feed the earth as well as the plant, you love your babies cause the strain you know so well does great with the lovin. All you business yuppies have no love for the plant thus you will never learn and it will not love you back. Best cannabis is grown at home by those who understand the nature of the plant big business will always be a ponzy scheme in this sector of course until gmo gets involved but i hear production is an issue there and most growers are all about that yield. Lol.

    Reply

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