Compliance costs, lost market share could take toll on cannabis edibles firms under new Washington state rules

Photo by Glen Carrie on Unsplash

A Washington state marijuana trade association is warning regulators that new packaging, labeling and product design rules for cannabis-infused edibles and beverages might decimate edibles manufacturers’ bottom line.

According to experts, the cost for some businesses to comply could be $100,000, and that doesn’t include lost revenue for manufacturers who have kept new products off the market while they waited for the state to approve the guidelines, which go into effect Jan. 1, 2020.

The rules could upend manufacturing contracts with out-of-state brands, too.

“More businesses will fail” because of the changes, the Cannabis Alliance, a Washington marijuana trade group, warned the board in November, “and no grace period will prevent that from happening.”

An overview of new rules

In an attempt to eliminate products or packaging that could appeal to children, the Washington State Liquor and Cannabis Board approved the new requirements in December and voted recently to give infused edible and beverage makers until Jan. 1, 2020, to comply.

The rules:

A timeline of changes

Here’s how the new rules unfolded:

  • In October, regulators ordered edibles makers to cease production of cannabis-infused gummies and hard candies, warning they might appeal to children.
  • After fierce industry opposition, the board reversed course, pausing product and packaging approvals and allowing manufacturers to continue producing those products until regulators could hear input from an industry coalition.
  • After months of back-and-forth with manufacturers and trade groups, the state released the new requirements for edibles in December.
  • Notably, cannabis-infused gummies and hard candies are no longer prohibited. Instead, “brightly colored” products and packaging are now against the rules.

Cost of compliance

“Imposing an arbitrary restriction on color(s) will result in businesses incurring further expense redesigning to comply while unquestionably losing market share,” the Cannabis Alliance told regulators in November.

Some businesses are already feeling the burden.

Jordan McAulay, the sales director at Green Labs, a Raymond, Washington-based infused product manufacturer, wrote in an email to Marijuana Business Daily that the cost for the company to comply with the state’s new rules could be $100,000.

McAulay’s estimate didn’t include the market share Green Labs has lost from not being able to move its new products to market.

The board’s decision in October to pause packaging approvals while it revisited rule changes “hindered the ordering of new-to-market product packaging, which has delayed our launch schedule,” McAulay said.

Green Labs will redesign its packaging in-house, said Oliver Stannard, the manufacturer’s director of business development.

That will mitigate the company’s costs some, he said, noting that businesses that work with third-party design firms could face higher costs.

“This is a deal breaker for smaller businesses,” Stannard said. “Small manufacturers – the mom-and-pop operators in Washington – they’re the ones that are going to pay the cost.”

Lara Kaminsky, executive director of the Cannabis Alliance, echoed that. She’s heard from other manufacturers who estimate they’ll spend $60,000-$100,000 to comply.

Getting products to market

Before the board voted to approve the Jan. 1, 2020, deadline for businesses to comply with the new rules, some marijuana retailers refused to reorder infused edibles and beverages because they didn’t know how much time they’d have to sell through old inventory, said Sam Mendez, an attorney at Cultiva Law, a corporate law firm for cannabis businesses.

Now, there’s more clarity. The board said retailers and infused edible and beverage makers will have the rest of 2019 to sell out of their existing product.

But, it’s likely retailers – afraid of getting stuck with product they can’t sell – will stop accepting infused edibles and beverages in old packaging before Jan. 1, 2020.

“It will be curious to see when retailers decide they are done accepting older packaging over the course of 2019,” Green Labs’ McAulay said. “Retailers tend to make that decision on a store-by-store basis.”

It could be difficult to quickly get new, compliant products to retailers because every infused food and beverage maker must resubmit redesigned products and packaging for approvals.

That could create a logjam if regulators struggle to approve redesigned products and packaging and give the OK in a timely manner.

According to McAulay, it typically takes two to three weeks to get a product or package approved, but Green Labs has had a request pending for product approval for more than two months.

The future of contract manufacturing in Washington

Washington’s new packaging, labeling and product design rules could harm the state’s infused edible and beverage makers that have contract manufacturing agreements with out-of-state businesses, said Daniel Shortt, an attorney focused on cannabis in Harris Bricken’s Seattle office.

Contract manufacturing allows a maker of infused edibles and beverages to license another brand’s intellectual property and produce and package it.

It is common for infused edibles and beverage makers to use contract manufacturing to get their products to market in other states.

Contract manufacturing agreements sometimes include guidelines for how products must be packaged or branded. Some of those contract manufacturing agreements will have to be reworked, Shortt predicted.

That could put Washington manufacturers at a disadvantage, because it will make it more difficult for them to attract out-of-state manufacturers for those kinds of agreements, Cultiva Law’s Mendez said.

“In the long term, (the state) is setting in place rules that are so onerous and so restrictive that we could see Washington left behind,” he added.

Joey Peña can be reached at [email protected]

2 comments on “Compliance costs, lost market share could take toll on cannabis edibles firms under new Washington state rules
  1. Rick on

    I live in Washington state and it’s mystifying that this is a problem ONLY in Washington state apparently. The problem isn’t the products, it’s the packaging!

    Making the packaging opaque so kids can’t see what’s inside is the easiest and most effective solution. And if keeping edibles out of the hands of children is the desired result, where’s the regulation requiring adults to keep edibles away from kids?

    The LCB once had control of the liquor industry here until they all but bankrupted it. They raised prices to the point where residents went out of state to buy alcohol and started brewing their own and/or bootlegging to save money. They think gray jellybeans and gummy bears are the answer???

    I can’t wait until the Fed legalizes it, states like Washington need all the help we can get.

    Reply
  2. AmericanMade on

    The biggest problem of all, if I read this article correctly, was the October deadline to stop selling. . . . . Forcing businesses to stop producing product is the biggest killer for any startup.

    Companies have loans and leased equipment that need monthly payments.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *