Is vertical integration the right approach for your cannabis business?

(This is an abridged version of a story that appears in the March issue of Marijuana Business Magazine.)

Kevin Currier has lost sleep over the prospect of vertically integrating his new marijuana business in Michigan.

A Michigan resident, Currier applied for a medical cannabis retail license in Grand Rapids while the state transitions to a recreational market.

However, he often wonders whether vertical integration – having a cultivation and retail component to a company – would better position him for success.

“People keep telling me, ‘Do what you love,’” he said. “Well, I’d love to make a living at this.”

Business owners make the decision to vertically integrate early on, and in some markets, the state chooses for you.

For example, Washington state’s adult-use businesses are forbidden to be vertically integrated.

But in New Mexico, medical cannabis companies are required to be vertically integrated.

Other states, such as Colorado and Oregon, allow vertical integration but don’t mandate it.

State license types and tax laws also play critical roles in the decision to vertically integrate.

“Every state is different, and that creates a different risk-reward for being vertically integrated versus not,” said Troy Dayton, CEO of the San Francisco-based Arcview Group.

The ability to leverage economies of scale in a vertically integrated business model is a clear advantage.

But experts who spoke with Marijuana Business Magazine largely agreed that vertical integration isn’t the model for a business to succeed.

“Because the customer demographic of cannabis is so broad, a diverse number of business models are potentially viable – if decisions are made well,” said Sabrina Fendrick, the director of government affairs for Berkeley Patients Group, a nonvertically integrated retailer in Berkeley, California.

“The question is: Does one want to be a jack of all trades or a master of one?”

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One comment on “Is vertical integration the right approach for your cannabis business?
  1. Lawrence Goodwin on

    Thanks for this great concise piece, Joey Peña.

    Here in New York, as far as I can tell, the state-mandated “vertical integration” regime still actively smothers business opportunities for the existing medical cannabis companies—almost 5 Years after advocates in Albany (w/yours truly as a humble witness) demanded passage of the “Compassionate Care Act.” New York’s paltry 10 companies are forced to grow the plants, process the raw materials, manufacture, distribute and sell the non-smokable products, all under the boots of state bureaucrats given egregious powers by Gov. Andrew Cuomo over the resulting medical “marihuana” commerce.

    In short, vertical integration appears to be a scam. New York patients find the products way too inaccessible (only 40 total dispensaries “allowed” over a vast geographic area) and prohibitively expensive. It equals excessive interference by government in cannabis markets, and there is no legitimate reason for any state to mandate it. Again, the ONLY thing we have to fear about cannabis, is the fear of these plants itself.

    Reply

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