Distribution emerging as important cog in California’s marijuana supply chain

By John Schroyer

A new niche sector within the larger marijuana industry is developing in California: independent distribution firms that don’t produce their own cannabis products.

Such companies – which often act as inventory clearinghouses for existing dispensaries and other plant-touching businesses – are a relatively new phenomenon in California.

“It has ramped up in a formal sense,” said Lauren Fraser, the founding director of the Cannabis Distribution Association (CDA), which was established in 2016 as a wing of the California Growers Association.

The distribution sector has emerged due to changes to the state’s cannabis market that have been in the works since the legislature approved a medical marijuana regulatory system in 2015.

A proverbial light went on for entrepreneurs after lawmakers approved the initial MMJ regulations in 2015, Fraser said.

“Distribution was such a big component of the language that was used – and they actually had a license type established for it – so after that, businesses started to come out and say, ‘This is the business I’m going to pursue in this industry,'” she added.

There are already dozens of distribution businesses that specialize in shipping, marketing for the brands they carry and – depending on the company – even the drying, curing and packaging of flower. The CDA, for instance, now represents about 50 distribution companies, Fraser said.

“In any other industry, distribution is a vital component,” said Lucas Seymour, co-founder of Old Kai, a California distributor that serves about 250 dispensaries. “Whether you’re selling neckties or beer, your distribution is critical.

“And it’s not really feasible for a majority of companies to do their own distribution.”

How it works

With business models centered on serving the existing market, many distributors simply act as third-party shippers for growers, edibles makers, concentrate producers and the like.

Some distributors specialize in raw flower, selling to both dispensaries and manufacturers such as concentrate producers. Others carry a wide range of products and can be a one-stop shop for retailers looking to fill their shelves.

And some companies, with an eye on the future, have begun diversifying their services and work only with brands they’re certain will be able to obtain state licenses when California’s fully regulated MJ market launches in January.

Under the state’s impending system, plant-touching companies will be allowed to obtain distribution licenses and, thus, be spared the expense of hiring an outside party.

But many industry experts don’t think that will lessen the need for third-party distributors, if only because some companies won’t want to deal with the extra work.

“If you were to map out the complexity of all the different types of companies within the supply chain, distribution sits at the center,” said Azam Khan, co-founder of California tech company Distru. “Because in order for flower to move from cultivators to manufacturers … you have to go through a (licensed) distributor once 2018 comes.

“These distributors are both going to be a sales and marketing engine – especially the bigger guys – and there are also going to be distributors that do solely transportation,” Khan continued. “What’s going to give distributors an edge is also what other services they can do.

“We see a lot of people that are distributing that also have processing facilities. Not only can they pick up your whole plant … but they’ll dry it and cure it at their facility, as well as bottle it up and sell it for you.”

Filling a gap

Many retailers are already shifting toward distributors because of the timesavings.

“I’d say over the last 6-9 months, dispensaries are really understanding the value of working with a distributor, the value of having one receipt for 10-12 products and one delivery driver. It makes the flow a lot easier,” Seymour said.

“We saw it as needed, especially for small-time cultivators and manufacturers.”

There’s already so much demand that Seymour’s Old Kai – which started distributing in 2015 with just one truck – now has an 11-vehicle fleet.

Calyx Brands, another established distributor, has had a similarly meteoric rise in the California market.

“Over time, distributors will become an indispensable piece of this industry,” said Calyx CEO Dakota Sullivan, who noted that her company services “all areas of California. All major markets.”

Evolving sector

That value – along with California’s upcoming licensing process and the likely shakeout of many gray-market operators – will likely lead to a dramatic face-lift for the distribution business, perhaps more than most other cannabis sectors in the state.

For one thing, it’s hard to anticipate how many plant-touching, vertically integrated companies will decide to get distribution licenses themselves, which could cut down on the need for middlemen distributors.

On the other hand, licensed distributors will also be responsible for collecting state taxes on marijuana products, along with ensuring quality control, proper labeling and other logistics that growers and retailers may not want to deal with.

And that likely will seal the future for well-organized distributors, according to some industry watchers who believe California eventually will be home to scores, if not hundreds, of licensed distribution companies. Some will operate statewide, industry insiders say, and others will service only smaller regions.

“You’ll see more of that, because for a smaller-scale company to maintain the infrastructure … just economically, it’s not going to make sense to (self-distribute),” said Brett Vapnek, the CEO of Perennial Holistic Wellness Center, a Los Angeles dispensary.

Vapnek said distributors already sell him about 20% of his flower inventory and 40% of his vape cartridges and edibles.

Kahn predicted that the prospect of reducing the number of vendors who sell cannabis flower or products will make the distribution sector more appealing to licensed retailers – simply because distributors will be able to offer more products at once.

“I know a dispensary that had … a thousand people walking through their door, selling them product,” Seymour said. “That’s a nightmare, paperwork-wise.”

Khan concurred.

“Retailers want to buy from distributors,” he said. “They don’t necessarily want to buy from random people coming to them with duffel bags.”

John Schroyer can be reached at johns@mjbizdaily.com