No one should be surprised to hear that the business of cannabis can be highly profitable. Transitioning an incredibly successful underground industry to a regulated market is going to create wealth. The demand for cannabis has always existed, and the nod of approval from state government legislators only increases the number of potential cannabis users.
Selling and producing cannabis has been historically lucrative; however, business owners are experiencing challenges unique to a regulated market. The most recent hurdle in operating or scaling a cannabis business is disruptions in the supply chain.
Several factors come into play regarding the logistics of a recreational marijuana business, including keeping up with demand, following regulations, product trends, and contained state markets.
Struggles in the Legal Cannabis Supply Chain
The election last November ushered in four more states to the adult-use marijuana industry, including the largest legal market in the world, New York City.
There are challenges in all adult-use markets, but we don’t have an existing plan for a metro area of over 18 million people to model after. New states will inevitably run into issues as the industry continues to mature and evolve.
Attempting to Keep up with Demand
The cannabis industry may be an emerging, cutting edge industry as far as legislation is concerned, but many companies are operating with pen and paper. A report by Spend Matters details how cannabis business operators in Denver were slow to adopt software to manage their logistics and instead relied on spreadsheets, emails, and handwritten notes. As a result, the businesses experienced difficulties purchasing enough products to keep up with demand.
Many new cannabis businesses don’t have problems selling products, but they run into problems once they begin to scale. Building a solid supply chain is challenging, especially in a heavily regulated market. Without experience negotiating contracts, establishing relationships with suppliers, and efficiently managing inventory, expenses, and waste can grow uncontrollably.
Demand only becomes more of a problem if too many licenses are given out to businesses. Oregon continues to see a sufficient aggregate supply. It continues to exceed annual demand, despite a historic level of sales in Oregon in the months following covid-19. However, this is unlikely to happen in the newly legal markets.
Regulatory Challenges in Packaging
Packaging and labeling can also cause disruptions in the supply chain. Changes in regulations can result in new labeling requirements or even potency levels per container. Edibles have gone through abrupt changes in Colorado and Oregon, forcing inventory managers to pull products from the shelves or cancel upcoming orders.
For instance, Oregon limited the potency levels for edibles to 5 milligrams per serving and 50 milligrams of THC per package. There is currently a bill awaiting approval that would expand the restrictions. Businesses in Oregon must be aware of changes and be able to adapt quickly.
New states legalizing adult-use will run into the same problems. Edibles consist of about 12% of Oregon’s 1-billion-dollar cannabis industry, but advocates suggest that regulations are hurting business. Just across the Columbia River, in Vancouver, Washington, the restrictions don’t exist; dispensaries offer 100mg per package.
Sudden regulatory changes in packaging can destroy a stable supply line. As a result, cannabis companies have to adapt to stay competitive by providing in-demand products. In addition, many of the new legal markets are awaiting packaging and potency restrictions; entrepreneurs will have to ensure they can keep products on the shelves that are compliant.
Trends in the Industry
After a decade of adult use marijuana in the US, we’ve witnessed a number of trends emerge. Low THC flower, CBD oil, terpenes, and dabs are just a few of the trends cannabis retailers must stay informed on to remain competitive. Specific strains like the Cookies brand have also driven consumer spending habits. These sudden changes can put strains on existing supply chains. New cannabis businesses must be aware of developments and work with manufacturers ready to adjust to the market’s needs.
The coronavirus pandemic recently tested the industry in ways we’ve never seen before. New Mexico, in particular, saw a flower shortage in their medical cannabis dispensaries. According to Global News Wire, “between December 31, 2019, and March 31, 2020, prices jumped by 17 percent to $11.64 per gram.” New Mexico hasn’t opened up recreational sales yet and has already seen the challenges of a growing market.
In other industries, the problem can be solved by importing products from other states or countries. The US cannabis industry, however, restricts production within state borders. A decrease in supply can only be resolved by increasing plant count, a solution impossible to implement overnight.
Challenges in the New Legal Markets
New Mexico isn’t the only state to experience supply line challenges. Every new adult-use program has specific regulations, demands, and trends to follow.
Supply Shortages in Illinois
Beginning January 1, 2020, residents of Illinois could start purchasing recreational marijuana. Due to expanding access to all adults from medical-only sales and the COVID-19 lockdowns, dispensaries experienced immediate supply issues. St. Louis NPR reports that Illinois will likely not experience stability in the market until later this year.
Preparing for New York
The tri-state area is getting ready for a massive green rush. New York, New Jersey, and Connecticut have passed legislation for adult use. Entrepreneurs are preparing for the number one legal cannabis industry by setting up adequate manufacturing to handle the demand.
Green Thumb Industries just invested 50 million into converting a former federal prison in Warwick, NY, to a cannabis production facility. They also plan on opening up eight dispensaries around New York as soon as legislators sort out the particulars regarding recreational sales.
Illinois rolled out its program in record time, taking around six months rather than the industry average of 12-18 months. However, New York cannabis business owners will likely have to wait at least a year for the licensing process due to the market size.
New York also passed a cannabis consumption site that will present new challenges for business owners and regulators. Giving cannabis users a place to use the legal products has yet to be done in the US; building these supply chains will be difficult, and there’s no model already in place to replicate. No one knows the level of demand for New York City residents or cannabis tourism coming to the Big Apple, but bet on there being issues early on.
The Stigma is Fading
A recent poll by Pew Research Center found that over 90% of Americans believe marijuana should be legal either for medical or recreational purposes. In 2015, the number was only 58%, according to a Gallop Poll.
Cannabis is here to stay, and the success of early programs is largely responsible for the growing support for legal weed. Colorado, Oregon, and Washington legalized adult use nearly a decade ago, and society hasn’t spiraled out of control. Social proof goes a long way with people unfamiliar with the industry and the effects of cannabis; historically, deep-red states are even starting to pass cannabis reform.
Destigmatizing the industry will continue to drive sales. The market shifting to products designed for medical purposes and not solely to get as high as possible also welcomes new users to the rapidly growing market.
An Ever-Changing Industry
Many factors affect a cannabis business’s supply chain. New legal markets have the luxury of learning from mistakes made in the past, giving companies an advantage today that didn’t exist five years ago. Building on these lessons, utilizing logistics software, maneuvering changes in regulations, and keeping up with market trends are essential to building and maintaining strong supply chains.