It used to be that if you wanted marijuana, you got the flower bud and smoked it in either a joint or pipe of some sort. Today, however, the options are expanding. Aside from the traditional bud, marijuana dispensaries offer various forms of marijuana concentrates, including shatter, wax, crumble, sugar, honeycomb, sap, and oil (apparently these names refer to a concentrates texture). The expanded options are because marijuana is becoming a big business. Actually, it’s always been a big business. However, now it is a big legal business. As a result, the marijuana supply chain is becoming increasingly complex.
Currently, marijuana is fully legal in 11 states, plus Washington DC; it has mixed status, which means it is either legal from a medicinal standpoint or CBD oil is sold, in 28 states total. Living in Massachusetts (which will be my bias for this article), it has been interesting to watch how marijuana laws have changed over the last decade. In November 2008, voters passed a ballot initiative that decriminalized the possession of small amounts of marijuana. This meant that the possession of less than one ounce of marijuana was punishable by a fine of $100 without the possessor being reported to the state’s criminal history board; this was in stark contrast to previous laws where people charged faced up to six months in jail and a $500 fine. Four years later, voters approved a ballot question to legalize medicinal marijuana. And finally, four more years later, voters passed a ballot initiative to legalize the recreational use of marijuana. This, of course, is still contrary to US federal law, which has yet to legalize marijuana.
The Marijuana Supply Chain
The marijuana supply chain is an interesting market to follow. Like any agricultural product, there are ebbs and flows to its supply and demand. However, there is one caveat in the marijuana supply chain that makes things a bit trickier: cannabis products can only be sold and consumed within the state that the original plant was grown. Given that marijuana is technically illegal from a federal standpoint, bringing said plants across state lines would bring about potentially harmful ramifications.
However, from a purely supply chain standpoint, the marijuana market strikes a similar delicate balance to other perishables. Luckily, unlike other fruits and vegetables, marijuana can be grown year-round, so there is no “peak season” for freshness. But, climate changes and droughts can certainly hinder production.
There is also the question of whether an entity wants to go legal or not. The critically acclaimed Netflix series Murder Mountain took a dive into this. Humboldt County, CA was, and continues to be, a hotbed for marijuana growth, given the location’s growing conditions. For decades, growers would hit the black market with high quality marijuana. The DEA would raid the area looking to shut down grow operations with inconsistent success. When California legalized marijuana, many of the growers looked at taking the legal route. However, the costs tied to permits were simply insurmountable for many growers, so they decided to continue to operate on the black market. For those growers that did decide to go the legal route, the expenses were significant, and they knew that any hiccups in their grow operation could cripple them.
From an actual supply chain standpoint, there are many entities that need to co-exist. Marijuana, like all agricultural products, starts with a seed. Companies at this stage are the first point of harvesting quality marijuana. Companies, growers, or cultivators (depending on what they want to be called) harvest the seeds and either process the flower themselves or sell them another entity to dry, trim, and prepare the flowers. Once the flowers have been dried, they move on the “finishing process” which can be in the form of bud, concentrates, or edibles. Every entity that touches the product needs to be fully licensed in the state that it is conducting business, and then the product moves on to a distributor. Marijuana distributors will ship the final products to a dispensary and / or warehouse goods that are waiting to be sold.
The marijuana supply chain, like any supply chain, comes down to matching supply with demand. This is easier said than done. For example, in October 2018, Canada legalized recreational marijuana country-wide. When dispensaries opened, a funny thing happened – they sold out too fast. There was a significant gap in the expected demand versus the actual supply. Whenever a new area legalizes marijuana, this is to be expected. For this reason, and with a close eye on the legalization in Canada and Colorado as a blueprint, Massachusetts put strict restrictions on the amount of marijuana a consumer could buy. This ensured that there would not be a significant shortfall of supply. Massachusetts also has a limited number of dispensaries at this time, and many are “by appointment only” to help mitigate the risk of understocks.
Another interesting aspect of the marijuana supply to watch, especially in Massachusetts, is the impact of home-grown operations. According to state law, adults can grow up to 6 plants in their home, and that number jumps to 12 for two or more adults. Growing marijuana, to some degree, is similar to the beer homebrewing market. However, unlike brewing beer, growing your own marijuana takes significantly more capital and space. Growers will need a dedicated space that can maintain a consistent temperature and humidity level. Additionally, growers will need grow lights, air flow, and lots of electricity. There is also the decision between soil and hydroponics, which is a method of growing plants without soil by using mineral nutrient solutions in a water solvent.
While all of this sounds daunting, for the homegrow expert, it can be managed; and this actually opens the potential for more business within the marijuana supply chain to offer kits to meet the needs of everyone. However, odds are, much like the craft beer craze, the DIY consumer will not make a serious impact on the overall market.
The next question for the marijuana supply chain is when does home delivery become a reality. I’ve had more than my fair share of friends live in New York, and all of them will tell you that marijuana delivery is already a reality. However, in this instance, I am talking about legal marijuana delivery. As we’ve written about many times, companies are looking to become the “Uber of Something” and I’m sure the marijuana industry is no different.
From a crowdsourced standpoint, the restaurant and grocery model is pretty saturated. Looking at marijuana, it is more similar to the alcohol industry. Sure, there are some liquor stores that will provide delivery, but it is not widespread. Sam’s Club’s recent partnership with Instacart for alcohol delivery may be the window that the marijuana industry needs.
However, considering that it is still against federal law, legal delivery does not seem to be imminent. There are a number of hurdles to consider. First and foremost, is that legal issue. Since the Federal government still classifies marijuana as a controlled substance, it would be quite difficult for a crowdsourced delivery platform to get clearance to deliver marijuana. Therefore, any company that is/ delivering marijuana to a customer would be in violation of multiple laws. Beyond that, there are two other questions. First, what are the potential security and shrink risks. And second, would marijuana delivery be profitable enough.
Every company that offers crowdsourced delivery of items faces the scrutiny of security and shrink. There have been too many stories about rideshares where the driver did not pass this scrutiny and then committed a crime. For the majority of retail segments, shrink with independent drivers is not much of a concern; they can’t simply open a package and take a little bit as it would be obvious. However, unless marijuana packages were vacuum-sealed with tamper proof packaging, it would be possible for drivers to pilfer small (potentially unidentifiable) amounts from each delivery.
There is also the question of just how profitable marijuana delivery would be. This is one of those questions that is certainly open for debate. Would the majority of customers prefer to stay home and have their product delivered? Sure. But how much would they be willing to pay. Also, unlike most crowdsourced delivery models, marijuana is sold by dispensaries only. This means that the dispensary would likely be using a private fleet for delivery. This negates any upsell and cross-sell opportunities on paraphernalia or other strands.
The marijuana supply chain is big business. And as more states look at legalizing the sale of marijuana, the business will only grow. The marijuana supply chain is also a complicated matter, as there are multiple hand-off spots for the actual cultivation of products. This does not even take into account the supply chain ramifications and the market for homegrown operations. Either way, the market is poised to grow, dispensaries need to balance supply and demand, and the possibility of home delivery remains in play. Over the next few years it will be interesting to see how many more states legalize recreational marijuana and how the federal government reacts.