Vertical Integration: Cannabis Experts Discuss Its Various Pros And Cons

Vertical integration in the cannabis industry is one of the most debated topics of the day across the sector.

As part of America's piecemeal approach to state-level legalization, states can choose their regulations. In most cases, vertical integration is allowed, with some states requiring separate licenses to integrate vertically.

Not so cut-and-dried to most, the business model offers numerous benefits and drawbacks. Benzinga heard insights from various industry professionals on the issue, with the following points discussed most.

Pro: Quality Control?

Advocates have long said that legalization leads to safer products. Vertical integration proponents take that point to another level.

Tyme Ferris, founder and CEO of New York-based The Pantheon Collective, said vertical integration allows for more efficient responses to quality concerns from customers.

"The production side of the business can more rapidly and easily respond and adapt as necessary," Ferris said.

He noted several other positives, including supply chain control and typically lower costs on goods "given there isn't an add-on to cost by each licensee down the supply chain line."

Laura Bianchi, a founding partner of cannabis law firm Bianchi & Brandt, that the model could benefit new markets via increased growth and stability.

"Individuals coming into the market are able to really control all aspects from seed to sale, and take greater advantage of limited tax benefits, through costs of goods sold," Bianchi said.

Ferris entered the market it Colorado during a time when the state mandated that companies produce a minimum of 70% of its products sold. He is appreciative of the experience.

"I think working within these restrictions and requirements made me a better business owner," he said.

He cautioned that results could turn out negatively as well. Ferris feels that without oversight, companies can over-produce "to allow for lower pricing, but it's with the intent solely to push out competition, control the market, and then lift prices to whatever they want to see as ideal profit."

In these situations, he said product quality can decline if a company decides to terminate staff in the quest for greater profitability.

Con: Mandatory States Limit Access?

In some states, operators must vertically integrate some or all of their operations.

Scheril Murray Powell, Esq., COO of The JUSTÜS Foundation, lives in New York and Florida, with the latter mandating its medical operators to vertically integrate.

Powell calls Florida's mandatory ruling "short-sighted and contrary to the spirit of equity associated with the freedoms of this country."

She feels such rules limit access to just those with wealth, leading small businesses to often rely on predatory partners for financial backing.

"A vertically integrated structure is unfavorable to the aspiration of the state to become a robust and inclusive industry," said Powell.

Martine Pierre, founder and CEO of Florida-based startup Cannalution, said she chose the tech sector after learning about cultivation and retail license rules.

"I ultimately realized that I would never be able to afford a permit in my home state," she said.

Pro: A Means To Profitability?

Several sources said vertical integration was the only way to survive and profit in today's market.

"When you factor in the high taxation on grow products and the competitive landscape for cultivators, having a dispensary to sell at a higher fixed margin is necessary to survival," said Michael Sassano, CEO of Somai Pharmaceuticals and Solaris Farms.

"Vertical integration is imperative for companies who wish to compete in the current cannabis market," said Matt Hawkins, founder and managing partner at Entourage Effect Capital.

Hawkins later said that "by adopting a vertical integration model, they will be better equipped to survive in the long-term."

Others disagree, like Jason Vegotsky, co-founder and CEO of sales and marketing firm Petalfast.

"I think vertical integration is the single, largest reason why cannabis companies are struggling, even with their access to higher margins," he said.

Vegotsky feels many operators underestimate the cost and resources associated with succeeding in vertical integration.

"With the market downturn and the uncertainty of funding today, vertically-integrated operators are now looking to downsize to get more focused and conserve cash," he said.

Vertical Integration Doesn't Fit All Markets

Most sources appeared unwilling to state if they were for or against vertical integration. Many noted that the model is not a uniform fit. Vince Ning, co-CEO and co-founder of California wholesaler Nabis, touched on the benefits and potential drawbacks.

"Markets with limited licenses, and as a result a lack of fragmentation and specialized roles in the marketplace, lend themselves to vertical integration for efficiency," said Ning.

He continued: "Once there are a prolific number of operators across a market, specialization (i.e.: the opposite of verticalization) needs to occur in order to create operational and fiscal focus."

Pantheon Collective's Ferris believes a regulated vertical integration model can work but urges proper oversight.

"Without regulation and government oversight, a vertically integrated business can grow into a beast, choking out competitors around them like we see today from many MSOs in various states," he said.

JUSTÜS Foundation's Powell echoed a similar sentiment, calling for an open market where vertical integration is allowed but not mandatory.

"I am not opposed to a free and open marketplace, where producers can purchase multiple license types to create a vertical environment, but equity and diversity language needs to be included in the legislation and regulations," she said.

Photo by Erik Mclean

Posted In: Bianchi & BrandtCannalutionEntourage Effect CapitalNabispetalfastSolaris FarmsSOMAÍ PharmaceuticalsSupply ChainThe JUSTÜS FoundationThe Pantheon CollectiveVertical IntegrationCannabisGovernmentM&ANewsRegulationsMarketsInterview

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