As the cannabis industry continues to grow, existing businesses are looking for ways to stay ahead of the competition. One strategy many companies are turning to is vertical integration. By bringing multiple aspects of the cannabis supply chain in-house, businesses can streamline operations, reduce costs and increase control over their products. But is vertical integration the right move for your cannabis company? Read on to learn the ins and outs of vertical integration to help you decide whether it's the right strategy to take your cannabis business to the next level.
What Exactly is Vertical Integration?
Vertical integration is a business strategy in which a company controls multiple aspects of the supply chain for a particular product or service. This can include everything from production and distribution to retail sales and customer service. The goal of vertical integration is to increase efficiency, reduce costs and gain greater control over the final product.
How Does Vertical Integration Work in the Cannabis Industry?
In the cannabis industry, vertical integration can take many forms. For example, a cannabis cultivation company might vertically integrate by also opening a manufacturing facility to produce cannabis concentrates and edibles as well as a dispensary to sell its products directly to consumers. This allows the company to have greater control over the quality and consistency of its products as well as the customer experience.
Another way vertical integration can be applied in the cannabis industry is through partnerships or mergers with companies that operate in different areas of the supply chain. A cannabis cultivation company might partner with a cannabis processing company to create a seamless supply chain from cultivation to manufacturing to retail sales.
By vertically integrating in the cannabis industry, companies can also reduce their reliance on third-party vendors, which can be costly and unreliable because of the industry's unique legal and regulatory challenges.
How to Use Vertical Integration in the Cannabis Industry
To fully use vertical integration in the cannabis industry, companies must carefully consider each step in the supply chain.
Cultivation
Vertical integration in cultivation means controlling the entire process from seed to harvest, allowing for greater consistency, quality and cost-effectiveness. Here are some ways that cannabis cultivation companies can vertically integrate their operations:
- Expand into manufacturing. By creating in-house manufacturing capabilities, cannabis cultivation companies can turn their raw plant material into finished products such as concentrates and edibles. This allows for greater control over the quality and consistency of the final product.
- Partner with a processing company. Partnering with a processing company can allow cannabis cultivation companies to outsource certain aspects of the supply chain while still maintaining control over the final product. For example, a cultivation company might partner with a processing company to create cannabis extracts for use in their products.
- Acquire other cannabis companies. By acquiring other cannabis companies that operate in different areas of the supply chain, such as manufacturing or distribution, cultivation companies can create a vertically integrated operation that controls every aspect of the process. This can lead to greater efficiencies and cost savings.
Extraction
Companies that are vertically integrated usually extract oil from the plant material they cultivate themselves. By doing so, they can create more potent and varied products while maintaining complete control over quality assurance measures, such as testing and labeling requirements. They’ll also be able to ensure consistency, which is crucial to building customer loyalty.
To successfully implement vertical integration in extraction, companies must invest in state-of-the-art equipment and skilled technicians to operate the extraction machines.
Manufacturing
Companies that have vertical integration often manufacture their own finished products such as edibles or topicals. This allows them to have greater control over product design, packaging, and branding, which can differentiate them from their competitors.
Distribution
By setting up their own retail outlets, they can not only interact with customers directly but also increase their brand presence and product offering. This helps them avoid the substantial fees associated with third-party retailers and ensure that their products are marketed in the most effective way.
Establishing partnerships with other cannabis companies can enable them to share resources, reduce costs and expand distribution networks beyond what one company could achieve on its own. These alliances offer better access to capital for business growth as well as more powerful platforms for research and development activities.
Benefits of Vertical Integration
Vertical integration can offer cannabis companies some key benefits.
Cost Savings
Vertical integration in the cannabis industry can provide substantial savings as companies have access to a range of resources, from production and distribution to retail. By controlling every aspect of the supply chain, cannabis companies are able to reduce costs associated with outsourcing and inefficiencies resulting from third-party involvement. Having full oversight over product quality allows companies to streamline their processes and better control variable expenses.
Quality Control
Cannabis companies that are vertically integrated are able to ensure that high standards are maintained throughout the supply chain. This includes proactive monitoring of inputs such as seed genetics and soil nutrients as well as careful cultivation techniques that optimize plant health and cannabinoid profiles. Vertical integration helps eliminate inconsistency between batches by providing a consistent process from start to finish.
Efficiency Gains
Vertical integration allows for greater efficiency throughout all stages of production, from growing and harvesting to processing and packing the final product. This enables cannabis companies to respond quickly to customer demands while ensuring quality at each touchpoint of the pipeline. It allows for rapid technological progress in areas like automation and digitalization, which increases operational efficiency further down the line.
Challenges of Vertical Integration
While vertical integration can offer many benefits for cannabis cultivators, including greater control over the quality of the product and increased efficiency, there are also several challenges that must be considered.
Regulatory Changes
As with any business, cannabis owners have to stay abreast of ever-changing regulations in the industry. With vertical integration, owners must pay special attention to how regulations may not only affect the cultivation and sale of their product but also its transportation and distribution. In addition, different states or localities may have different laws associated with cannabis use and sales that can impede the ability to vertically integrate a business.
Capital Investment
In order to vertically integrate a cannabis business, it is necessary for owners to be able to invest substantial amounts of capital. This includes purchasing new equipment as well as hiring employees who are knowledgeable in all aspects of the industry from seed to sale. Research and development in new products or services often requires additional investment in personnel and materials.
Complex Supply Chain Management
Cannabis owners face numerous challenges when managing the supply chain associated with a vertically integrated business. This includes having an understanding of where product is sourced, determining when it is most cost-effective to transport it, tracking inventory levels at all points along the supply chain and having accurate data on customer demand.
A Valuable Strategy for Some Cannabis Companies
Vertical integration can be a valuable strategy for cannabis companies looking to gain greater control over their production and distribution process. However, it is important to recognize that there are also several challenges and risks associated with this approach, including high costs, regulatory compliance, market risk, expertise, operational complexity and intensive capital needs. Carefully consider the potential benefits and drawbacks of vertical integration and determine whether this strategy aligns with your long-term goals and capabilities.
Frequently Asked Questions
Is vertical integration allowed for cannabis companies?
In some states and countries where cannabis has been legalized, vertical integration is allowed, while in others it may be prohibited or restricted.
What are two types of vertical integration?
The two main types of vertical integration are forward vertical integration and backward vertical integration. In forward vertical integration, a company takes control of the distribution process, such as wholesalers and retailers. In backward vertical integration, a company takes control of the production process by owning or controlling suppliers.
How is vertical integration and horizontal integration similar?
Both horizontal and vertical integration have many similarities. Both involve taking advantage of synergies between two sides, both involve combining different businesses that belong to the same industry, and both can help reduce costs by avoiding redundant activities.