Marijuana Business Magazine March 2019

Marijuana Business Magazine | March 2019 78 T he decision to vertically integrate his new cannabis business is one that has kept Kevin Currier awake at night. Ahead of Michigan’s transition to an adult-use market, Currier, a resident of the Great Lakes state, applied for a medical marijuana retail license in Grand Rapids. But he often wonders whether choosing to vertically integrate—defined here as having a cultivation and retail component to a business—would better position his future endeavor for success. “People keep telling me, ‘Do what you love,’” he said. “Well, I’d love to make a living at this.” Business owners make the decision to vertically integrate early on, and in some markets, the state chooses for you. In Washington state’s recreational market, vertical integration is prohibited, and in New Mexico’s medical marijuana market, it’s required. Other states, such as Colorado and Oregon, allow vertical integration but don’t mandate it. State license types and tax laws also play critical roles in the decision to vertically integrate. Consider Oregon, for example: The state has temporarily suspended approvals for new cultiva- tion licenses because of oversupply. But there’s no cap on the number of licenses the state can award. If the state lifts its suspension and begins approving new licenses, it could create an even more tenuous environment for a nonvertical- ly integrated cultivation business that doesn’t control its retail destiny. “Every state is different, and that cre- ates a different risk-reward for being ver- tically integrated versus not,” said Troy Dayton, CEO of The Arcview Group in San Francisco. The ability to leverage economies of scale in a ver- tically integrated business model is a clear advantage— but experts largely agreed that vertical integration isn’t the model for a busi- ness to succeed. “Because the customer demographic of cannabis is so broad, a diverse num- ber of business models are potentially viable—if decisions are made well,” said Sabrina Fendrick, the director of govern- ment affairs for Berkeley Patients Group, a nonvertically integrated retailer based in Berkeley, California. “I think the question is, does one want to be a jack of all trades or a master of one.” THE CASE FOR VERTICAL INTEGRATION Vertically integrated businesses can be more responsive to the needs of con- sumers and rapidly capitalize on trends, said John Downs, director of business development at The Arcview Group. For example, if a vertically integrated business sees retail sales increase for its Bubba Kush strain, that information can quickly be relayed to the cultivators, who can grow more for the next harvest. With vertical integration, business owners are also able to leverage econo- mies of scale, he said, meaning they see higher profit margins throughout the supply chain. And so far, Dayton said, the public markets seem to favor vertically integrat- ed businesses. He’s not convinced that’ll always be the case, but if you’re building a business to be an acquisition target, vertical integration might make your venture more attractive. A state’s license structure could also make vertical integration more When deciding to vertically integrate, there are a number of factors to consider, experts said. Things to keep in mind include: • What your state allows. In Wash- ington state, for example, vertical integration is prohibited; meanwhile, in New Mexico, it’s required. Other states allow vertical integration but don’t mandate it. • Upfront capital costs, which can be higher for concentrates and infused food and beverage manufacturers. • A state’s license types and the corresponding tax rates. Alaska's cultivators, for example, pay a hefty excise tax on high-quality flower when it’s sold to retail. • Your business objective—whether, for example, you want to stay in charge of day-to-day operations or build an acquisition target to sell. Sabrina Fendrick of Berkeley Patients Group Courtesy Photo When it comes to retail, consumers care more about a shop's location, trustworthiness, selection and professional staff than about whether the store grows its own product. Photo by Lindsey Bartlett JACK of all TRADES ... or Master of One?