July 4, 2017

California Cannabiz – What’s the Deal with Vertical Integration?

July 4, 2017
california vertical integration

The state of California recently consolidated the rules and regulations for both medical cannabis and recreational cannabis, officially merging the Medical Cannabis Regulation and Safety Act (MCRSA) and the Adult Use Marijuana Act (AUMA) to form the Medicinal and Adult Use Cannabis Regulation and Safety Act (MAUCRSA).  MAUCRSA serves as the all-encompassing, official set of rules and regulations for both medical and recreational cannabis in the state of California.  So now that we officially have guidelines on how cannabis businesses are allowed to operate, one big question atop people’s minds is, “What’s the deal with vertical integration?”  The reason this is such a big question is because the state intentionally made it difficult to establish a vertically integrated business, at least at first.

With the way the rules are currently structured, the closest you can get to a true full vertical cannabis business still has limits. “Commencing January 1, 2023, large outdoor, indoor, and mixed-light cultivation licenses would also be available.”  California currently offers a full vertical license combination with a Type 10 license (dispensary; general) in combination with either a Type 6 or 7 state license (manufacturing license with either nonvolatile or volatile extraction methods) and a cultivation license of under 22,000 sq. ft, at least until January 1, 2023, when large cultivation licenses become available.  So technically, it could be considered vertically integrated, but only to the point of what you’re able to grow.  If your 22,000 ft. cultivation facility runs out of product, you’re forced to get product from your competitors to get sellable inventory into your dispensary.  So you can be a full vertical, but only to an extent before you’re forced to reach beyond your integrated supply chain.  Makes you wonder; how many dispensaries can a 22,000 sq. ft. cultivation facility supply before they run dry?  We’ll know that answer soon enough.

So why is California restricting licensees from creating a true vertically integrated business without limitations?  The answer is simple; they want to allow an open market where everyone has a fair chance to establish their presence.  Let’s use Colorado as an example; Colorado has had an active recreational market for almost 4 years and new studies show that 33% of dispensaries are now a part of a chain, and that number is likely to increase exponentially.  As with any new industry, thousands of business owners and entrepreneurs flood the market, but as time goes on and the more established businesses continue to grow, they slowly overtake the smaller businesses.  California currently has an estimated 20,000+ cannabis businesses operating in the state and is expecting to give out even more licenses than that.  These restrictions are in place to allow everyone to get a fair chance at their share of the market, but these protections aren’t going to be permanent, so it’s not to be taken lightly when I say you need to establish your business and create a strong customer base before the real competition begins.

The new MAUCRSA law states that starting January 1, 2023, a Type 5, Type 5A, or Type 5B licensee (cultivation facility greater than 22,000 feet) may apply for and hold a Type 6 or Type 7 license (manufacturing license using nonvolatile or volatile extraction methods) and apply for and hold a Type 10 license (general dispensary license with no limitation on locations).  In other words, you can have the largest cultivation facility license offered, coupled with a full manufacturing license and an unlimited number of dispensaries; AKA a true full vertical cannabis business with zero limitations on growth.

So what does that mean for businesses?  It means you have 5 years.  If you’re a small business owner, or any size business owner, you have 5 years to establish your foothold in the market before the well-funded chains have the freedom they need to expand as quickly as they’re able to.  California has been gracious enough to structure the program in a way that allows you to compete, but the protections won’t last, so you need to do everything you can to establish your business, your brand, and your customer base.  Those who establish recognizable and trusted brands will be able to sustain.  There’s no time to delay in becoming the business that you need to in order to stay alive in what will become the largest cannabis industry in the world.

Check out our California page for updated rules and regulations, as well as break downs on the current vertically integrated license combinations that are being offered.

Dr. Moe Afaneh, COO, BioTrackTHC



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