Maturing Cannabis Industry Cultivates Supply Chain Professionalism
The legal cannabis trade often is compared to consumer packaged goods, but it has similarities to the produce industry, too. Photos courtesy of The Evergreen Market.
Let’s be honest: Nobody goes into the supply chain profession because it’s an easy gig. The challenges are plentiful when you spend your days tending to the many links in today’s complex supply networks, no matter what your industry is.
But some industries come with their own added challenges. For instance, what if you were restricted to sourcing products from a very limited number of suppliers and partners, all of them confined to your state? Or, what if you just experienced the most successful product roll-out in your young industry’s history, only for this to be followed by a severe product shortage that could drag on for months or longer? Then, how about we throw in lingering historic concerns about the safety of products like yours, competition from an unregulated black market and the little matter of your business being illegal in the eyes of the U.S. government?
Supply chain professionals in the 11 states that have legalized adult-use of cannabis face exactly those challenges today — in addition to the more routine issues that could keep any procurement or logistics pro up at night. They are all looking for and developing best practices to help them succeed as the U.S. market for legal cannabis grows to nearly $23 billion by 2023, according to a forecast by Brightfield Group, a Chicago-based consumer insights and market intelligence firm for the CBD and cannabis industries.
However, as fast as the industry is growing, players in the legal cannabis industry recognize that much work lies ahead. Product shortages and state-imposed market protectionism are the biggest concerns for this sector, says Andy Seeger, a research manager for the Brightfield Group. The irony is that some legal operators today might wish they could meet product shortfalls by importing from states with more mature infrastructures. But if legal barriers continue to fall, as expected, some of those same companies might someday seek protection from much-larger multi-state operators (MSO).
“Oregon would love to ship its excess product to under-supplied markets, like newly opened Illinois where demand has outpaced supply to the point of out-of-stocks citywide in Chicago in its third week of sales,” Seeger says. “Oregon even passed a law saying [it] would love to enter into trade with other states if and when allowed. Once nationally legal, we expect many of the industry players that fought and paid for access to look to their states for protection from out-of-state competition. We are already seeing these issues with large-scale MSO.”
Some issues are likely to improve in the near-term as, indeed, all newly legalized states have experienced shortages at the outset. But other challenges are likely to linger, at least as long as the product in question remains illegal at the federal level.
“Because all product must be grown, processed and sold within the state vertical integration requirements, restrictions can make it difficult for small firms to establish presence in mature and emerging markets,” Seeger notes. “The size of firms involved will be a result of the regulations set in place by the government and must be adjusted over time.”
In a sidebar below, we offer some of Seeger’s observations on best practices in this unique industry. But to get the supply chain perspectives of a company that has been on the front line of the legal cannabis industry for many years, we reached out to Danny Khuu, director of purchasing for Washington state-based The Evergreen Market. Khuu has 10 years of marijuana cultivation experience and five years of processing experience in the Washington state medical marijuana industry.
Founded in 2014, Evergreen has maxed out the number of recreational dispensaries it can operate in its home state of Washington with its five current retail locations. To continue growing, it plans to open its first out-of-state dispensary this year in California.
Supply Chain Best Practices: What best practices can cannabusinesses in newly legalizing states learn from their peers in states such as yours?
Danny Khuu: Some of the challenges that a new market will see are understanding which price categories to have and which of those will make up most of the purchases, as well as what is a fad and what isn’t. Most cannabis consumers love good-quality cannabis but the honest truth is a majority of the consumers are living on a budget and what they are able to purchase becomes a part of that.
Economically priced cannabis is a big key and takes up most of the market share, but it is also important to have higher-quality product as well. I would parallel this to the beer industry as Budweiser or Coors produce higher volumes of more affordable products, especially compared to every region’s locally produced craft beer. In my eyes, craft beer and craft cannabis consumers may be a bit more loyal but will take up a smaller percentage of consumers.
SCBP: The Evergreen Market is opening its first non-Washington store. What supply chain challenges does this present?
DK: Some of the challenges that we will see setting up in a new, separate state will be building relationships in the California market as the medical scene [there] has been in place for over 20 years, even though the recreational industry is relatively new. Many of the vendors and better growers have already established partnerships with retailers and are limiting supply to each region to ensure that existing partners are supplied.
SCBP: What are some best practices in controlling product consistency?
DK: Ensuring consistency with our supply chain will require a lot of interaction between the buyers and the growers, and getting to know how they operate and what their procedures are will be key. Regular visits to the farms while providing feedback on quality and product presentation will be healthy for both sides of the partnership. My experience in cultivation has helped us with a lot of relationships and has helped us stay away from some fly-by-night operators.
SCBP: How do you ensure your supply chain can support your business as you scale up?
DK: Working with multiple farms and growing with your supply chain will play a major key in scaling up on the retail side as well as for your partners. Being mindful of the obstacles that the grow operations are up against will help, [and] creating a consistent flow of product with quick turns will be a great tool to help ensure a good partnership.
This will allow the farms to keep their employees busy as well as keeping the retailers from over-stocking inventory. Cannabis is still an agricultural product and can lose quality over time and [that] may ruin a customer experience.
SCBP: What are some best practices in maintaining product quality? Is it preferable to be vertically integrated — as when growers and retailers share ownership — when the state government allows it?
DK: Being open to feedback from your staff and the consumers will help aid in quality control. Having team members that are familiar with the cultivation process will help eliminate risks or even any upcoming risk.
Again, understanding how your supply chains operate and their cultivation processes are key to staying on top. Vertically integrated operations are not allowed in the state of Washington but should play a major key in states that allow it.
Most retailers in other industries have [private-branded] products, which allow them to control the margins on the specific items. A few examples of this are Costco Wholesale, which has Kirkland Signature, and Target, which has Good & Gather. It is important for companies that are able to be vertically integrated to not try and create every product on the market.
SCBP: Is it wise to model a cannabis supply chain after the consumer packaged goods (CPG) industry?
DK: The cannabis industry is quite unique and does have a lot of parallels to the CPG industry. When looking at the pre-rolls, vape products and edibles, it will resemble the CPG model. But when it comes to the cannabis flower, relating that to the fruit and produce industry will be a bit more helpful as quicker turns will help ensure fresher product [after the cure process] is provided to the buyer.
SCBP: How do you keep up with fast-changing regulations?
DK: To ensure that our supply chain is compliant, it is our job to stay ahead and implement procedures well before the regulations are put in place. Most governing agencies will give a deadline or a date of when the new regulations take effect. We will usually implement the new regulations a week or two in advance, expecting some failures along the way.
SCBP: What are your biggest concerns for the cannabis supply chain?
DK: My thoughts and concerns on the cannabis supply chain … would be with the overall quality of the products and the survival of the local craft growers within each region. While products will be more available with states like California and Florida going into mass production, we also have Canada and Mexico eager to supply our industry. Bigger brands will attempt to drive prices down in order to capture market share, while the small local craft growers will be fighting to be relevant and for shelf space.
Sidebar: Best Practices for a Growing Industry
At one time, the most visible link in the cannabis supply chain for many people was probably that friend of a friend who became notably popular whenever a Phish or Snoop Dogg tour came through town.
That’s changing fast as the industry professionalizes. Andy Seeger, a research manager for the Brightfield Group, a consumer insights and market intelligence firm for the CBD and cannabis industries, notes that for today’s legal products, “consistency is incredibly important given the testing requirements in place for products to be sold through legitimate channels. Slight differences in THC levels, other cannabinoid profiles or foreign chemical presence can either force a crop to be processed for its oil or place it among the top-shelf products.”
Here are some of Seeger’s observations on best practices in the legal cannabis supply chain:
On Supporting Growth
“[Growth] can be difficult given the variances between markets and the local requirements,” he notes. “Many growers in California have elected to enter co-ops to bundle their products and receive lower rates on processing or distribution. Distribution, in the traditional sense, is being stretched as the three-tier separation requirements of beverage alcohol are not present, allowing [cannabis] firms to become branding houses for smaller firms. Such models partner with small brands to help them tap into supply chain needs while investing in marketing, with the winners often being purchased outright by the branding house.”
On What Can be Learned from CPGs
“It is easy to want cannabis to act like any other CPG good, and for many intents and purposes it will,” Seeger says. “However, there are significant and unique differences in format, use, channel and a host of other facets that necessitate new thinking on how route-to-market strategy is executed. We will see online sales, direct-to-consumer, on-premise and likely integration into other retail outlets within the next decade, all of which will face challenges that are wholly separate from other goods.”
“Compliance should be an ongoing, ever-present thought at the forefront of any industry member’s mind,” he counsels. “Making these systems work requires participants willing to make them work and states willing to listen to what is working. Change will be constant in the industry for the foreseeable future, and compliance will be the single-largest factor in the success of many firms.”
On Vertical Integration
“Vertical integration can be a challenge or a boon depending on the market. It can inhibit growth to new markets given the high upfront capital costs as easily as it can enable firms to insulate themselves from market conditions,” Seeger observes. “We are beginning to see pricing tiers and quality preferences emerge as more product formats, such as edibles, come into their own with highly professional, branded offerings. Today’s consumers look for high THC content and what’s on sale, but we should be cautious as tomorrow’s users will be remarkably different.”