Staying compliant costs money, 280e kills your deductions, and price per pound is down. Just how the hell are you supposed to make money? You do it by bringing your supply chain in-house, cutting out middle men from the process, and boosting your overall efficiency. This is the essence of being vertically integrated.
The cannabis industry loses a lot of profit margin to 280e and compliance costs, but vertical integration could be your solution in 2024. By controlling production from seed to sale, you’re cutting out several middle men from the process and boosting your overall efficiency.
Going vertical isn’t easy - it requires more licenses, more paperwork, additional compliance needs, and the ability to operate multiple businesses at once. If you can handle that successfully, it can be the catalyst for huge success. Learning how to do just that is what we’ll be covering right here.
As always in US cannabis, the legalities here are complex and vary state by state. Some states allow vertical integration, some prohibit it and many leave it up to you. Once you’re done here, be sure to check your local regulations before you head into the planning stage.
Why vertically integrated cannabis operators have so much potential
A lot of operators tend to write off vertical integration as something reserved for those with deep pockets and leave it at that. While the setup costs are very high (see below for a smaller scale option, though) the benefits for getting it right are significant.
Increase profits by removing the middle men
Every business needs to have a profit margin for them to be functional, and this includes the other brands that make up your supply chain. What that means is if you rely on 3 or 4 other businesses to help you produce, package, ship or retail your product, that’s 3 or 4 chunks of profit margin you’re currently giving to others.
When you handle that entire chain from start to finish, all of those profits go directly to your P/L statement instead.
Overall cost reduction
When you’re only producing your own products, the entire supply chain becomes simplified. While your current processor might be producing 300 SKUs to satisfy their entire range of customers, you may only need 100 to get the job done.
The same goes for the rest of your process as well. When you only need to provide for your needs, everything gets smaller and easier. A smaller space for cultivation, a smaller warehouse to store product, smaller facilities for packing, simplified packaging and straightforward logistics.
While there is something to be said for economies of scale, the fact that you can downsize so much compared to regular operators is a huge saving.
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Production flexibility
When you are your only client, you can make all the changes you need without having to worry about upsetting your buyers (so long as the retail product is good).
This flexibility leaves you free to experiment with new products, procedures and methods to find even more efficiency in your day to day. You also have more room to trial new product ideas and see what resonates with your audience, potentially making a more popular product line at a lower production cost.
Quality control
It’s so frustrating and time consuming when a vendor sends you sub-par products. Not only do you have to deal with reordering and the wait times that come with that, you also have to jump through Metrc hoops to make sure you only receive tags for the good products..
Since your sheer production volume is lower than a dedicated processor, for example, you have a more manageable flow to keep under control. Better yet, if quality problems do pop up, you can get them resolved more efficiently.
This reduces your wait time, Metrc time and overall frustration, leaving you free to get on with the work that matters most.
A more adaptable supply chain
Since you control the entire process from seed to sale, you have a far better ability to adapt to market demands and changes in legislation. For example, if you have a sudden increase in demand for one particular product type, you simply increase production and have it on the shelves fast.
Working with third parties, this can be weeks or even months for them to have that capacity to ramp up, and even then you’re competing with their other customers to get that increased stock.
Vertical operators can be more agile and faster to respond to market trends.
A better result for your retail customers
When you can produce a better range of product, faster and at a lower sale price, this is the dream outcome for your retail customers. This, in turn, boosts customer satisfaction, customer loyalty and demand for your product. All because you were able to streamline further up the chain.
A better product line, low prices and more satisfied customers. What’s not to love about vertically integrated cannabis ops?
The downsides to being a vertically integrated cannabis operator
To make your own educated decisions around vertical integration, it’s important that you know the drawbacks of this model as well. For most, the pros far outweigh the cons, but only you can make that final decision for yourself.
You need a lot of capital to get started (Or do you? See the microbusiness section below)
From a cost perspective, setting up vertical integration is no different to setting up multiple businesses simultaneously. You’ll need multiple premises which means multiple leases, multiple sets of insurance, utilities, staff etc.
Depending on your state, you may also need multiple cannabis licenses which carry separate application and license fees. So the chart above for the current status in your state (accurate as of December 2023).
You need the clout to attract experienced talent at every stage of the supply chain
Expanding to cover multiple business types required a broader spectrum of specialized knowledge than any one person is likely to have. Rather than learning the hard way, you should be looking to hire at least one specialist for each of these stages.
By leaning on their specialist experience, you can learn from them rather than making a series of costly beginner mistakes.
Jack of all trades, master of none
(but so much better than master of one)
You may come across the opinion that it’s better to specialize in one field rather than cover the entire spectrum in-house. While there is some validity to that idea, this is where hiring the right experience becomes so important.
Given how strong the pros are for vertical integration, and how easy it can be to hire the right specialists, this is only a sticking point if you don’t hire the right talent. Each segment of your supply chain needs to be given the right resources, attention and experience for vertical integration to be successful.
It can be done very effectively, so long as you have the right attitude from the jump.
More moving parts and paperwork to manage
Since you’re effectively running multiple businesses, that means you have the combined paperwork and most of the compliance requirements that go with it. At this level, spreadsheets and whiteboards aren’t going to cut it anymore, and that’s where a cannabis ERP becomes critical.
A solid ERP offering like Distru gives your entire brand a single interface to deal with, and uses automation to do so much of the heavy lifting for you. More on that below.
Use an ERP to manage all these moving parts in one place
With multiple segments running in parallel, there’s a lot more data, paperwork and compliance required than any spreadsheet can hope to keep in line. The key to successfully managing all of this is with a powerful Cannabis ERP (Enterprise Resource Planning software) like Distru. We automate so much of that tedious workload and remove the need for double and triple-handling of data.
Imagine how complex your spreadsheets would have to get, just to manage inventory. From your initial seeds, through to processing and packaging, shipping and eventual retail. Just tracking that product inventory alone, across multiple facilities would be an absolute nightmare without an ERP.
Then, you throw in the complexities of Metrc compliance, financials, packaging, reporting and team comms across all of your facilities. . . you can see how this would quickly get out of hand. Or, you can implement an ERP which handles all of this for you seamlessly from a single interface.
When we have regular operators like Cheef, Drops, Eureka and Argent saving 150 - 200 hours per month with their single operation, just by using Distru, imagine the impact that’ll have for you as a vertical cannabis operator.
The bottom line is, not using a cannabis ERP as a vertical operator will hurt your bottom line in a huge way.
Read more about what a cannabis ERP means to your business, even if you’re not a vertical operator.
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Microbusiness licenses offer a more cost effective entry point
In states that allow them, a microbusiness license is a great way to get started without needing millions in cash. This smaller structure removes the need for a series of large facilities, licensing and other big startup costs from the equation. Instead, a microbusiness is a vertically integrated cannabis business with at least 3 of the 4 operations taking place in a single facility.
As always, each state will have its own set of restrictions you’ll need to get familiar with. For example, there will be limits on the total size of your operating space, the number of employees and your overall production volume.
While these will represent a literal limit in the future, it’s a perfect way for you to get set up and operational at a more reasonable price point. Cheaper licensing costs, cheaper leases and insurance, lower payroll costs etc.
If you choose to expand later, your functioning microbusiness is a far more attractive base for investors to consider.
Bringing your entire supply chain in house is what a vertically integrated cannabis operation is all about. It might seem like an intimidating prospect but with the right team and a powerful ERP on your side, you’re in a position to be far more successful than a standalone brand.
Unsure about what those next steps look like or if an ERP is the solution for you? Have a chat with our team today and we can point you in the right direction.
