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Posted by Mike King / Apr 08, 2021

The Pros and Cons of Cannabis Vertical Integration

Vertical integration is a term that’s thrown around a lot in the business world, yet not everyone truly understands what it means. In short, vertical integration is when a business owns every stage of its supply chain. For a company like Apple, it means they not only manufacture their own screens and cameras to create an iPhone, but also own the manufacturing facilities where they’re made and the retail locations where they’re sold.

It’s not much different for the cannabis industry. When someone talks about a vertically integrated cannabis company, it means they own and control the cultivation, lab and extraction, manufacturing and retail sectors of their business. Each vertical works in tandem to streamline the seed-to-sale process. Let’s dive a bit deeper into how it all works.

The 4 Stages of Cannabis Vertical Integration

  1. It all begins at the cultivation stage where cannabis plants have grown to maturity. Once ready for harvest, the team trims the plants to prepare them for the next stage.
  2. During the lab and extraction stage, the cannabis plant goes through an extraction process to remove the cannabinoids for edible or concentrate production.
  3. In the manufacturing stage, the extracted cannabis is made into products and packaged. If the plant remains in its flower form, this is where it’s weighed and labeled.
  4. The final step is the retail stage. Once products are labeled in compliance with local state laws, products can be sold on retail or medical shelves.

Vertical Integration Laws Vary by State

In some cannabis-legal states, vertical integration is mandated because it allows for better oversight of the seed-to-sale process. State regulators claim it helps reduce retail facilities from purchasing black market products since businesses are required to produce, manufacture and sell their own products. Proponents also argue it helps address federal tax issues since cannabis businesses can’t deduct regular business expenses under Section 280E of the Federal Income Tax Code. Plus, vertically integrated businesses can share overhead costs like rent and utilities if properly handled, which helps relieve the tax burden of 280E.

Other states ban vertical integration, often citing alcohol pre-prohibition fears for doing so. Before prohibition, alcohol manufacturers developed shady business partnerships with bars, promoted over-consumption and enjoyed a lack of competition. In an effort to change these practices, alcohol post-prohibition regulators prohibited vertical integration in the alcohol industry. States that ban vertical integration have the same fears of cannabis businesses’ monopolization and decreased competition as reasons to ban the practice. In addition, it’s difficult for small businesses to enter the market due to the high upfront capital required for vertical integration.

While some states require or ban vertical integration, a handful of states leave the choice up to the businesses. For those states, cannabis companies can weigh the following pros and cons of vertical integration to decide if it’s right for them.

The Pros and Cons of Vertical Integration

Like all business decisions, it’s important to carefully weigh the pros and cons before deciding what’s best for your company. This, of course, depends on whether vertical integration is allowed in your state.

Pros of Vertical Integration

  • Controlling the production process allows companies to make their products at a lower cost.
  • Flexibility in the production process creates opportunities for cost-saving measures.
  • Control of the production line ensures better accuracy and quality control.
  • Vertically integrated cannabis businesses can potentially save on overhead costs like rent and utilities.
  • Vertical integration allows for faster changes to product offerings. For instance, if Sour Diesel is flying off the shelves, the retail team can let the cultivators know, who can adjust the supply accordingly.

Cons of Vertical Integration

  • Vertical integration is expensive and businesses must raise significant capital in order to do so.
  • Small business owners have greater difficulty entering the market in states that require vertical integration due to limited resources.
  • While it’s possible to specialize in all vertical sectors, opponents argue vertical integration makes businesses a “jack of all trades” versus a master of one craft.
  • Multi-state operators face challenges in the variance of state requirements. If one state requires vertical integration and one bans the practice, multi-state operators must adjust their business models, which is a laborious and costly undertaking.

Understanding Vertical Integration Gives Job Seekers An Edge

If you’re looking to break into the cannabis industry or move up to a new position, knowing the ins and outs of vertical integration can help you stand out from other candidates. Understanding the benefits of vertical integration and your state’s laws around the practice demonstrates you’re interested in staying informed about important topics in the industry and employers are bound to take notice of that.

Now that you know more about how vertical integration works, be sure to register on Vangst.com to find job opportunities and share your knowledge with cannabis employers in your state.

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Tags: cannabis education, cannabis industry

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