The California craft beer industry is worth upwards of $7 billion, and with approximately 750 breweries, the state is home to more brew operations than any other in the country. Now, the Golden State’s cannabis contingent is hoping to follow suit, with many industry leaders emphasizing the importance–and frankly, rights to–self-distribution.
“For California to grow and to emulate its craft beer and wine models, small operators need to be able to distribute,” said Gavin Kogan, co-founder of real estate operation Grupo Flor.
Kogan’s Salinas-based “family” of companies control 2.5-million-square-feet of property in Monterey County that’s already permitted for cannabis businesses, and helps tenants access legal, financial and agricultural resources to build out their business. Cannabis ventures are a lot like craft breweries, said Kogan, in that successful entrepreneurs in both industries have built their brands on personal relationships – and hustle. Craft brewer Ballast Point, for example, wouldn’t be where they are today (purchased two years ago for $1 billion) if they had been forced to use a third-party mass distributor like Coors, said Kogan. Coors won’t go to bat for the little guy, he explained, and instead simply pushes the larger products and brands that already sell.
“They create the monopolistic market,” said Kogan.
The Teamsters Have Other Ideas
Critics of the self-distribution model (namely, the Teamsters) have said the exact opposite. They claim it’s this vertically integrated system that results in monopolies.
“It’s quite conceivable that the entire market can be owned by someone who also controls distribution and access to the market,” longtime Teamsters lobbyist Barry Broad told the Sacramento Bee. “It’s a big problem.”
The debate over distribution is an integral part of the controversy that emerged earlier this month after California Gov. Jerry Brown released a proposal merging regulations for the recreational and medicinal marijuana industries. Citing the importance of protecting consumer safety, safeguarding local control over the industry and ensuring businesses comply with California’s environmental laws, Brown’s proposed guidelines are intended to reduce confusion and “duplicative costs.”
Although medical regulations slated to take effect in January would restrict the type and number of licenses cannabis businesses can acquire, Brown’s proposal lands on the side of the voter-approved Prop. 64, aka the Adult Use Marijuana Act (AUMA), which has no restrictions on how many licenses a business can hold. The only caveat is for testing facilities, which must operate independently of any other business.
“Overly restrictive vertical integration stifles new business models and does not enhance public and consumer safety,” the proposal states. “AUMA has restrictions to protect against the over concentration of licenses in areas as well as monopolies.”
Delivery Control Drives Reliability
Cannabis businesses currently have the option to self-distribute, and many have built their brands and reputations because of it.
Kenny Morrison, owner of edibles company VCC Brands, said he landed a lot of business through his own self-promotion. He was reliable. He showed up with the products he promised, while his competitors didn’t. He wouldn’t have controlled those defining factors if he had been forced to contract with a third-party distributor.
“If they took that right [self-distribution] away I’d have to divest myself of half my business,” said Morrison. “I’d have a lot of employees out of job.”
Morrison founded VCC (previously the Venice Cookie Company) in Venice, Calif. in 2008. Today VCC is a statewide edibles operation. Last September, Morrison founded the California Cannabis Manufacturers Association (CCMA). Members now include industry veterans like Gavin Kogan and large manufacturers like Jetty Extracts, Kiva, and Cheeba Chews.
As president of the CCMA, Morrison wrote a letter to the state legislature in February that pointed out the pitfalls of the “three-tiered” system modeled after alcohol. (In that system, manufacturing, distribution, and retail sales are all handled by separate companies.) Supporters of the three-tiered system say it helped stop the consolidation of “Big Alcohol” and helped eliminate the black market following the end of alcohol prohibition. But many of the reasons for its success are antiquated, said Morrison.
For one, it was pre-internet: California’s cannabis industry will have access to a high-tech tracking system that uses advanced software, GPS, vehicle monitoring and more to ensure products stay within the state and end up where they’re supposed to go. Wayward cannabis flower in a Ziploc bag may be hard to trace back to the source. But California edibles companies spend so much on packaging and branding that it’s pretty easy to tell where a product originated.
And, it’s really a basic issue of principal.
“If you don’t trust me to distribute my products, why the hell should you trust me to manufacture them?” said Morrison.
Third-Party Drivers Led to Big Alcohol
Look no further than the existing liquor industry to see the pitfalls of third-party distribution, said Morrison. Spirit companies are required to use an outside distributor. As a result, large booze brands dominate the market. Distributors get paid on volume, he said, so if takes the same amount of time to get two stores to carry a new brand, versus landing an established company in more than 1,000 stories, it’s a no-brainer where the distributor will focus its effort.
It’d be a “slap in the face,” Kogan said, for the people who founded the industry to be forced to hand over their trade secrets to an outside distributor who doesn’t understand the micro-climates of California’s industry. Overall, the cannabis field still faces a lot of growing pains, he said, and like many states that have gone before it, it’s bound to overregulate and over-tax before eventually easing restrictions.
If the cannabis industry can be said to have a lifespan, we’re currently at the gawky, awkward middle school phase.
“We’re sort of at the pimply-faced teenager [stage] right now,” said Kogan.