April 20, 2018
Subscribe to our newsletter to get alerts about new posts, local news, and industry insights.
As the cannabis industry evolves, it’s not surprising to see increased interest by other highly regulated industries that stand to lose market share as more states legalize adult-use marijuana. While the pharmaceutical industry has lobbied to stop legalization, some pharmaceutical companies have started developing partnerships with cannabis companies for research and others are already developing medicinal marijuana products. The alcohol and tobacco industries are also looking for ways to get into the market as they see their sales dip in states where recreational marijuana is now available. The problem is in some of these states, these companies are getting preferential treatment that could lead to limited competition in the form of monopolies and oligopolies.
Cannabis may soon be just as normal to U.S. markets as alcohol and tobacco, but that doesn’t mean old market inefficiencies should be yoked onto this new industry. As more states legalize recreational use and new cannabis markets emerge, many parties are vying for control by influencing the drafting of legislation and rulemaking of regulations. This has already happened with the licensing of cannabis wholesalers, where state governments may mandate that a small number of entities be allowed to act as wholesalers where all cannabis must pass through them between grower and retailer.
One such instance that has been in the news occurred in Nevada last year. Nevada had it written into the state’s cannabis legalization law that only those who held a wholesale alcohol license could be granted a cannabis wholesale license, in essence meaning the current liquor laws regulate who is licensed to sell wholesale. When the first day came for legal marijuana sales, there was an enormous lack of supply at dispensaries even though enough plants had been grown to meet the demand. The issue was that there were not enough distributors to handle the demand because too few alcohol wholesalers applied for cannabis licenses.
There was also attempts in Massachusetts by the tobacco industry to implement a similar wholesale structure where tobacco wholesalers would be responsible for cannabis distribution, regulation, and collection of taxes before the products pass to dispensaries.
A slightly different situation occurred earlier this year when adult-use marijuana became available in California. Under the state’s Medicinal and Adult Use Cannabis Regulation and Safety Act (MAUCRSA), distributors would distribute, arrange for testing, and handle packaging and labeling quality control as well as collecting and remitting taxes on behalf of cultivators and retailers. This regulatory scheme not only adds extra time and costs at multiple points of the supply chain but it also creates a system that can easily be dominated by a few companies.
It’s common for industries to lobby governments during legislative debate and rulemaking in an effort to further their interests and influence the creation of an environment that is economically advantageous to them. With cannabis legalization, those companies that have the most potential of lost profits because of competition are the ones in the tobacco and alcohol industries, even though there has been both evidence in support of this concern and evidence to the contrary.
Despite inconclusive evidence in the relation of cannabis sales to alcohol and tobacco sales, those industries have assumed losses as evidenced by their funding of campaigns against ballot initiatives that were attempting to legalize recreational cannabis. The same is true of pharmaceutical companies that could lose millions per year to cannabis. When legalization is not defeated, these industries may try to control the distribution and increase prices with little competition and even further, may act in bad faith and attempt to stifle the market.
The states also have some interest in allowing centralized distribution. In effect, it’s like the governing agency is outsourcing the task of regulations at the wholesale level. For the government, it takes less time to promulgate new rules when you can just carry over tobacco or alcohol wholesale regulations. In addition, it’s easier to monitor fewer entities and those fewer wholesalers will probably have a higher level of compliance knowing they’re under more frequent scrutiny.
Overall, centralization of wholesalers is net loss for the industry. It may benefit the tobacco and alcohol wholesalers, but the costs are carried over to the growers, processors, dispensaries, and ultimately, to the consumers.
First, in the supply chain, with fewer competing wholesalers, prices will increase because of the lack of supply of wholesalers and the increased regulation of those distributors. For example, in Massachusetts, current tobacco wholesalers must have a signed affidavit from three different sellers saying they’ll agree to sell their product to the wholesaler if they obtain the license. If a seller is lost, then the wholesaler must find another one or the license is revoked, which creates more market delay and cost for the time spent licensing.
Second, unique to the cannabis market is the danger that increased cost of the product and transaction will just help the black market continue operation. Cannabis is already being taxed at a higher rate, which the black market may be able to undercut. Increased costs of regulations that trickle down to consumers will only make this more likely to occur.
A possible argument for centralization by state agencies and lobbyists is that it’s better to centralize distribution now – in the early stages of legalization – because cannabis is a new area, and it’s better to be overcautious with regulation despite the costs. Also, the rules can always be tweaked to increase market efficiency once there is a clearer picture of how the industry will operate.
However, those entities that gain power and market influence rarely give it up and continue to lobby to perpetuate the status quo. The increased profits also allow these industries to fund campaigns and lobbying for politicians who will favor their established position.
Legalization is not just about cannabis but a chance to change government models of the market and incentives from the past.
.png)