Since marijuana was legalized in California at the beginning of January, demand for legal marijuana has been on the rise. But there are big problems looming for the California market, which is expected to grow to $7 billion. Marijuana regulations have created a supply chain filled with delays the create product shortages and requirements that raise prices for consumers. It’s a trickle-down effect that could actually bolster illegal marijuana sales.
As anticipated before recreational marijuana was legalized in California, there is widespread demand for cannabis products. Dispensaries are making sales, and it’s very likely that the black market is feeling the effects. However, the industry buzz paints a bleak picture for the future if things continue along the path they’re currently traveling. Here are a few of the red flags being raised:
1. Supply Chain Delays Will Create a Marijuana Shortage for Retailers
According to the Washington Post, many marijuana retailers stockpiled inventories at the end of 2017 in anticipation of a rocky start to legal marijuana sales in 2018. The question California marijuana retailers are asking now is what happens when they deplete their inventories?
With only 756 licensed marijuana cultivators in California, according to the Cannabiz Media License Database, the legal marijuana industry has to compete with tens of thousands more illegal marijuana farms across the state. The Washington Post reports there are 15,000 illegal marijuana farms in Humboldt County, California alone, but there are just 168 licensed marijuana cultivators in Humboldt County per the Cannabiz Media California Scorecard.
The process to get marijuana products from cultivators to retailers is a long one with many stops along the way. Here’s a very simple overview. Retailers are required to contact distributors when they need inventory. Distributors must get the marijuana from growers, and store it in a warehouse for a testing company to retrieve a sample. There are only 20 testing facilities currently licensed to conduct the tests required by law before marijuana products can be sold to consumers.
Once the testing is done and the marijuana is approved, the distributor can package it and deliver it to the retailer. Of course, if the marijuana is not approved, the marijuana goes back to the cultivator where the problem must be fixed or the marijuana must be destroyed.
If you do the math, it shouldn’t come as a surprise that retailers are concerned their marijuana supplies will dry up. If they can’t meet consumer demand, not only will they lose money, but the black market will profit. It’s a lose-lose situation.
2. Supply Chain Requirements Will Add Extra Costs to Consumers
In addition to shortages caused by supply chain delays, regulations will also add costs to the prices consumers have to pay for legal marijuana products. Each “stop” along the supply chain adds delays and offers an opportunity for another player to add fees.
Growers, processors, distributors, delivery companies, testing facilities – the list of players who are required by law to participate in the California marijuana supply chain creates an even longer list of added costs. As a result, end user consumers might turn to the black market for less expensive products.
The laws of supply and demand are very clear. At some point, the price will rise high enough that consumers won’t buy or will seek alternative buying solutions.
3. Regulations Create Challenging Obstacles for Marijuana Businesses
Looming marijuana shortages are unlikely to resolve themselves in the near future. Many producers, cultivators, and retailers are struggling to obtain licenses. Without licenses, the supply shortage problem can’t be solved.
As reported by the Washington Post, one of the biggest obstacles for marijuana businesses looking to enter the market (or to expand to new areas of California) relates to local rules and regulations. For example, small producers are struggling to get licenses from their local governments, which are required before they can apply for state licenses.
Many businesses are kept out of the marijuana industry in California because their local governments have banned marijuana growing or sales. Making matters worse is the fluctuation of marijuana laws. Towns and counties could allow marijuana one day and ban it the next. This happened in Calaveras County where commercial marijuana farms, which had been operating without problems, were suddenly banned by county officials.
Marijuana licensing is a problem in California, and until new businesses are able to enter the market, supply chain problems will continue. Currently, there are 2,038 licenses awarded in California to serve the 23.1 million adults over the age of 21 living in California. Of course, not all of those adults want to buy marijuana products, but we are talking about a state with the fourth largest economy in the world. The license shortage is definitely a problem.
Here’s the breakdown in California marijuana licenses from the Cannabiz Media License Database as of January 30, 2018:
- Cultivator = 756
- Manufacturer = 448
- Dispensary = 289
- Distributor = 276
- Retailer = 186
- Delivery = 63
- Testing = 20
Solving the Marijuana Supply Chain Problem in California
Clearly, the marijuana supply chain problem in California needs to be addressed soon. The marijuana products that businesses purchased and stockpiled in 2017 can only be sold through July 1, 2018. More licenses and streamlined supply chain requirements are necessary to ensure demand can be met in the future with products that are offered at competitive prices consumers are willing to pay.
What do you think about the early supply chain problems in California’s recreational marijuana market? Leave a comment and share your thoughts.