One of the most frequently cited predictions for the cannabis industry in 2020 is consolidation through mergers and acquisitions. The cannabis industry is highly fragmented, so some consolidation certainly makes sense.
However, the continued growth and development of big businesses with deep pockets in the cannabis industry has many people worried that the result of continued mergers and acquisitions will be monopolies, lower quality products, and a shift of revenues away from mom and pop businesses in local communities to out-of-state (or out of country) corporations.
The Start of Monopolies and Oligopolies in the Cannabis Industry
Monopolies and oligopolies are already developing in the cannabis industry — not just in terms of big businesses usurping smaller businesses but also in terms of state regulations that allow vertical integration, which leads to markets dominated by one or a few players that control the cultivation, processing, and sale of cannabis products.
To clarify, all but two states (Louisiana and Washington) with active medical or recreational cannabis programs allow or require vertical integration of the cannabis supply chain. Cannabiz Media defines the related cannabis license structures as follows:
- Fully stacked licenses: A single licensed business can or is required to handle all operations from seed to sale in a fully vertically integrated structure.
- Partially stacked licenses: A single licensed business can or is required to handle more than one operation but not all operations from seed to sale.
- Unstacked licenses: Different businesses handle different operations across the supply chain from seed to sale.
For example, in Minnesota, the state’s medical marijuana program requires full vertical integration with only one type of license – the Medical Cannabis Manufacturer license. Currently, only two of these licenses are allowed in the state to grow, process, and sell (at four dispensaries each) cannabis.
Other states, like Colorado and Oregon, have ceased to award additional licenses to some cannabis businesses in the past thereby creating oligopolies. In California, oligopolies are forming in a different way. Regulations passed leading up to opening the state’s adult-use market in 2018 allowed large businesses to exploit a loophole and obtain as many cultivator licenses as they could afford.
Across the country, smaller cannabis businesses are struggling to compete with other bigger cannabis companies. In Maryland, large out-of-state companies (including several well-known cannabis companies that are publicly traded on the Canadian Securities Exchange) have been quietly taking control of multiple marijuana dispensaries through management agreements or acquisition plans that circumvent the state’s regulations limiting ownership to one dispensary.
The concern about monopolies and oligopolies in the cannabis industry was in the Florida news extensively throughout 2019 when a Florida court ruled that the state’s required vertical integration was unconstitutional.
The Future of Marijuana and Big Business
Bottom line, whenever every business that wants to be in an industry cannot enter the market, competition will not flourish. The result is the same whether businesses are shut out due to state regulations or because big businesses have deeper pockets and force smaller players to leave. Either way, the result is the same. Fewer players equals less competition which usually leads to higher prices and limited market growth.
As Sean Williams of The Motley Fool warned back in 2017, “The culprit for the substantial drop in marijuana prices appears to be big businesses infiltrating the industry and flooding the market with product. As with any industry, if big business can push the little guy out, they’ll have considerably more liberties down the road to raise their prices back up and capture a juicier margin, along with greater market share.”
Only free competition ensures fair prices and market growth over the long-term as well as ongoing innovation and product accessibility.
Originally published 3/4/17. Updated 2/7/20.
Susan Gunelius, Lead Analyst for Cannabiz Media and author of Marijuana Licensing Reference Guide: 2017 Edition, is also President & CEO of KeySplash Creative, Inc., a marketing communications company offering, copywriting, content marketing, email marketing, social media marketing, and strategic branding services. She spent the first half of her 25-year career directing marketing programs for AT&T and HSBC. Today, her clients include household brands like Citigroup, Cox Communications, Intuit, and more as well as small businesses around the world. She has been working with clients in the cannabis industry since 2015. Susan has written 11 marketing-related books, including the highly popular Content Marketing for Dummies, 30-Minute Social Media Marketing, Kick-ass Copywriting in 10 Easy Steps, The Ultimate Guide to Email Marketing, and she is a popular marketing and branding keynote speaker. She is also a Certified Career Coach and Founder and Editor in Chief of Women on Business, an award-winning blog for business women. Susan holds a B.S. in marketing and an M.B.A in management and strategy.