Repair, Restore, Reclaim Series Part 3: Re-thinking Vertical Integration in the Cannabis Industry

During this four-part series, join Marijuana Matters as we break down the regulatory barriers to social equity in the cannabis industry. This is part 3. You can read part 1 here and part 2 here.

A company that cultivates, processes, and sells its own cannabis is vertically integrated. When regulators gather in a room to talk about vertical integration, this is usually what gets covered:

· Vertical integration is appealing to corporations because it reduces costs and amplifies efficiency at every segment of the industry.

· Regulators like vertical integration because it simplifies their job. Instead of issuing a license to a cultivator, a processor, and a retailer, regulators can issue a single license to a company responsible for conducting all three operations, or all three licenses to a single operator.

· Vertical integration is expensive, so prospective cannabis businesses better start fundraising now.

Missing from this discussion is the history of racist U.S. American policies designed for the economic benefit of the few and how vertical integration plays a role in extending that tradition.

The costs of starting and operating a vertically integrated cannabis company are exceptionally steep. The owners of such companies need enough capital to

· acquire the real estate for a commercial cultivation space, a manufacturing facility, and a cannabis retail store or dispensary,

· build each of those spaces out and keep all facilities operational and secure, and

· obtain licensing, an expense that can quickly accumulate to thousands of dollars, especially when a company owns multiple parts of its supply chain.

A vertically aligned cannabis company is a multi-million-dollar investment, and most Americans do not have a single — let alone several — million to invest in a business venture that remains illegal at the federal level.

One of cannabis criminalization’s most devastating impacts has been the economic disempowerment of mostly Black and Brown communities. Before the war on drugs, Black people in America were already burdened by the collateral consequences of slavery, Jim Crow segregation, and redlining.

The war on drugs targeted low-income communities of color, widening the wealth gap by tearing thousands of Black people from their families and communities, throwing them in jails and prisons (sometimes for life), and then releasing them to a society that excludes formerly convicted individuals from gainful employment.

Requiring vertical integration ignores the reality that there are People of Color directly impacted by the war on drugs who desire to enter the industry but who are at a severe disadvantage because their family member or they themselves were targeted by racist policies.

Social Equity Spotlight: Washington State

When states prohibit vertical integration or otherwise mandate the inclusion of minority-owned or disproportionately impacted individuals, they begin the work of leveling the playing field. Washington state gives us a glimpse of what that repair can look like.

Washington State cannabis law prohibits vertical integration. In doing so, Washington prevents companies from stacking licenses, pre-emptively interrupting the formation of cannabis monopolies and discriminatory licensing practices. However, banning vertical integration is not enough. Preventing further social inequity is not the same as making reparations for the racial injustice created by former policies.

In June 2020, the Washington State Liquor and Cannabis Board (LCB) acknowledged this by implementing a new law creating a social equity program. Among other social equity mandates, Washington’s program authorizes the LCB to award 34 retailer licenses exclusively to social equity applicants, individuals who have “lived in a disproportionately impacted area or [were] convicted of a cannabis offense or [are] a member of a family in which someone was convicted of a cannabis offense.”

Focus on Solutions

Social equity advocates, policy makers, and businesses can consider the following as they determine how to address vertical integration in the cannabis industry:

· Award a specific number of cannabis licenses to those disproportionately impacted by cannabis prohibition. As seen in Washington, regulators can be just as targeted about social equity as the war on drugs was targeted about disempowering communities of color. Determining social equity status and license numbers should be directly tied to the demographic and quantity of people harmed by cannabis prohibition within each jurisdiction.

· Find alternatives to mandating vertical integration. The tight parameters created by vertical integration aren’t the only way to guarantee quality control. Regulators can limit the number of licenses awarded instead but must also award a specific percentage of licenses to individuals disproportionately impacted by the criminalization of cannabis to guarantee an equitable outcome.

· For vertically integrated businesses: incorporate social equity into your business practices. We aren’t demanding that you change your business structure, but we ask you to take a look at your key performance indicators and search for the metrics evaluating your contribution to social equity. If there are none, create them.

· For entrepreneurs who cannot afford to vertically integrate: consider starting an ancillary business. If you live in a state that requires vertical integration and you don’t yet have the capital for it, consider opening an ancillary business, one that supports the cannabis industry without ever touching the plant itself. Marketing agencies, garden supply stores, and apparel companies are all examples of businesses that can enter the cannabis industry without needing a cannabis license to operate.

Social equity aside, vertical integration comes with its own challenges including the following:

· Lack of specialization. Vertical integration forces the farmer to become a retailer and the retailer to become a farmer. The results are mediocre products and services, a disadvantage for consumers and patients who enjoy the niche products that emerge out of economic environments suitable for craft and boutique cannabis businesses.

· Lower inventory. Requiring companies to operate every part of their supply chain demands a massive capital and time investment from them, and that means less available product.

· Decreased quality control. Keeping every aspect of the supply chain in house can create dangerous incentives against quality control. Why pay special attention to the quality or safety of the product you’re distributing if your primary objective is to move it from your cultivation site to your consumer’s hands?

· Development of cannabis monopolies. Vertical integration invites the wealthiest corporations to control most of the industry, which means that a handful of corporations will own the majority of the wealth created by regulated cannabis. The result is less competition, higher prices, and slowed market growth.

· Barriers to social equity. The expense of operating a vertically integrated cannabis company makes it exceedingly difficult for those most harmed by the war on drugs to economically benefit from cannabis legalization, widening the wealth gap created in part by cannabis criminalization.

Social equity in marijuana matters for everyone. It is a targeted effort to undo the harm caused by racist drug policies. But this movement isn’t charity. It is responsibility. Social equity matters because poverty and all of its comorbidities — poor health outcomes, increased crime, social unrest — will continue to decay communities of color at a disproportionate rate and tear this nation apart unless social equity is written into the law. One policy at a time, we can focus on how to create equitably accessible avenues to economic opportunity for everyone.

Marijuana Matters is a non-profit centering those disadvantaged by the criminalization of marijuana. M2 identifies and eliminates barriers to economic opportunity in the regulated cannabis industry through advocacy, entrepreneurship, and education. Support our work.