California Cannabiz – What’s the Deal with Vertical Integration?

The state of California recently consolidated the rules and regulations for both medical cannabis and recreational cannabis, officially merging the Medical Cannabis Regulation and Safety Act (MCRSA) and the Adult Use Marijuana Act (AUMA) to form the Medicinal and Adult Use Cannabis Regulation and Safety Act (MAUCRSA).  MAUCRSA serves as the all-encompassing, official set of rules and regulations for both medical and recreational cannabis in the state of California.  So now that we officially have guidelines on how cannabis businesses are allowed to operate, one big question atop people’s minds is, “What’s the deal with vertical integration?”  The reason this is such a big question is because the state intentionally made it difficult to establish a vertically integrated business, at least at first.

With the way the rules are currently structured, the closest you can get to a true full vertical cannabis business still limits you to only three retail dispensary locations.  There are several licensing combinations currently being offered, most of which allow you some combination of a cultivation license and a manufacturing license, with a few combinations offering a limited producing dispensary license.  The closest California currently offers to a full vertical is a Type 10A license (producing dispensary that may have up to 4 acres of canopy space for cultivation and up to 3 retail dispensary locations) in combination with either a Type 6 or 7 state license (manufacturing license with either non-volatile or volatile extraction methods), effectively creating a limited-growth full vertical license structure by only allowing a max of 3 dispensary locations.

So why is California restricting licensees from creating a true vertically integrated business without limitations?  The answer is simple; they want to allow an open market where everyone has a fair chance to establish their presence.  Let’s use Colorado as an example; Colorado has had an active recreational market for almost 4 years and new studies show that 33% of dispensaries are now a part of a chain, and that number is likely to increase exponentially.  As with any new industry, thousands of business owners and entrepreneurs flood the market, but as time goes on and the more established businesses continue to grow, they slowly overtake the smaller businesses.  California currently has an estimated 20,000+ cannabis businesses operating in the state and is expecting to give out even more licenses than that.  These restrictions are in place to allow everyone to get a fair chance at their share of the market, but these protections aren’t going to be permanent, so it’s not to be taken lightly when I say you need to establish your business and create a strong customer base before the real competition begins.

The new MAUCRSA law states that starting January 1, 2023, a Type 5, Type 5A, or Type 5B licensee (cultivation facility greater than 22,000 feet) may apply for and hold a Type 6 or Type 7 license (manufacturing license using nonvolatile or volatile extraction methods) and apply for and hold a Type 10 license (general dispensary license with no limitation on locations).  In other words, you can have the largest cultivation facility license offered, coupled with a full manufacturing license and an unlimited number of dispensaries; AKA a true full vertical cannabis business with zero limitations on growth.

So what does that mean for businesses?  It means you have 5 years.  If you’re a small business owner, or any size business owner, you have 5 years to establish your foothold in the market before the well-funded chains have the freedom they need to expand as quickly as they’re able to.  California has been gracious enough to structure the program in a way that allows you to compete, but the protections won’t last, so you need to do everything you can to establish your business, your brand, and your customer base.  Those who establish recognizable and trusted brands will be able to sustain.  There’s no time to delay in becoming the business that you need to in order to stay alive in what will become the largest cannabis industry in the world.

Check out our California page for updated rules and regulations, as well as break downs on the current vertically integrated license combinations that are being offered.

Dr. Moe Afaneh, COO, BioTrackTHC

The Weed Blog

California Cannabiz – What’s the Deal with Vertical Integration?
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