Cannabis Distributors: An Industry Investigation

10/8/2020

Cannabis distributors influence some of the most extensive free markets for recreational cannabis.

They serve a crucial role as connectors between suppliers and storefronts, essentially providing the major cannabis economies' backbone.

What does that mean for the industry? Keep reading to find out.

The Breakdown of Responsibilities

Cannabis distributors may not grow plants or run a storefront, but they do have essential responsibilities to cannabis supply chains.

They conduct quality checks, arrange transportation, test product, and, most importantly, help place products on dispensary store shelves.

When distributors get their license from the state of California, they have several responsibilities to the public.

If you were to start a cannabis distribution business in California, your license requires you to:

  • Sell and store only cannabis goods
  • Conduct quality control to ensure what you sell is safe
  • Store batches separately to avoid cross-contamination
  • Handle testing
  • Ensure the labels are consistent with the ingredients in the packaging
  • Obtain insurance coverage that covers at least $2 million or $1 million for each incident
  • Check inventory every two weeks
  • Keep accurate records
  • Only transport with another company that has the proper permits

Distributors Impact on Cannabis Supply Chains

Cannabis distributors often cause shifts in supply chains. When suppliers get used to a particular demand level, cannabis distributors might institute changes to the product flow.

Large growers and corporations can usually keep up, but this could prove difficult for small upstream startup cannabis businesses to interface with distributors.

This was the case for one hash producer in Southern California.

Avoiding Negative Market Impact

Cannabis distributors must be regulated when they are challenging the market. For example, in California, terrible distribution contracts were binding businesses and preventing growth.

Through exclusivity and barring wholesale-retail relationships, predatory distribution influence has stifled licensed cannabis businesses.

When the market is overly centralized on a small distributor's small cohort, a lack of diversification can impact consumer interest in the legal market.

One of the reasons Colorado's distribution economy succeeds is because it is diversified with many distribution channels and retail outlets.

Exclusive Distribution Relationships & The Supply Chain

When suppliers, distributors, and their retail stores have exclusive relationships, the supply chain is affected. There is no way around that. However, it helps to know exclusive relationships.

A distributor might be the only company that works with a significant supplier—or that distributor might be the only company that handles a particular product.

Exclusive relationships change at any time, and they occur anywhere in the supply chain.

While distributors want a steady and guaranteed income from a whole deal with a supplier or a retailer, those deals might complicate other aspects of the business.

It is not as simple as "we only work with store X and company Y" when business Z comes along and pays top dollar for distribution or product placement.

Cannabis Distributors & Pricing Determination

Cannabis distributors that only deliver products determine the price based on shipping costs.

A distributor that charges high prices for delivery will increase prices on the shelves. Similarly, a distributor that charges low fees for deliveries will help keep costs down in the store.

Some companies are reluctant to spend money on distribution services that are too cheap. These companies might overspend, and they pass those costs on to their customers.

Finding the right balance is critical, and having a consultant helps with the research required to choose a distributor, decide on prices, and determine product shipment.

Taking On The Territories

Cannabis distributors attempt to establish a territory by offering the best service in that area. For example, the distributor might work exclusively in Los Angeles County.

There could be a battle over the territory, and the company that has a quality consultant remains organized and remains in compliance with state laws that will likely win out.

This battle could trickle down to retail stores accustomed to working with a distributor until that distributor is out of business or undercut by a better company's prices.

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