By Pace La Via • December 4, 2018

Ultimate Guide To Building a Scalable Cannabis Business — Part 1: Cannabis Industry Organization

Over the next few weeks, we’re going to run a 5-part, in-depth series with valuable information for those who wish to start or grow a cannabis business.

In Part I, we will present an overview of this rapidly growing industry including offering some growth statistics and breaking down the various segments of the industry.

In Part II, we will go into detail on regulatory considerations.

In Part III, we will discuss the various ways to finance a cannabis business.

In Part IV, we will go over a wide range of considerations involved in planning a successful cannabis business.

And in Part V, we will discuss the latest, cutting-edge technology in enterprise resource planning, point-of-purchase sales, and seed-to-sale systems designed especially for the cannabis industry. We’ll talk about what to look for in a seed-to-sale software system and how it relates to cannabis industry regulatory requirements, accounting, production, sales and marketing, and more.

Let’s get started.

PART I — Introduction To the Cannabis Business

The cannabis industry is currently one of the fastest growing industries on the continent according to industry analyst firm ArcView Group. The projected US market of $24 billion by 2020 will provide ample opportunities for growing cannabis-related businesses regardless of whether they are large or small.

The cannabis industry cannot be contained in a single business category. The so-called “plant-touching” operations include farming, manufacturing, laboratory testing, product distribution, and retail sales. Each of these categories has its own particular needs, not just for production, but also legally and financially. There are also a good number of ancillary businesses which do not touch the plant.

In this document, we’ll take a look at the considerations that owners of plant-touching businesses in each category must address in order to build a highly scalable business model and to grow without tripping over itself. Cannabis companies focusing on either medical or recreational cannabis will benefit from this document. Some of these considerations are shared by all categories, while others are unique to each category.

All cannabis-related businesses have to consider aspects such as facility management, human resources, sales, marketing, analytics, information technology, etc. But each category also has very particular needs when it comes to scaling up their businesses.

For example, growers are tasked with increasing yields, which involves expanding facilities or maximizing yield in other ways, while manufacturers of cannabis products have very different considerations for increasing production capacity such as supply chain factors and tooling.

In this guide, we’ll discuss both the common considerations and the unique aspects of each category in order to provide a well-rounded overview of the industry as a whole.

The goal of this document is to present new cannabis entrepreneurs with a well-rounded view of what it will take to plan, fund, launch, and grow a cannabis-touching business.

The Exponential Growth of Cannabis

The cannabis industry is one of the fastest growing in modern times. The expansion and growth of the cannabis industry has been compared to the growth of broadband internet in the early 2000s. But the cannabis industry has a luxury that broadband didn’t have — that is a pre-existing market. In fact, by mid-2017 combined sales of legal and illicit cannabis made it the second largest cash crop in the U.S. after corn.

Industry think tank ArcView Group, claims that the illicit cannabis market was nearing $45 billion when adult-use sales first began in 2014 in Colorado and Washington. The legal cannabis market is expected to take away more than half of that illicit market, exceeding $24 billion by 2025. That’s nearly equal to liquor sales for 2016.

Also, according to a report by Brightfield Group, hemp-derived cannabidiol (CBD) is projected to be a multi-billion-dollar market in just three years. CBD sales were already estimated at $170 million in 2016 and are approaching $1 billion in 2018. With an expected 55% compound annual growth rate over the next five years, CBD is on track to crack the billion-dollar mark.

So, as you can see, there is plenty of room for growth in the cannabis industry.

“Very few consumer industry categories reach $5 billion in annual spending and then post anything like 25% compound annual growth across the following five years. Cable television came close, growing 19% annually in the late 1980s as national networks like CNN and HBO proved to be wildly popular. Broadband internet subscription spending grew 29% per annum in the early 2000s as it became almost as much of a ‘must-have’ utility as electricity or television for the modern home. What became the ubiquitous home video business that birthed the great Blockbuster success story only grew at a 12% CAGR after reaching $5 billion in revenue in 1988” - Arcview Group, The State of Legal Marijuana Markets 5th Edition

Cannabis Industry Structure

The cannabis-touching portion of the industry can be organized into five categories:

  • Cultivation
  • Manufacturing
  • Laboratory Testing
  • Wholesale Distribution
  • Retail Sales

While all five categories share some scaling considerations which are common to most businesses, each also has its own unique considerations when considering expansion plans.

We’ll go into these considerations in detail later in this document, but let’s take a quick look at each of these categories here.

Cultivation

Everything starts with the plant. Without growers, there would be no industry. Growers typically take the product from seed (or clone) to harvest, to curing. Dried flower is sold as is for consumer use, but is also sold in bulk to distributors and companies that manufacture cannabis products such as oils, concentrates, cartridges, etc.

Manufacturing

Cannabis product manufacturers either grow their own raw materials or purchase them in bulk. As mentioned above, this bulk product then undergoes various manufacturing processes to package and/or concentrate the plant’s extracts and create consumer goods.

Laboratory Testing

Each state which has enacted a regulated cannabis industry has set purity standards and requires some level of lab testing to assure the safety of the products. Because labs are considered cannabis-touching businesses, they are also required to be licensed by the state in which they are doing business and are subject to industry regulations.

Distributors

Distributors generally buy cannabis products including dried flower and concentrates in bulk and wholesale and then, in turn, sell these products to retailers and possibly other distributors.

Retail Sales

Although some states require medical dispensaries to grow and process their own cannabis, retailers that do not produce their own goods will purchase dried flower from growers and distributors, and buy wholesale processed goods as well as consumption gear either directly from manufacturers or via distributors. Some retailers also sell some of their products wholesale to other retailers.

On a side note, social consumption and hospitality businesses are also considered retail. In many cases, however, these businesses are not legally allowed to sell the products — they are merely allowed to accommodate its use.

Coming up in Part II: Regulatory Structure

Although there are some common themes, each state has its own regulatory structure with unique requirements for each category of plant-touching business listed above. These regulations are the rules of the game for growers, manufacturers, testing labs, distributors and retailers of the product. Breaking those rules can have serious legal and financial consequences.

In the next section, we’ll look at why understanding and following your state’s regulatory structure is crucial to building a successful and scalable business and avoiding potential regulatory disasters.

NEXT PART