What comes to mind when you think of cannabis sales? The sketchy kid in high school behind the bleachers with overpriced bags of shake? Burner phones, bags of cash, and back alleys? A pizza delivery guy who delivers more than just pizza?
While these romantically sketchy memories of the illicit market may still loom large in people's minds, the past decade of incremental legalization has changed the scene dramatically. Today, the American legal cannabis industry is adapting to operate like any traditional industry. Unfortunately, there are still many old school processes in place, and selling weed legally is a complicated, debt-based, and uncertain process.
Let's start from the beginning. A rural single license grower in California, let's call him Bob, wraps up his harvest and ends up with 100 pounds of legally regulated and tracked flower. The testing labs got back with his results and confirmed that his flower is 100% safe for consumption and sale. Bob is probably in or near the red on his balance sheet at this point, having paid thousands in county regulatory fees, bought tons of dirt and nutrients, paid his trimmers, and covered his living expenses from beer to mortgage. Naturally, Bob wants to cash in his pounds, pay his bills, and bail to Hawaii for the winter.
Down in the big city, Alice runs a distribution facility. Alice's customers are usually dispensaries who are trying to contend with almost daily changes in brand trends, health products, and how much cash their regulars have. Lucky for the dispensaries, there are many fantastic POS insight technologies they can use to understand the demands of the market and their unique customer base. These needs must be filled, so when they see a demand for the latest fire strain, ChemDank, they call Alice and ask if she can hook them up. Now Alice is really busy, so instead of doing this sourcing herself, she hires a few people to call out to farmers, contacts, their cool uncle, Snoop Dogg, anyone who might have a lead on some good flower they can buy.
Through a friend of a friend, one of Alice's callers gets through to Bob. Bob has heard of Alice's distro before and they seem trustworthy, and Bob just happens to have grown ChemDank this season, so they set up a meeting. A week later, Alice's buyer drives out to Bob's farm in his licensed transport van. The buyer knows good weed when he smells it, and a good whiff with his nose in the bag confirms it: Bob has the fire that Alice's customers crave.
The buyer drives down the mountain (Bob lives way out in the country out of cell service, so communications are a bit shaky) and calls Alice, who confirms that they can pay $1,100 maximum a pound for Bob's product. The buyer returns, they haggle a bit in the kitchen (Bob's farm is at his house), and break even at $1,000 a pound. They shake hands on a contract of $100,000 nominal with 90 day terms, and Bob lines up a transfer of product in the regulatory software, confirming the exchange. The buyer loads up the pounds and drives them back to Alice's distro facility. Bob is now down 100 pounds of weed, hasn't seen any cash yet, and has a contract that states he will eventually. He periodically checks the regulatory software but sees that Alice never closed the transfer contract, but that doesn't really bother him because the vast majority of distros never close their contracts in state records. He's dreaming of Mai Tais in Hawaii and hopes he gets paid soon.
Alice gets Bob's flower tested by a lab for regulatory compliance and it passes with flying colors, so she adds it to active inventory and notifies her customers. Over the next month, Alice's workers part out Bob's pounds in 10 pound shipments to 10 customers, until they are all on dispensary shelves. For every package that Alice ships to a dispensary, she gets a contract in return, promising full payment of $1500/pound after 30 days, meaning that her maximum return would be $150,000 if everyone pays up, leaving her with $50,000 left once she honors her contract with Bob. All those phone callers, state excise taxes, testing costs, and transport miles add up though, and she calculates that she'll make about $20,000 profit after she covers costs and taxes on weed sold.
After a month, she chases down her customers for payment. Of her 10 customers, 7 were able to sell everything they bought for a nice profit, so they pay her in full. Two dispensaries are having a rough month on sales, and can't pay just yet but will pay ASAP, they promise. One dispensary doesn't answer Alice's calls, and after some digging she finds that they went bankrupt and are closed for good, meaning she has to expend time and money with their bankruptcy lawyer to get even a fraction of her cash back. Most of these dispensaries sold the flower at about $4,000 a pound, walking the fine line between reasonable retail cost and making enough to cover their massive overhead.
Over the next thirty days, Alice goes through the hectic process of trying to get paid in full. Eventually, time runs out and she has to pay Bob. One of the dispensaries that promised to pay late managed to pay in full, and the other only managed half a payment. The bankrupt dispensary is being torn apart by lawyers and the old owner disappeared, so Alice knows it will be at least a year before she sees a cent of that money. In total, of the $100,000 contract, Alice made enough back to pay Bob $85,000. Unable to use a normal bank transfer due to federal banking regulations, Alice stuffs an envelope with cash and gives it to her brother to deliver. He sticks it next to his socks in his luggage, climbs into a nondescript personal car, and drives out to Bob's.
Bob is annoyed with the $15,000 short on the contract, but there's very little he can do, and at least he has enough cash to stay afloat this year. Alice's brother assures him that they are actively trying to get the rest of the cash, and leaves. Bob never sees him again.
At the end of the story, Bob is left with 85 grand. After up to 60% in taxes (depending on where Bob lives), overhead, mortgage, licensing, and beer money, that leaves him with a net of $11,000. He sticks half of that in his mattress for next season's expenses and leaves for Hawaii.
So lets wrap this up. The above dramatization is a GOOD OUTCOME. It assumes that dispensaries, distros, and cultivators have a good relationship. It assumes everyone sells within the legal market. It assumes that Bob is really good at managing his expenses so he can actually pay his bills. It assumes that nobody along this whole supply chain got robbed. It assumes that nobody ripped anyone off, switched bad weed for good, threatened anyone, or simply never showed up. It assumes that customers in the dispensary actually bought Bob's product. Finally, this illustrates the shortest supply chain from seed to sale that you can find in this industry, as most chains are longer and involve manufacturing lead times and additional transport and warehousing.
This process is beginning right now, in conversations up and down the West Coast as pounds finish curing and distros balance their books to see how much they can sink into purchasing this year. How does your cannabis business take this fragile supply chain into account? At OmniCann we are acutely aware of these problems: in this story, many of our team members would be Bob or Alice. Our current and future development takes these issues into account.
Here's hoping you make a profit this year!
-The OmniCann Team