Hurdling the High Entry Barrier: Opportunities in California’s Cannabis Retail Landscape

California’s cannabis retail landscape has hit something of a snag as the state’s recreational marijuana dispensaries and producers are finding themselves locked out of the market by prohibitively restrictive licensing regimes.

Recreational cannabis has been legal in the State of California for more than half a year, but for the California cannabis consumer and the thousands of cannabis businesses, the state’s licensing regimes have fallen far behind. The state has not been prepared to process the enormous number of applications from cannabis players looking to get licensed and into the game. California’s regulatory framework is still very much a work in progress and the licensing logjam has left the state’s legal recreational cannabis market underprepared to meet the massive demand for the product.

It’s a bad situation, but a crisis like this can present excellent opportunity for those with the position and foresight to take advantage. Through the regulatory chaos, cannabis companies are finding opportunity via mergers and acquisitions. It’s a strategy that allows some cannabis companies to put themselves in enviable positions in the most desirable markets in the Golden State.

California’s cannabis retail landscape

Despite its current troubles, the current and potential markets for recreational cannabis in California are massive. With a population of nearly 40 million people, California is by far the largest state economy in the United States and the sixth largest economy in the world. California represents the greatest opportunity for the nascent cannabis business yet, even greater than the entire nation of Canada. Cannabis industry research firm BDS Analytics reports that even with the current licensing situation, California cannabis sales are likely to hit $3.7 billion by the end of 2018 and grow to 5.1 billion in the following year as the licensing logjam calms down and more dispensaries are able to open.

As of now, the California cannabis market is ludicrously underserved. Part of the problem comes from the fact that as of March 2018 only about 33 percent of counties and local governments in the state had authorized some sort of licencing for recreational and medical cannabis businesses within their jurisdictions. Even in the areas where licensing systems have been set up, approvals are often few and far between. Complicating matters further is the fact that under the framework laid out in the Medicinal and Adult-Use Cannabis Regulation and Safety Act, cannabis businesses of all types must be licensed by both the State of California and their local municipalities. This dual licensing system creates a long process for licensees and adds a significant barrier to entry for emerging companies or small-scale retail outlets.

Great news for larger players

The licensing situation in California isn’t so bleak for everyone involved. Those cannabis companies with the capital are able to establish vertically integrated footholds in their selected markets via mergers and acquisitions. Large cannabis players can quickly establish themselves in California and avoid a drawn-out licensing permit by acquiring assets like smaller existing dispensaries that already hold the necessary licenses. A consolidation can be seen across the California industry as companies build their asset portfolios by picking up retail outlets, growing facilities, extraction labs and more all with pre-established licencing and local market footholds. The best part for the companies fortunate enough to be in position for these types of mergers and acquisitions is that with the California industry in its current state of licencing backup, these new cannabis empires are enjoying a relatively uncrowded cannabis space in this massive market.

One of the main considerations to be made when going about a merger and acquisition strategy can be summed up simply: location, location, location. Since California municipalities vary so greatly in terms of what, if any, cannabis activity they’ll allow, companies need to think strategically about where they want their various operations to be located. Some jurisdictions will allow cultivation but not sales and vice versa. Some might allow extraction but not cultivation or sales. Vertically integrated cannabis companies are going to want to buy operations in areas where the policy will work synergistically with their other operations.

Cannabis mergers and acquisitions in action

Cannabis company Harborside Inc. (CSE:HBOR) is one of the companies making the situation in California work to their advantage with ongoing acquisitions covering every aspect of the cannabis supply chain in some of the country’s biggest markets.

The proposed acquisition of cannabis cultivator Agris Farms, including Agris’ 40,500-square-foot low-cost greenhouse and 3,000-square-foot craft-style indoor facility, would give Lineage access to a pre-established comprehensive cultivation network in the strategically advantageous Yolo County, California. The acquisition would also expose Lineage to Agris’ numerous distribution relationships.

Lineage has also been working on establishing a presence in California’s cannabis retail landscape. This includes the agreed upon acquisition of Bay Area retail outlet LUX, which would comfortably position Lineage in the largest cannabis market in the US. The city of San Jose has stopped accepting new cannabis licenses of any type, but LUX already holds the coveted delivery, cultivation, extraction and distribution licenses.

Mojave Jane Brands Inc. (CSE:JANE, OTC:HHPHF, FSE:OHCN) acquisition of 420 Realty creates similar advantages for the company. 420 Realty was well into the process of gaining multiple permits to in the City of Cudahy, California at the time of the acquisition and the move gives High Hampton access to an established vertically integrated distribution network in California.

In April 2018, Golden Leaf Holdings announced its intent to acquire a cannabis dispensary in northern California, which gives the company access to the dispensary’s licenses and permits for cannabis cultivation, production, manufacturing, distribution and as well as access to California’s cannabis retail landscape.

Takeaway

The implementation of licensing has been anything but smooth, and the situation does not look like it will get sorted out anytime soon. In the meantime, there is a huge opportunity for cannabis companies to make the best out of a bad situation in California’s cannabis retail landscape. Intelligent use of strategic mergers and acquisitions is allowing companies to establish market dominance while much of the competition is still trying to get in the front door.

This article was written according to INN editorial standards to educate investors.