Integrated Supply Management in the California Cannabis Market

- February 24th, 2020

The California cannabis market has a unique need for distribution and logistics services to connect retailers to their customer base.

The legal cannabis industry requires a sophisticated logistics system. This is especially true in the world’s largest legal cannabis market, California.

On top of the inherent challenges that come with transporting any agricultural product from seed to sale, cannabis comes with its own considerable set of regulations and barriers owing to its complicated legal status. However, the complications and confusion pose an opportunity. California and other legal cannabis markets have a clear need for logistics and technology companies that can navigate regulatory frameworks to provide efficient logistics and supply chain management services.

California’s growing cannabis market

It’s hard to overstate the sheer scale of the California cannabis market. Legal cannabis sales in the Golden State reached US$2.5 billion in the first year of legalization, even as the industry grappled with a difficult regulatory transition period and strong competition from the remaining black market. As the industry steadies itself, sales in the state are projected to hit US$3.1 billion in 2019 and US$7.2 billion in 2024, according to data by Arcview Market Research and BDS Analytics. California’s legal cannabis market on its own is 253 percent larger than Colorado, 40 percent larger than the Canadian market and worth more than the rest of the legal US states combined.

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Despite its size, cannabis companies operating in the state are facing plenty of challenges. California is one of the most stringently-regulated cannabis markets today. There are three different authorities with jurisdiction over cannabis businesses in the state: the Bureau of Cannabis Control (BCC), the Department of Public Health’s Manufactured Cannabis Safety Branch and CalCannabis, which is managed by the Department of Food and Agriculture. Between these three agencies, there are 47 different types of licenses covering each part of the cannabis supply chain. Each individual municipality can require its own licensing as well.

California cannabis supply chain management

Cannabis transport and distribution falls under the BCC. In addition to imposing strict rules on how distributors can handle the product, the BCC has developed a comprehensive and stringent system for tracking cannabis logistics. Introduced in January 2019, the California Cannabis Track-and-Trace (CCTT) system, which is powered by Metrc, has been designed to establish a record of the production and movement of every legal cannabis product in the state. All cannabis producers with licenses in the state are provided with unique identification tags and are required to attach these tags to each product. The tags are then scanned at each stage of the supply chain by licensed manufacturers, distributors, test labs and retailers in order to create a complete seed-to-sale record of the product. In theory, this system should help eliminate fraud and illegal sales by licensed businesses.

The implementation of the CCTT system has not been flawless. As of July 2019, many legal cannabis businesses operating on temporary business permits had not yet implemented the tracking system. Some businesses handling a particular product have not been using the system and this has led to frequent occurrences of incomplete records. The system and its users have had difficulty accounting for the resulting gaps in data. In some cases, CCTT-compliant companies have tried to scan in received products only to find that they were not scanned in at the last stop along the supply chain, forcing them to “invent” previous data in order to proceed. As of September 2019, the BCC was hopeful that nearly all cannabis businesses would be compliant within the next couple of months. However, the rollout has been marred by other sources of confusion and red tape.

California cannabis logistics and distribution

Companies are seeing the market need for better logistics and supply chain management services in California’s cannabis industry. The unique challenges in cannabis logistics and supply chain management require services that are specifically equipped to manage these challenges. Specialized cannabis distributors that can stay up to date with the evolving regulatory landscape and reliably transport cannabis products from growers and manufacturers to retailers are in high demand, particularly in stringent environments like California. Additionally, the necessary licenses to handle and distribute cannabis are valuable assets.

Cannabis product manufacturer TILT Holdings (CSE:TILT,OTCQB:SVVTF) has developed a comprehensive technology platform in order to provide distribution services through its Baker subsidiary. The platform manages inventory at retailers across the state and allows the company’s Blackbird subsidiary to track inventory needs and customer orders to distribute accordingly. Baker and Blackbird each work with more than 250 wholesale and retail cannabis operators in Nevada and California and have completed over 100,000 deliveries.

TransCanna Holdings (CSE:TCAN) is working to establish a comprehensive cannabis distribution network throughout the state of California. Through its subsidiary Lyfted Farms, TransCanna recently won a unanimous recommendation from the Stanislaus County Planning Commission to recommend to the Board Of Supervisors the approval of the Daly Project, a 196,000 square foot cannabis cultivation, manufacturing and distribution facility in Modesto, California.

“We are very pleased with the unanimous vote of approval by the County Planning Commission,” said TransCanna President and CEO Steve Giblin. “Our team in Modesto has worked diligently to meet all the criteria required by the county. Our goal is to operate a successful business that will add jobs and contribute to the local community.” Once fully permitted, the vertically integrated Modesto facility will be one of the largest in the state, with manufacturing, cultivation, extraction, transportation and distribution capabilities. TransCanna is currently operating out of their Lyfted Farms Facility where the company holds licenses for cultivation (nursery), cultivation (grow) and distribution.

While there are many challenges unique to the cannabis supply chain, it involves many of the same obstacles faced in other agricultural industries. Whether distributing cannabis buds to retailers or onions to grocery stores, the job is about getting the right amount of perishable product from the farm to the retailer while it is still fresh and intact. Problems arise when outside factors cause transportation delays, and it’s the job of the distributor to anticipate, manage and work around these challenges. By integrating cultivation, manufacturing and distribution operations all under one facility, TransCanna has the potential to streamline its production and distribution throughout the state.

On top of the standard agricultural distribution difficulties and responsibilities, cannabis brings a world of extra regulatory and oversight considerations. Nobody is overly concerned about a crate of misplaced cucumbers falling into the wrong hands, but regulatory bodies are extremely concerned about legal cannabis products potentially finding their way into the black market or becoming tainted and unsafe. Under the BCC’s licensing, the distributor must be the sole connection between the grower and the retailer. The job of California cannabis distributors involves much more than simply moving product from point A to point B. Distributors are also responsible for conducting quality assurance, which involves coordinating third-party product testing, ensuring that packaging and labeling meet requirements and collecting/remitting cultivation and excise taxes.

Whereas traditional agricultural distribution faces no issues crossing state lines, cannabis remains federally illegal, making it unlawful to transport cannabis between states. Because of this, it is legally impossible at this time to set up a multi-state distribution network. The fragmented marketplace means that cannabis companies may need to form relationships to set up complete, fully functional supply chains within the borders of the states in which they operate.

“One can argue the most critical component of a successful business is its employees. This is especially true for a start-up and holds true for us at TransCanna. While it can be difficult to find the right staff and form business relationships, many employees have an unparalleled passion and dedication to the industry. Our teams at Lyfted Farms and Soldaze Snacks are highly knowledgeable and dedicated to their craft with a focus on consumer satisfaction,” said Giblin.

Takeaway

The massive California cannabis market is still working to gain ground on the black market. As legal cannabis continues to grab market share, there are opportunities for consolidation all along the supply chain. The cannabis distribution and supply management space, in particular, has created an opportunity for companies with the skills and qualifications necessary to navigate the stringent regulatory landscape while overcoming logistical challenges. Cannabis companies with integrated operations throughout the supply chain could be best positioned to capitalize on this opportunity.


This INNSpired article is sponsored by TransCanna Holdings (CSE:TCAN). This INNSpired article provides information which was sourced by the Investing News Network (INN) and approved by TransCanna Holdings in order to help investors learn more about the company. TransCanna Holdings is a client of INN. The company’s campaign fees pay for INN to create and update this INNSpired article.

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

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