In the emerging American cannabis market, multi-state cannabis operators are working to secure a foothold in a much larger national industry.
The United States is home to a variety of multi-state cannabis operators dealing with the challenges of operating across state lines.
Although Canada has captured much of the mainstream media’s attention regarding the future of the cannabis industry, it’s easy to forget that other markets have been around for much longer. Below the border, various states such as California and Florida have been leading the way when it comes to cannabis, from both a medical and recreational standpoint.
While cannabis-friendly markets like California could eclipse Canada’s market, not every state in the country has the same views on the plant. Many jurisdictions have chosen to embrace the cannabis industry and legalize recreational use, but often with their own set of unique regulations.
While different state regulations make things tricky enough, when coupled with the fact that cannabis is still illegal under federal laws, the US cannabis market becomes increasingly difficult to navigate. For instance, some companies can list on US exchanges if they don’t directly handle the plant, while most others resort to getting listings on Canadian stock exchanges.
Despite these problems, these cannabis industry multi-state operators (MSOs) have enjoyed significant success. As the US cannabis industry continues to progress towards a national industry, multi-state cannabis operators could have a unique opportunity to create vertically integrated business models.
The current state of the regulatory landscape
While cannabis is still illegal in many states, public sentiment regarding recreational use in the United States is changing. One survey from Gallup found that two out of three adults are now in favor of legalizing cannabis on a national level, a figure that has doubled over the last 15 years.
Additionally, the signing of the 2018 Farm Bill into law in December legalized hemp and hemp-based cannabidiol (CBD) cultivation, creating a new option for cannabis companies in states where cannabis production is otherwise illegal. The US Food and Drug Administration also approved the very first cannabis-derived drug in 2018, opening up new potential avenues for cannabis companies. Thirty-three US states have legalized cannabis for medical purposes, while 10 of those states, along with the District of Columbia, have also permitted recreational adult use.
Despite these changes and the growing pro-cannabis sentiment in the country, cannabis remains a Schedule 1 drug at the federal level. This means cannabis is considered a dangerous substance that is prone to abuse with no medical benefits. While an increasing number of medical studies are proving cannabis has legitimate medical applications (even the World Health Organization has admitted to this), it’s uncertain when these regulations will change. Any potential federal reform wouldn’t require much amendment from the state’s existing infrastructure to implement.
The challenges and opportunities of MSOs
Considering the size of the biggest cannabis-friendly states in the country, such as California, with an estimated $32 billion market size by 2022, it’s entirely plausible for a company to focus on one state and be successful. But in doing so, these businesses are opting out of the chance to get in on the ground floor as entirely new state markets open up. This is perhaps one of the biggest advantages that MSOs have over their competition. With a successful history of expanding into other jurisdictions, MSOs are in a better position to continue that success in new markets.
States like Arizona are expected to legalize recreational cannabis soon, which would result in a new multibillion-dollar market popping up almost overnight. Some of these states are especially attractive expansion targets due to the high barriers of entry and limited existing competition. In cases such as these, big MSOs will often enter the market through acquisitions of local businesses that are already operating within the state.
Running a cannabis company across state lines can be challenging, especially with each market having its own specific rules on packaging, testing, marketing and growing the plant. While MSOs try to standardize their business practices to streamline operations, this can become very complicated, especially as local companies that focus on operating in individual states could have an advantage over them in this regard.
For example, it’s cheaper for a company to use the same packaging for every state rather than make different ones for each state. Often times, MSOs will pick the jurisdiction with the most stringent regulations as its template, using said standards in every state they operate in even if the regulations aren’t as strict. This makes it simpler for companies to expand, at least in principle.
While this can work in theory, cannabis rules can be so nuanced and complex that they are difficult to standardize. Edward Fields, chief executive of DionyMed Brands (CSE:DYME), said to Forbes, “The differences on a state by state basis are so nuanced that it’s not possible to simply apply the strictest standard and clear the bar.” The executive went on to cite specific ingredients within pesticide formulas as an example of something that could be banned in one state and allowed in another.
Multi-state cannabis operators
There are a number of multi-state cannabis operators that have grown dramatically over the years. The largest of these is Acreage Holdings (CSE:ACRG.U,OTCQX:ACRGF), which operates in an impressive 19 states across the country. Recently, the company acquired a major Florida-based nursery, entering a highly lucrative market with relatively little competition. Mergers and acquisitions are an easy way for larger MSOs to “buy” their way into a market, bypassing the hassle of trying to start up their own operations in the state.
Another multi-state operator that’s been growing rapidly while remaining under the radar is Grown Rogue (CSE:GRIN). A multi-state cannabis company that first coined the “seed to experience” concept of vertical integration, the company operates in California, Oregon and Michigan, with 22 licenses under control. Normally, large producers remain divorced from their end consumers; however, Grown Rogue is shipping its product directly to other businesses with retail networks as opposed to starting their own.
The company is one of the few that operates all along the cannabis supply chain, a trend that has become increasingly attractive to companies that have recognized that branding and retail relationships will become more important in the industry’s future.
Operating a cannabis business across state lines brings with it a plethora of challenges. Whether these come from conflicting regulations in packaging, ingredients or marketing, MSOs have their fair share of issues to resolve. However, those that are successful in doing so could have access to multiple consumer bases and revenue streams, providing themselves with a better chance of success in the years to come.
This article was written according to INN editorial standards to educate investors.