California's recreational cannabis market is set to open in January 2018, but regulators have yet to release details for how distribution licensing will work for what looks to be a $500-million logistics industry regionally.
The California Bureau of Cannabis Control is responsible for setting the licensing requirements for distributors. In June, the Medicinal and Adult-use Cannabis Regulation and Safety Act, or MAUCRSA, created one regulatory system for both medicinal and adult-use cannabis. But it has yet to release the rules regarding distribution licensing.
If distribution licensing is not ready to go in January, it “could be a big mess for the industry,” said Alison Malsbury, an attorney with the law firm Harris Bricken, who serves clients in the cannabis industry.
The state has not released much information on the issue, Malsbury said.
Trucks.com contacted the board multiple times for an interview but did not receive a response.
Under the forthcoming regulations, companies that grow their own cannabis or produce their own products will be allowed to use a licensed distributor or self-distribute, Steve DeAngelo, co-founder and chief executive of Harborside Health Center, told Trucks.com.
Harborside is the largest medical cannabis dispensary in the country and reaches more than 200,000 registered and certified patients in California. The company cultivates cannabis at its own farm to sell at its dispensaries in Oakland and San Jose.
“But what isn't clear to me is if that will be rolled into your regular license or if you'll need an additional license for self-distribution,” DeAngelo said.
What is clear is that anyone who transports more than an ounce of cannabis will need a distribution license. Distributors will not only be responsible for transportation but also testing, quality assurance and compliance with packaging and labeling, Malsbury said.
This is different from the alcohol industry where there are mandatory separations between distribution and manufacturing.
“It's going to be a lot more involved with a much higher level of responsibility than we initially thought,” Malsbury said.
CalCannabis Cultivation Licensing, an office within the California Department of Food and Agriculture, is implementing a “track-and-trace” system to record the movement of cannabis through the distribution chain.
DeAngelo forecasts up to a 100 percent increase in demand for cannabis at dispensaries when the adult-use market opens.
“Regardless of what happens, the distribution end is going to be a major force in the industry,” DeAngelo said. “Almost every dispensary in the state will be working through a distributor.”
Transport Companies Ready for Market
As in other legal states, small transport companies are stepping up to meet the needs of the industry. Many of these companies use cargo vans or armored trucks, and transport both marijuana and cash.
On average, the secure transportation end of legal cannabis equates to 7 to 10 percent of the wholesale cost, said Terry Blevins, president and chief executive of Armaplex Security in Los Angeles.
An analysis by the University of California Agricultural Issues Center at UC Davis found the recreational market could top $5 billion in annual sales, making cannabis distribution a $350-million to $500-million industry.
To prepare for the recreational market in 2018, Armaplex is partnering with a company that currently has a medicinal distribution license in California City. And because California law requires that marijuana be stored in secured and licensed locations, Blevins is also seeking licensing options in other cities to create a statewide distribution network.
“You'll need locations throughout the state because you can't just go park at your house or a storage lot. You're limited based on driving distance and time as to which types of customers and retailers you can service,” Blevins said.
Some marijuana cultivators may try to establish their own transportation networks. Outco, a licensed purveyor of medical cannabis and a “seed-to-sale” company based in San Diego, plans to engage in the recreational market but is still waiting to see how distribution rules will play out.
“All we know for sure at this point is that the state is clearly taking input from all stakeholders and trying to come up with a plan that makes sense for all parties,” says Lincoln Fish, Outco’s chief executive.
Outco could use a combination of self-distribution and outside distributors depending on geographic areas, size of customers and types of shops, Fish said.
Complications With Federal Law
Blevins believes there will still be “big bottlenecks” in the supply chain when the market opens as few cultivators have distribution licenses or direct relationships with retailers. In mid-July, dispensaries in Nevada started running out of product two weeks after the market went legal.
Armaplex has one truck so far but is in the process of acquiring others. Like other companies in the industry, Blevins has had difficulties obtaining traditional financing because marijuana remains illegal under federal law, effectively severing the industry from the banking system and capital markets. Blevins has so far relied on his own funds as well as investments from associates and venture capitalists.
DOT-regulated companies and drivers will not be able participate in the cannabis market. Transport companies are trying to stay clear of the federal government by operating in strict compliance with California state law. Any selective enforcement will be against “businesses that are doing things sloppy, crossing state lines or operating in the gray market,” Blevins said.
The alcohol distribution industry has been eager to gain a stake in the pot business. The Nevada ballot measure legalizing adult use of cannabis gave the alcohol industry exclusive initial rights to distribute marijuana. And there’s expectation that legal cannabis may cannibalize some alcohol sales. More than a quarter of beer drinkers said they have already substituted cannabis for beer or would make the switch if marijuana was legal in their state, according to a survey by Cannabiz Consumer Group.
Other transporters in the medical cannabis space are preparing to enter the recreational market. Hardcar Security does a brisk business moving dispensary cash and medical cannabis around the state with 20 employees and multiple trucks.
But the transportation company has faced challenges with insurance, and already has run through three insurers. The first company turned out to be a “scam,” and the second company “gouged us on rates,” said Todd Kleperis, Hardcar’s chief executive.
Some technology companies and service providers also are not willing to work with companies in the space due to federal implications. One of Hardcar's partners recently walked away after one of their lawyers advised them to do so, Kleperis said.
“Everyone has to keep in mind this is a new industry,” Kleperis said. “It changes quickly. Not every six months or annually. You have to reassess every month.”
Most in the transport industry believe that while the road might be rocky at first, cannabis distribution will be a lucrative market. And as more states move to legalize marijuana, the federal government will be more inclined to react.
The whole strategy of Harborside is built around the assumption that the federal government will ultimately loosen the reins and allow interstate cannabis commerce, DeAngelo said.
“We don't know if that will be in two, five or 10 years,” he said. “But there's no doubt in my mind that it's going to happen. There will be an interstate market.”