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While prospective cannabis entrepreneurs are busy applying for general licenses in New York, some of those already in operation are concerned how one of the new license types will affect their business: distributors.
Up to this point, the Empire State’s licensed adult-use market has operated without distributors, who will buy, transport and sell cannabis to and from regulated weed businesses under one of the 11 license categories outlined in the MRTA.
But with the general application process closing in December and licensing expected soon after, those cultivators, processors and dispensary operators that are already up and running are considering how they will need to adjust their operations once distributors become part of the equation, and whether these middlemen will disrupt their companies.
“We need to have small craft operators on the supply side, and I think distributors are going to eat up their margins,” said David Falkowski, founder of Long Island-based processing business OMO Labs.
Under the MRTA – which prohibits most companies from vertically integrating – cultivators and processors cannot sell directly to customers, while dispensaries and consumption lounges cannot grow or process the products they sell.
This is part of the two-tier marketplace envisioned by architects of the cannabis law and leadership at the Office of Cannabis Management. Axel Bernabe, OCM’s former chief of staff and senior policy director, often championed the idea of strictly dividing supply side companies from retailers – largely mirroring alcohol regulations.
Under the two-tier plan, distributors will serve as intermediaries between the supply and retail tiers by buying from growers and processors and selling to dispensaries and lounges.
However, since the OCM hasn’t yet licensed any distributors, the state’s Adult-Use Conditional Cultivators and Adult-Use Conditional Processors have been selling their products directly to Conditional Adult-Use Retail Dispensaries.
But these businesses will soon have to work through distributors – unless they receive a distribution license of their own.
“As the distribution model evolves in the New York State cannabis industry, growers … may need to adjust their business strategies and operations to align with the changing dynamics of the market and the role of distributors,” said Joann Kudrewicz, CEO of cultivation company Ravens View Genetics and chair of CANY’s Cultivation Committee.
For growers, there can be upsides and drawbacks to working with distributors, Kudrewicz said.
On one hand, distributors can help increase the market reach for growers and processors. Some distributors could get cultivators’ and processors’ products on shelves in far-flung areas of the state, where the brands may have trouble making connections – creating growth opportunities.
On the flipside, Kudrewicz said, distributors typically charge fees for services like transportation, storage, and sales support. If they can’t extract these fees from dispensary customers, the costs will fall on growers and processors, which cuts into their profit margins – especially as cultivators and processors compete for market share.
“With more growers vying for distribution deals, there may be increased competition among growers to secure contracts with distributors,” Kudrewicz said. “This competition could lead to downward pressure on product prices, potentially impacting profitability.”
Falkowski of OMO Labs worries that distributors taking an additional cut of already struggling businesses could shrink profits to unsustainable levels for small operators within the market’s production tier.
Based on his experience growing and selling vegetables, Falkowski said a distributor’s cut usually amounts to 20% to 30% of the sales price.
It’s also likely, Falkowski said, that distributors will favor larger cultivation and processing companies because they can produce greater volumes of product, which enables distributors to consistently meet demand from their customers on the market’s retail tier.
“Let’s be honest here,” Falkowski said.
“In a capitalistic economy, people are going to look for the highest margins.”
And that’s not always going to come from a craft product, he said.
Falkowski is applying for a distribution license so that OMO Labs can continue self-distributing its products, but he worries that dispensaries may favor doing business with large distributors because they’ll offer more brands and products.
Distributors may also disrupt relationships that have formed between small farmers and dispensaries, said Don Andrews, who owns Upstate Canna Co., a Schenectady CAURD licensee.
If most brands work through distributors, some smaller ones could fall through the cracks.
“For us, it’s more about being able to build that relationship with these small farms, and be able to keep that rapport with them,” Andrews said. “Going through a distributor kind of kills that.”
At the end of the day, the effect distributors have on New York’s growers and processors will largely depend on the terms of the deals they make with each other, Kudrewicz said.
Growers and processors “will need to negotiate distribution agreements that specify pricing, payment terms, product volume commitments, and other terms and conditions,” Kudrewicz said.
“This negotiation process will be crucial for growers to secure favorable deals and maintain profitability.”