Supply Chain Impact on California Cannabis Industry

Supply chain problems have negatively affected American consumers. The lack of micro-chips has reduced the availability of new car and truck production while consumer goods from China and the Far East are in short supply: just try and replace your washer dryer or refrigerator. Why even car radios are not immune. Every industry and retailer is plagued by short supply, even cannabis manufacturers.

California companies are particularly hard hit. California, number one in the nation for cannabis retail sales (according to the June 2020 annual report performed by Arcview Market Research and BDS Analytics) at $3.8 billion (mix of both recreational and medical), is especially hard hit by lack of available raw materials.

The California cannabis industry is already hard hit by high taxes, regulatory red tape, labor shortages, and is now also dealing with supply chain gridlock, causing operations managers to rework procurement strategies. The problem is not just the lack of raw materials, but also the rising cost of materials when they can be procured at all.

Rising Cost of Materials

“Everything is costing a whole lot more, especially on the industrial side,” said Will Brophy, head of operations of Nabis, a cannabis wholesale distributor in Oakland. Nabis is trying to stock up on raw materials, as well as pursue additional avenues for risk reduction.

“Folks recognize the supply chain isn’t infallible,” Nabis’ Brophy said. “We’ve had to move up our procurement process in our warehouses considerably to account for a multiweek procurement cycle for certain products.

Covid has become a double-edged sword: demand and consumption are up, stressing the supply chain at the same time that consumers are purchasing more products. Nabis, is opening a third distribution center in the Central Valley with 86,000-square-feet of space, doubling the current combined warehouse space in L.A. and Oakland. However, construction, renovation, maintenance, and fleet costs have all increased over the past six months and material shipments have been delayed for weeks or more.

Las Vegas-based Hara Supply, one of the world’s largest pre-roll distributors, is seeing a 733% increase in container shipping costs from India. Hara relied on nine manufacturing plants in India to fulfill cone orders for more than 100 California brands, packagers, distributors and resellers. Over the last two years, Hara overseas production grew from 3 million pre-roll cones per month to more than 20 million just for the California market, according to founder Bryan Gerber.

“Because we’re not buying capacity from someone like the other cone manufacturers or cone brands, we were able to prioritize customers,” Gerber said.

Eroding Profit Margins

Atlas Seed, a Sonoma County-based supplier of cannabis seeds, have had profit margins eroded over the past year due to skyrocketing material costs. According to William Hancock, Atlas Seed sales director, “Some materials are now twice as expensive or nearly impossible to procure, from packaging materials to drip tape for our irrigation systems.”

In 2020, “we experienced a seller’s market for cannabis flower and were able to make a 70% to 80% profit margin,” Hancock said. “Last year, profit margins sank 80% on average”.

Impact of Shipping Delays

“There are these massive unforeseen shipping delays,” said Josh Krane, vice president of operations for 4Front Ventures based in Phoenix. in California. The price of copper tripled during the construction of 4Front Ventures’ recently opened 170,000-square-foot cultivation and processing plant in Los Angeles and the business has had to contend with vape hardware shortages for months.

“I have machines waiting, I have packaging waiting. I have everything but raw ingredients for edibles waiting in those ships right now.” Says Krane.

4Front is now ordering materials from both Asian and domestic suppliers much further ahead of production, stockpiling inventory to prevent manufacturing shortages, which increases 4Front cost tying up capital in inventory. 4Front has been able to negotiate agreements with vendors storing inventory willing to offset some of those carrying costs.

“We’re constantly trying to shop new vendors,” Krane said. “The real name of the game has been trying to lock down and find already domestically landed pools of inventory.”

While inflation is affecting the entire country, the high demand in California produced longer-term investments in physical plants, which are most susceptible to inflation. The cost of steel, copper, and wood have all increased the cost of production.

Brophy said. “Some of these precautionary measures we’re taking now are probably going to stay in place for quite a while.”

Aspen Insurance Agency is a family-run business in Denver, Colorado servicing clients nationwide. We work with multiple insurance carriers to offer our customers a wide variety of risk reduction coverage at the lowest possible cost. We offer a wide range of personal, auto insurance, commercial and professional insurance to residential and commercial insurance customers enabling the cheapest rates available. Call to speak to one of our professionals for home or business insurance and see how painless insurance shopping can be.