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Importance of Vertical Integration in Cannabis Industry

Food and Beverages | Monday, April 26, 2021

For cannabis firms that can afford it, adding new layers to their existing business should provide financial benefits that increase the odds of long-term survival.

FREMONT, CA: Vertical integration in cannabis unites extractors, cultivators, manufacturers, and retailers under one umbrella. Business consolidation in cannabis may be inevitable, thanks to the COVIDcannab-19 pandemic and preexisting trends that carried the sector in that direction. Before the pandemic had made its presence known, cannabis sector analysts were forecasting a wave of consolidation in 2020. With stock prices down and capital funds starting to dry up, several were convinced consolidation provided the only hope of survival for several struggling firms.

The concept behind vertical integration is to get greater control over the supply chain by buying existing firms, forming partnerships with them, or releasing brand new enterprises.  Seed-to-sale chains in cannabis may combine interests in cultivation, processing, extraction, manufacturing, distribution, and retail, or some combination of the above. Vertically integrated enterprises may function in the same state, but increasingly cannabis firms leverage vertical integration to spread their reach to several states or regions.

Regardless of the firm's structure, the benefits of the vertically integrated approach are many and myriad.  Lower costs and increased profitability are some of the results when a cannabis firm vertically integrates. Better cash flow can pay for increases in the number of crops planted. Increased profits can finance the purchase of state-of-the-art equipment to enhance efficiency and output in processing, extraction, or manufacturing. Vertically integrated firms that find success may select to expand horizontally, further boosting their potential to benefit economies of scale.

When cultivation, manufacture, and retail are harmonized, the supply chain gets a level of missing reliability when processes are run independently. Retailers and processors are assured access to good quality raw materials or final products, while cultivators don’t have to worry about finding buyers for their crops. In the vertically integrated sphere, parent firms can monitor sales trends in their retail outlets and plan their planting and manufacturing activities. Manufacturers and retailers won’t be reliant on the decisions of independent suppliers as they look for products to purchase for processing or stocking.

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