Does going vertical make sense in Calif.?
The country’s biggest and most successful cannabis operators, have built their empires on vertical integration. By controlling cultivation, factories and retail in multiple states, players like Curaleaf, Trulieve, Green Thumb Industries have grown quarterly sales well into the nine figures while continuing to expand their geographic footprints and sometimes even turn a profit.
As the California market has struggled with a raft of challenges, major west coast players like Eaze, The Parent Co., Unrivaled and StateHouse Holdings are betting on a similar strategy. But can it work in the state’s far more competitive market? (Eaze, The Parent Co. and Unrivaled declined to comment for this story.)
The case for vertical
StateHouse Holdings, is a new vertical company that combines retailers Urbn Leaf and Harborside with a portfolio of brands including Smokiez, Dime Bag Fuzzies KingPen and Loudpack. (After two years putting the deal together, Harborside changes its name to Statehouse on the 25th.)
In an email to WeedWeek, incoming StateHouse CEO Ed Schmults wrote:
“Vertical integration probably makes sense in most jurisdictions, and it certainly does in California where the market is challenging and quickly evolving. Full integration will enable Harborside to match our cultivation and production against our brand requirements and retail sales volume in our own stores. Having this proprietary supply chain immunizes us against the vagaries of price changes in a volatile market and ensures us access to consistent quality cannabis. Growing, manufacturing and selling cannabis products gives the vertical company the full margin, rather than just a piece of it. In addition, this enables Harborside to provide a distinctly wide selection.”
Schmults, who has an MBA from Harvard and was previously CEO of iconic toy store FAO Schwartz, has provided a textbook explanation for the benefits of vertical integration. But it’s not yet clear how much these benefits matter in California.
The case against vertical
Many of the big eastern and midwestern states where vertical integration has worked limit the number of licenses available. This serves to protect the position of operators big enough to get vertical no matter their product quality.
- In California, by contrast, consumers are constantly presented with new products from new companies at bargain prices (not including tax).
Jason Vegotsky, CEO of brand agency and incubator Petalfast, called vertical integration in California “a fantasy.” “It only works where regulation allows it to work,” he said. A competitive market forces companies to be the best at what they do, he said.
While Vegotsky said partial integration can make sense, for a brand to have it’s own grow for example, he called the drive to go vertical the number one reason California companies go out of business.
After years of investment California now has a robust network of contract manufacturers and white label growers. Vegotsky and other insiders I spoke to for this article said it’s expensive and hard to be the best at everything, especially when financing dries up, as it has now.
- Vegotsky also blamed vertical integration for catalyzing the state’s “race to the bottom.” Their product “either sits in your warehouse or you drop the price,” he said. “We’ll all be better off when they pick a lane.”
- One exception, Vegotsky said, is Stiiizy, “a unicorn…which has done it and done it extremely well,” Vegotsky said Jeeter has had so much success with its pre-rolls that, “They could probably back into any lane they wanted to.” (
- The state’s other breakout consumer-facing success story, Cookies, generally doesn’t own licenses and instead licenses its intellectual property to the owner.
Nor do the benefits of vertical integration necessarily help with conditions in the California market. At the moment there’s little need to control price and supply with great flower available for very reasonable prices. And many expect prices to keep falling.
- For this reason, MSO Jushi, which is vertical in several states, decided it wasn’t necessary here, at least for now. Instead it will open dispensaries and white-label products for its house brands.
- “We feel extremely comfortable” with the companies who have invested and built grows and factories in California, Chief Commercial Director Trent Woloveck said this week.
- Woloveck sees better ROI in building expensive grows and factories in Pennsylvania, Virginia or other states where Jushi can quickly stand out as a big producer of high quality biomass.
StateHouse Chairman Matt Hawkins, who’s also managing partner at San Diego-based investment firm Entourage Effect Capital, told WeedWeek that the combined StateHouse is capable of excellence at each step of the supply chain, because it’s an amalgamation of companies that have already excelled at each step of the supply chain.
Down the line, Hawkins added, as the far larger east coast and midwest MSOs set their sites on California, they’ll be looking for partners who have “figured out” the state. “We know exactly what they want because we talk to them,” he said.
Anyone who agrees with Hawkins’ thesis can pick up a share of Harborside stock for 32 cents.