Calif. Supply Chain Tested by Industry Growth

By Willis Jacobson
Dec 18, 2020
Photo by CRYSTALWEED cannabis on Unsplash

This is Part 2 of a series looking at issues within the California commercial cannabis supply chain. For Part 1, click here.

Chris Patel, who has run dispensaries in California dating back well before REC legalization in 2018, is familiar with the annual up and down nature of the state’s flower supply.

Because much of the outdoor-grown crop is harvested over a four-month span from July to October, the state’s supply chain gets flooded with premium flower immediately post-harvest. That product runs dry in the summer months leading into the next harvest, causing inventory issues for many retailers.

This annual ritual places even greater importance on the relationships between retailers and the distributors and cultivators they work with, Patel said, as retailers with connections are more likely to win out when supply gets low. This can put smaller companies at a competitive disadvantage – they’d be unable to afford to stock some top product brands – and lead to both business and supply chain disruptions.

“Every year I think it’ll get better as more people come online [to the California REC market],” said Patel, a founder of the United Cannabis Business Association (UCBA) and owner of the DC Collective dispensary in Canoga Park. “But, so far, I haven’t seen it get better at all.”

Over the next 12 months, California is projected to see a major influx of new retail licenses and dispensaries. While these new businesses are expected to help improve some aspects of the industry – such as expanding access and opportunity – their arrival could lead to further problems within the supply chain. That’s if related issues, like high taxes and a disproportionate ratio of retailers to cultivators, aren’t addressed, according to some operators.

Patel said he remains confident the California market can reach its potential, but acknowledged things could get worse before they get better.

“The more time it takes, we’re going to have more people out of business,” he said.

Trouble ahead?

Looking ahead, Patel predicts that shortages in the supply chain could become a significant problem in late 2021 and beyond. This owes in part to the high costs, including taxes, of running a cannabis business, and the geography and dynamics of the state’s marketplace.

  • Los Angeles has around 200 of the state’s 716 retail licenses, with that number expected to more than double over the next year. The L.A. area is also home to hundreds more unlicensed shops. With more than 30 other municipalities set to introduce or expand REC programs in the next year, this is likely to increase demand – and possibly lead to shortages – for flower from the Northern California growing regions.

An increase in cultivators could alleviate some of these concerns, but cultivation is not an easy sector to enter, said Patel, with the UCBA.

  • Obtaining a cultivation license can take considerable time, often a year or more, and capital. These barriers to entry restrict growth in the sector, operators say.

High state taxes, combined with local taxes, compound the issue, Patel said. 

  • Business taxes cut into already thin profits, which can lead some companies to fall behind on bills or become unable to stock brands and products that their competitors, including those in the illicit market, can.
  • Companies don’t want to invest millions into cultivation operations only to see already high taxes get raised every year, said Patel. He suggested rates be lowered more in line with traditional industries.

What can be done?

There is no consensus on how supply chain issues should be addressed, but many within the industry feel it’s up to operators to ensure the industry’s health.

  • This could require business owners to file complaints with the state about bad actors who either don’t pay their vendors or are otherwise causing supply chain disruptions, said Ryan Bacchas, president of the California Cannabis Coalition (CCC).
    • Bacchas suggested that operators have traditionally been reluctant to report the actions of supply chain partners, partly out of fear of ruining those relationships. “This isn’t snitching anymore, this is just telling the truth,” he said. “Not saying something about evil being done is just as bad as the act itself.”
  • Bacchas encouraged the formation of an industry-wide registry of good and bad actors, similar to Dun & Bradstreet business reports. Operators could refer to this registry before entering into supply chain agreements.
    • “It’s far past a bud and has pretty much become a flower now,” Bacchas said of bad practices within the industry. “The best way that we can really flush this bad weed out of the garden is by standing up, being accountable and being upfront with each other and able to say, ‘These are the folks you should probably not be doing business with, and these are the folks I’ve never had an issue with.’”

Regulatory help?

Regulators, including those on the local level, need to stay abreast of issues affecting the supply chain, said Kyle Tankard, a senior consultant with SCI Consulting Group, which works with municipalities on the development of cannabis regulations.

  • Cities and counties ultimately rely on businesses for their tax revenue, so it behooves municipalities to support industry improvements, Tankard said.
  • Nicole Elliot, Gov. Gavin Newsom’s top aide on cannabis matters, said in a recent North Coast forum that state regulators were “very willing” to engage in discussions about tax reform.
  • Patel, with the UCBA, said that reform can’t come fast enough. “We’re already seeing right now a lot of people who are selling and just want to get out of the industry,” he said. “They just can’t make it work.”
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