4 Greatest Challenges of Being A Multi-State Operator
As cannabis companies continue to outgrow their states, they face myriad of problems unique to their industry.
Although cannabis businesses have been deemed “essential” in several states, the industry still lacks the rights, benefits, and protections that are necessary for any type of business to operate successfully. Despite a fragmented state-by-state market, several cannabis businesses have outgrown their initial locale and have expanded beyond their state lines. Operators who have achieved that milestone often face a series of challenges for which there aren’t any easily prescribed solutions. Most notably these challenges occur in the areas of consistency, capital, compliance, and community engagement.
Challenge #1: Consistency
“Each market has its own set of idiosyncrasies — how can you advertise, the structure between wholesalers, brands, and retailers, compliance rules, and how do you manage production facilities to make sure that you have consistency of products,” explains Peter Barsoom CEO of 1906, one of Colorado's most successful edibles companies. In late 2019, 1906 raised $18 million to launch in Illinois, Massachusetts, and Michigan.
When it comes to building a product brand, consistency of experience is key. That’s why a Big Mac or Frappuccino tastes the same whether you buy one in Boulder or Kalamazoo. This is inherently difficult to achieve with cannabis products, especially with flowers as the plant's cannabinoid and terpene composition will naturally vary with each batch. For a company that sells flowers and Cannabis extracts, these challenges compound when expanding to new geographies.
“Consistency. That’s the biggest challenge,” says former NBA baller turned Cannabis executive, Al Harrington, CEO of Viola Brands. “The same strain in Colorado will be different in Michigan due to the environment. Regulations are state-specific, so we have to adjust to different growing techniques, production methods, regulations, packaging, and sometimes THC limits.” Viola also raised $16 million at the end of 2019 to expand into new markets.
Challenge #2: Raising capital
Before a business can tackle the challenge of creating new supply chains and recreating a consistent product line in new markets, it must first capitalize its growth. This too comes with unique challenges, beyond the not-so-easy task of finding millions of dollars of investment capital. In order to control product quality and consistency, multi-state operators typically opt for vertical integration. Often this will create a structuring or restructuring problem for efficiently getting investor capital in the door.
“A multi-state operator has at least one entity for each state that it’s operating in. It might have several, seperate ones for each license type. It’s not uncommon for a multistate operator to have 15 or 20 entities under one investment holding company. That means you could have several different state regulators who need to sign off on the transfers [when licenses are acquired] and every state has a different process for doing that,” explains Michael Harlow, CPA and Partner leading CohnReznick’s Cannabis practice.
“The real rub is that for most of these reorganization processes, we want the entire reorganization to happen at one time, as one transaction, so that it qualifies as a tax-free transaction. It is almost impossible to have state regulators from five or six different states with two or three licenses per state all to approve the license transfers at the same time.“
The difference can have millions of dollars of impact, which could easily kill a deal. To orchestrate this kind of transaction requires in-depth knowledge of compliance protocols in multiple municipalities and the ability to coordinate with multiple stakeholders.
Challenge #3: Building a new customer base
After overcoming the myriad trials required to begin operating in a new state, a brand must then go back to square one of developing an engaged, loyal customer base. Your target audience or demographic in California might not be relevant in Michigan. The consumers in Illinois may respond completely differently to your messaging that worked so well in Colorado.
Viola Brands made a strategic hire to tackle that piece of the puzzle by bringing in Ericka Pittman, a highly accomplished and experienced marketing executive on board as their CMO. When asked how Pittman planned to win in new markets, she shared her plan to “create brand equity by educating consumers. Cannabis is still a CPG, how do people choose dishwashing liquid? Is it much different from how people choose cannabis products?”
In line with Harrington’s mission to “help as many people as I can through Cannabis, especially people who look like me,” Pittman expressed that “we want to lead the way in community reinvestment and create social equity and economic access by creating education opportunities, expungement opportunities, incubation opportunities, and jobs.”
Certainly, investing in and including the local community is a tried and true way to create a loyal following. Another method is by influencing the point of sale. According to Barsoom, “budtenders are integral to the shopping and consumer experience, especially in new markets where people don’t have much experience with legal cannabis. We focus on budtender education. We’ve developed an extensive budtender training program that we can roll out in any geography.”
In all likelihood, brands that successfully flower into multi-state operations will have to invest resources into community engagement all the way up and down from the consumer, B2B, and political levels as each state has its own ecosystem and culture.
Challenge #4: Compliance
One entrepreneur’s complex problem is another entrepreneur’s business opportunity. As more brands scale into multi-state operations, there is a greater potential to support them as they face the many challenges associated with that growth.
“Outside the cannabis industry, multistate manufacturers benefit from economies of scale. It’s really hard to do that in the cannabis industry though for several reasons,” explains Julia Cortopassi, Co-Founder of Batch Bud, a software startup established to help cannabis-infused products manufacturers scale their operations with greater efficiency. One way Batchbud does this is by giving MSOs a tool to coordinate non-cannabis inventory across states for significant bulk order discounts and superior traceability.
As Cortopassi explains, “State compliance software doesn't track non-cannabis inventory. So let’s say you’re in Colorado and California and find out that a lot of eggs you put into a bunch of brownie batches in both states is compromised. If by California standards you have four hours to compile a list of everyone you sent those brownies to, you need to quickly know which batches were affected. Without a tool like Batchbud, it’s really hard to retrace that, so the brand usually recalls every finished good from a certain date onwards. It’s a colossal waste of money and goods. Batchbud gives companies the ability to quickly & accurately recall compromised inventory in any market they expand into.”
As the industry evolves, green entrepreneurs would be savvy to observe and discover both operational and regulatory inefficiencies for which they can provide solutions to at scale.
Cannabis commerce post-pandemic
Given the massive supply chain disruptions that many industries are dealing with in these times of stay-at-home orders and quarantines, what kind of recourse would a state have if its now-essential cannabis businesses were undersupplied and patients couldn’t access their medicine? Would Governors call in the National Guard to build popup grow-ops? Highly doubtful.
Perhaps in a post-COVID world, policymakers will have greater urgency to figure out a sensible framework for interstate cannabis commerce. Legislatures would demonstrate compassion, responsibility, and preparedness by advancing policies that would encourage the now-essential cannabis industry to thrive. Until then, cannabis entrepreneurs will continue to face artificially high degrees of difficulty due to the institutional stigma against cannabis.