Cannabis Supply Chain Woes: Bridging the Gaps

Authors’ note: In this three-part series, we will first investigate the hurdles involved with establishing an efficient cannabis supply chain, and then dive into cannabis taxation and its influence on the market.

Growing, processing, packaging, distributing, and selling cannabis flowers and manufactured products is a time- and labor-intensive process. Each step along the supply chain presents unique challenges that must be surmounted to bring cannabis to market.

Cannabis supply chains already impacted by logistical problems are, in many regions, also taxed at each link from grower to retail consumer, adding financial burdens along the way that often result in regulated cannabis products being sold above illicit market rates.

How the Cannabis Supply Chain Communicates

The cannabis supply chain is beset by disconnects from growers to consumers and back again. There are many links in the seed-to-sale chain—breeders, nurseries (seed, cutting, tissue culture providers), growers, processors, manufacturers, distributors, retailers, and consumers—with many chances for breaks along the way.

Many plant people (breeders, nurseries, and growers) are ill-equipped to understand the retail market well enough to predict trends. They often struggle in finding direction for breeding programs, deciding which cultivars to multiply in nurseries, and choosing which new cultivars to grow next. Product people (manufacturers, distributors, and retailers), on the other hand, are in closer contact with consumers and are therefore better equipped to predict and possibly even direct future trends. However, there often is a dysfunctional delay in transmitting consumer preferences up the supply chain to breeders, nurseries, and growers.

This is a highly unfortunate situation, for the burden of selecting and distributing impactful new cultivars rests on breeders’ and cultivators’ shoulders. Nurseries supply plantlets of what they anticipate growers will want to grow, and growers’ decisions are based on what they think they will be able to sell to distributors. Meanwhile, distributors make purchase decisions based on what they think retailers can sell, and retailers can only stock what distributors offer, limiting consumers to buying those products.

At every link along the chain, economic decisions are based at best on data-driven educated guesses, and customers’ tastes may change before the crop can be harvested. The further up the supply chain businesses are situated from end customers, the longer the delay in receiving consumer feedback, and even more guesswork results. Plant-producing businesses are at the greatest disadvantage.

Just a few years ago, almost any new cultivar breeders developed became popular (at least at a regional level), and some gained a loyal following that persists today. Presently, however, a plethora of new “cuts” regularly appears, many of which were simply grown from accidental seeds found in commercial cannabis flowers. Although the offspring of these “bag seeds” differ in some respects, they largely resemble the female parent, and may even become popular as an improved cultivar.

Although new cultivars start in the hands of breeders, breeders are often even further removed from consumer feedback. It is difficult for breeders to focus their variety improvement programs in the absence of market feedback, especially as only a few of the cultivars breeders work so diligently to develop will be accepted by growers and directed into large-scale production. That said, some new cultivars will become popular and the future choices available to others down the chain.

Being closer to the customer feedback, nurseries and growers are better positioned to choose favorable cultivars and control the flow of flowers. But consumer insight is not the only guiding light in these decisions. As marijuana prohibitions are progressively lifted and the wholesale price of sinsemilla drops, economic considerations become more and more important. Many established cultivars are infected with pathogenic diseases that impinge on both the quantity and the quality of flowers, and they must either be remediated through tissue culture or replaced. The industry is becoming increasingly focused on breeding, multiplying, and flowering cultivars that are resistant to diseases and pests, are economically efficient to grow, and produce competitive yields of high-quality sinsemilla.

Distribution is the controlling link in the chain. Distributors decide which cultivars to buy (or not) from growers. Their decisions often are based almost entirely on perceived sales potential. Distributors will stock cultivars A, B, and C with highly hyped names that presently sell the most, even though varieties D, E, and F may be essentially the same type of sinsemilla at a more affordable price. The most popular varieties are subject to selling out, and limited supply further raises both demand and retail prices.

Following a more predictable and efficient marketing scenario, retailers would stock cultivars that customers consistently want, and order more of those from their distributors who would then inform growers to produce more of those favored cultivars. Supplies would be more secure, shortages better avoided, and the market stabilized to the benefit of consumers. Efficient communication must move both up and down the supply chain.

Too Many Choices of Diminishing Variety

Today’s cannabis market offers too many “new” cannabis varieties and products, all competing for increased popularity. So many different cultivars are available, each essentially its own brand, that consumers find it increasingly difficult to make informed purchase decisions. Although in the bigger picture competition is healthy, consumers are becoming overwhelmed by choice and may eventually be numbed by this seemingly endless variation and lack of reproducibility. Once a consumer does find their cultivar or product of choice, it can be difficult to find it again. It may no longer be the flavor of the month!

An unstable retail market can lead to consumer uncertainty and disarray. As the retail cannabis market matures, consumer tastes will consolidate, national brands will appear, and product lines will become more focused on fewer choices marketed more widely.

Bridging The Gaps

There are several avenues for breeders, growers, distributors, and retailers to communicate more directly with consumers and gather valuable feedback.

Following the lead of early medicinal cannabis dispensaries, retailers can survey consumers to learn their preferences. Why does a consumer prefer one product over another? What elements of branding drive their purchase decisions? Are consumers looking for more information on the label than simply THC content? Are there attributes in addition to potency that attract consumers? This information, when transmitted up the supply chain, will assist distributors and growers in making decisions.

Growers and distributors can host tastings or informational sessions of their products (in jurisdictions that allow such events) to glean feedback directly from their guests. Cannabis competitions also offer venues for gauging the most engaged consumers’ preferences. These are excellent ways to get new varieties in front of devoted consumers and generate marketing hype. Yet since the early days of the Amsterdam Cannabis Cup and through the decades to recent competitions, a select few judges under challenging circumstances have been responsible for picking the most desirable cultivars, with little consideration for how well they grow or what the true market demand of more general customers with less experience might be. This could place an additional burden on growers to efficiently produce crops they have little experience growing, resulting in less-than-desirable agronomic outcomes.

Advance orders will help stabilize production flow, but even when consumer preferences are better understood by retailers, distributors, and growers, tastes may have changed by the time sinsemilla flowers reach the market, and what was hyped six months before may no longer be catching any market momentum. Once distributors place advance orders, it will be their responsibility to sell the flowers and satisfy market demand, while encouraging additional market stabilization.

Keep Cool

Cannabis quality can suffer from poor storage conditions, and flower in retail packages sometimes becomes stale long before purchase. To stabilize quality, the entire sales chain from grower to retail sales point should be refrigerated. This is particularly important for aromatic sinsemilla flowers. Even when sealed packages are stored in the dark, volatile aromatic compounds evaporate and disappear at room temperature, and refrigeration can help preserve them.

Once the aromatic constituents flee, little varietal character remains, the characteristic “brand aroma” is gone, and the favorable effects also diminish. Many jurisdictions allow packaged flower to be sold for up to a year, but storage for more than three months at room temperature is usually inadvisable.

In this regard, cannabis suppliers can take a lesson from the flavored tobacco products industry. Tobacco pouches (snus), chewing tobacco, roll-your-own, waterpipe tobacco, and other fragrant tobacco products deteriorate quickly. As such, these products are often stored in glass-door refrigerators at retail sales points, not on open shelves.

Presently, it is rarely possible to smell sinsemilla flowers before buying. Gone are the days of opening a large jar and filling your head with wonderful fragrances. As a result, consumers have lost their access to directly measure freshness. Without a stable refrigerated supply chain bringing fresh products to retailers in a timely fashion, it is less likely that sinsemilla consumers will consistently be able to buy their favorite flower in the best condition possible.

Taxation Troubles

Exorbitant taxes impact the cannabis supply chain in several ways. While the cost of production of high-quality, smokable flower (whether low- or high-THC) is unchanged, taxes have become a large portion of the retail price regardless of potency. Although wholesale prices have plummeted in many regions due to overproduction, retail prices remain much the same. Distributors and retailers have minimum margins including taxes that they must meet to allow them to profit. Their costs are fixed, except for the flowers, and increased profits are rarely shared down the chain. It is always the growers who are expected to tighten their belts for the good of all. Customers are paying so much for their flower that they want the most value. And since they can’t smell the flowers, price and THC potency as stated on the label are all they have to go on, and other important attributes such as aroma figure less in purchase decisions. This further complicates understanding if consumers are buying what they really want, or simply settling for what attributes are stated and which products are available.

However, potency and efficacy are not directly related. THC is the primary psychoactive molecule, but its effects are subtly changed by the presence of other compounds, especially aromatic terpenes. There are many wonderful cannabis varieties available offering a wide range of pleasurable effects, yet they rarely if ever appear on the market because they do not fulfill potency expectations that can only be expressed by the THC content stated on the label.

Under prohibition, little usable product went to waste, but now once-valuable trim simply isn’t worth enough to justify paying the taxes or taking up precious storage space, and ends up in the bin destined for destruction. Only the best flower from top colas fill branded retail packages, while mid-size and small buds are often destined for pre-rolls or extraction.

[Authors’ note: Would a potency tax on THC open the cannabis market to increased product diversity? We will broach the complexities of taxation in future articles.]

Take-Home Messages

It is challenging enough to grow high-quality sinsemilla, but it is made even more difficult when trying to sell to fickle consumers who are unlikely to develop brand loyalty in a market of ever-changing choices and confusing marketing.

Vertical integration is the best solution for overcoming costs at each step along the supply chain. But this is only an option for larger companies that can afford to invest in the infrastructure required at several links along the chain and keep them under one roof. In a more mature and regulated market, vertical integration and economies of scale available to larger companies will allow them to control the availability of cultivars and determine what is ultimately available to consumers.

Many small growers, manufacturers, and distributors will likely drop out as the economic playing field tilts more in the favor of larger, more efficient, and better-positioned players who will offer a focused selection of sinsemilla varieties and cannabis products.

In the meantime, larger companies must deal with the broken supply chain just like smaller growers. In the flavor-of-the-month economy, smaller growers may be at an advantage because they are lighter on their feet and can more easily pivot as consumer trends fluctuate in the vacillating marketplace. Big companies must commit to larger volume orders to profit from large-scale production. Advance orders all along the line will add stability and predictability to a more mature market benefiting everyone.

The cannabis industry has a long way to go before it operates as other agriculture-based industries. Like other crops, the burden of production seems heaviest on the shoulders of the farmers, and consumers are ultimately offered whatever products make it through the challenges of the supply chain. What is perceived as too much variety now is really much of the same type of sinsemilla with generally the same effects. Once the number of choices among all the sameness is reduced, there will be more space on the shelf for distinctly different varieties. Consumers can only want them once they have the opportunity to try them. We will fight a long uphill battle to nurture our nascent industry into economic stability while struggling to preserve the cannabis complexity that consumers will ultimately desire.

Robert C. Clarke is a freelance writer, photographer, ethnobotanist, plant breeder, textile collector and co-founder of BioAgronomics Group, specializing in smoothing the transition to a wholly legal and normalized cannabis market. rob@bioagronomics.com

Mojave Richmond is the developer of many award-winning varieties such as S.A.G.E., which served as a springboard for creating many notable cultivars. Richmond is a founding member of international consulting company BioAgronomics Group. info@bioagronomics.com