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Is Vertical Integration Good for the Medical Cannabis Industry?

Recent discussions about medical cannabis gave Mississippi lawmakers plenty to think about. One of the topics discussed was vertical integration. Utah state senator Evan Vickers, in comments to his Mississippi counterparts, appeared to praise vertical integration. But is it really a good thing for the medical cannabis industry?

Vertical integration is a simple concept. In states that allow it, a single company can operate with multiple licenses. The company can be a grower, processor, and retailer all at the same time. Theoretically, vertical integration would allow companies to also obtain testing licenses.

While Vickers seems to be in support of vertical integration, he is firmly against the idea of allowing integrated organizations to own and operate testing labs. He believes that aspect of medical cannabis needs to be kept separate.

Vertical Integration and Efficiency

Efficiency is the foundation of the vertical integration concept. By combining three licenses under a single business entity, greater efficiency is theoretically achieved. How theory translates into reality remains to be seen. Examples from other industries point to both good and bad results stemming from vertical integration.

On the positive side, vertical integration allows a company to control every aspect from cultivation to retail sale. It can pull resources in from industry experts and vendors to create an efficient system from start to finish. And by maintaining control over every aspect of the process, companies ultimately control the products customers have access to.

The economics of scale are also in play here. Vertically integrated companies have more scale to work with as they grow. The larger the scale, the greater their efficiency and cost savings. Companies like Amazon and Walmart prove as much.

On the negative side, vertical integration always presents the risk of mediocrity or outright failure. It is not unusual for vertically integrated companies to do a lot of different things but not do any of them well. That is something the medical cannabis industry cannot afford.

Separate License Inefficiencies

Vertical integration proponents often point to the inherent inefficiencies found in the separate licensing model. Sen. Vickers has first-hand knowledge of those inefficiencies thanks to the medical cannabis program in his own state.

As things currently stand, Utah licenses only eight growing operations. They have only licensed fourteen cannabis pharmacies, Park City’s Deseret Wellness being one of them. In between are the processors who turn raw cannabis material into usable medical products.

Deseret Wellness says that one of their biggest challenges right now is keeping their shelves fully stocked. There doesn’t appear to be enough product to go around in the Beehive State. Lawmakers could address that by increasing the number of growing operators they license. But still, separate licenses create a certain amount of inefficiency.

The separate license system requires processors to compete for grower product. They are at the mercy of growers and the success of each year’s crop. Likewise, they partially contribute to the success or failure of those retailers they sell their products to.

Free vs. Monopolistic Markets

The issue of vertical integration really boils down to control. Vertical integration may be naturally more efficient while separate licenses encourage and efficiency but, at the end of the day, what is more important is market control.

The biggest downside to vertical integration is that it trends toward monopolies. Small numbers of players control an entire market to the detriment of their customers. On the other hand, separate licenses maintain free markets despite any inherent inefficiencies. So which is more important? And at what cost? Should states trade free markets for efficiency and risk creating a monopolistic structure?

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