Monopolies & Acquisitions in the Cannabis Industry

Monopolies & Acquisitions in the Cannabis Industry

The three vertically integrated companies will soon start growing their own cannabis and cause an oligopoly.

Before marijuana was made legal, it was almost entirely the sole domain of the black market. Since it has been legalized, those on the black market are still holding a stake in the industry. There is a lot of focus on this by policy makers & enforcers and for good reason. As black-market dealers avoid taxes and regulations, it makes it harder for legitimate companies to compete. What is often overlooked, however, is that the big businesses using aggressive business tactics are also making it hard for small companies to succeed.

Falling Prices

Many believe the drop in marijuana prices is due to the appearance of big businesses in the market, flooding it with projects and pushing the little guy out. It’s no surprise that investors are scrambling over each other to get into the marijuana industry, which isn’t a bad thing, but the threat of monopolies are becoming bigger and bigger every day. The likelihood of big businesses upsetting small businesses is high, but there is also a threat of the market being dominated by one or two major players.

Vertical Integration

We are already starting to see this in states that allow vertical integration of cultivation (when a company controls more than one stage of the supply chain), processing, and the sale of cannabis goods. In Rhode Island, the state’s medical-marijuana program is dominated by three vertically integrated businesses. This means that many smaller licensed growers are forced to drop the price to sell to those three outlets and lose all control of the market.

The three vertically integrated companies will soon start growing their own cannabis and cause an oligopoly. Other states, like Colorado, have stopped awarding additional licenses to marijuana companies, almost encouraging oligopolies. In Maryland, large out of state companies have been using acquisitions or management agreement to take control of cannabis dispensaries without a lot of people noticing.

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Impacting Tax Revenue

In California, regulations have passed laws which allow large businesses to exploit a loophole and obtain as many cannabis cultivator licenses as it could afford. The costs and regulatory requirements of starting a business in the legal cannabis industry have forced many smaller growers to stay behind the scenes, this has had a significant effect on tax revenue. California’s cannabis revenue is coming up tens of millions of dollars short of the state’s projections, this is due to the reluctance of many cultivators to enter the legal, taxable marijuana market.

Washington, one of the first to legalize recreational cannabis, should be viewed as a cautionary tale about monopolization in the sector. When designing their cannabis legislation, Washington state created three tiers of licenses depending on the size of the market. Retail and wholesale prices of marijuana in Washington has quickly dropped since 2014, squeezing smaller companies out of the scene. In 2014 the average price was $10 a gram wholesale, by 2017 that had fallen to $2.50 a gram. These lower prices may sound great to a consumer but come at the expense of smaller businesses whose income makes it almost impossible to carry on trading without making a loss. Large scale operations can handle a big drop in wholesale prices and, because of their scale, can still turn a profit.

The Merging Buyouts

Earlier this year, the maker of Marlboro paid $1.8 billion for half of the Cronos Group, a large Toronto based cannabis business. In August last year, Constellation Brands who own Corona, amongst other beers, paid $4 billion for a stake in Canopy Development, another Canadian cannabis business. Coca Cola has also expressed interested in the sector although they are waiting for the right time.

Essentially, fewer players equal less competition which leads to higher prices and limited market growth. Competition cannot flourish in a market when every business that wants to be in that market isn’t allowed to enter. On a positive note, large corporations entering the sector means they could step up lobbying efforts to make marijuana federally legal within the US.

Businesses are just getting started in the cannabis industry, but it’s inevitable that more large corporations that have not yet entered the market will do so. Unless the competition can flourish, the consumers will be left unsatisfied and from an economics point of view, more money will be left on the table.