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California Companies Becoming Less Vertical

If you were to take a trip back in time to California circa 2018, you would find the recreational cannabis market at an all-time boom. Two years after the purchase and consumption of recreational marijuana were legalized in the state, companies had found their rhythm and a structure that was profitable and delivered top-quality products to clients.

In recent years, as a result of a number of factors, the once vertical market has been forced to branch outwards, resulting in the loss of valuable assets, needless expiration of licensure, and a narrowing of business scopes.

Voguing Vertical

It might not come as a surprise that in an ideal business environment, all – or most – of said business’ facets are run from within. Companies then have control over an array of business decisions including production, distribution, and marketing. That said, the aforementioned model is often more simple in theory than it is in practice.

In recent years, the global economy has been greatly impacted by a number of factors, notably, the Coronavirus Pandemic, which took hold of the world in 2020. While the recreational cannabis market saw an initial spike at the onset of COVID, Cannabis companies were forced to think quickly and adjust to the new state of the world. The economic climate has made it incredibly difficult for emerging companies to gain traction without relying on their more established counterparts.

According to CEO and co-founder of NorCal Cannabis Co., the company was forced to make difficult decisions, including significant divestitures, which later enabled management to narrow their focus on brand expansion.

Crunching The Numbers

Since June of 2021, California’s wholesale cannabis market has been on a steady decline. While production has only increased exponentially in the state, consumption rates have not increased in accordance. This has resulted in what experts are calling a “glut” in product.

According to MJBizDaily, California is home to more than 1,700 acres of cannabis production, while the state’s consumers only contribute to roughly 1,000 acres worth of sales annually. This means that farmers who harvest their crops outside through the Fall months and then sell them in the off-season are left with no one wanting to purchase from them. Instead, they are turning to indoor growers and light-deprived flowers in order to ensure maximum quality.

Market Mayhem

Sadly, it appears as though the situation is unlikely to change any time soon. “We’re going to start from a lower place than we have in a while, and … it’s going to be interesting to see how people play it when we get to November-December, and what are people going to do with their product?” said one expert.

The market is seeing what experts like cultivation consultant and distributor Scott Raquiza are calling a price compression.

“For commercial grows, non-AAA, you’re probably at a 40% price compression. Outdoor is 50%-60% price compression, and premium indoor is only 10-20% price compression,” said Raquiza.

Cannabis companies and wholesalers have found themselves caught between a rock and a hard place as they’ve now been forced to choose between loss of business avenues and loss of business altogether.

 


 

While the vertical model is ideal in most markets, the global economic climate is making such a model less and less attainable. Cannabis companies and wholesalers are being forced to choose between divestitures and foreclosures, leaving them at a loss. An overwhelming amount of production has led to an underwhelming rate of consumption, which has resulted in an overall compression of prices per pound.

At this point in time, the light at the end of the tunnel is seemingly nowhere in sight. The hope is that businesses and wholesalers will continue to adapt through the market and survive periods of inevitable loss.

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