Distribution Woes Are a Major Buzzkill for the California Pot Industry

Passing the pot from manufacturers to stores has been problematic.EXPAND
Passing the pot from manufacturers to stores has been problematic.
Courtesy Terraform Genetics

Recreational weed’s debut in Nevada this month was marred by a legal fight over how product reaches consumers. Despite lines stretching out pot shop doors, stores reportedly couldn’t restock their shelves for the first two weeks of sales because the state hadn’t issued any distribution licenses. There was no legal way to deliver product to stores.

Nevada resolved the matter, at least temporarily, by awarding two distribution licenses, but a bigger, messier fight over distributing pot in California is just beginning.

California legalized medical marijuana in 1996, but it took 20 years for the state to create rules for the industry. While some cities have regulated the industry, the movement of product around the state has functioned as a gray market. Cities and counties can license growers and dispensaries, but how product moves from, say, a grower in Humboldt County to a Bay Area infused-chocolate maker to an L.A. dispensary has left drivers vulnerable to criminal prosecution.

California passed a statewide law for governing medical marijuana in September 2015. Since then it had to reconcile its elements with Proposition 64, which voters passed in November to legalize recreational pot. One of the important conflicts between the two laws has to do with distribution, a behind-the-scenes function that could have a significant effect on whether small cannabis businesses will be able to thrive in California.

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The September 2015 state law, the Medical Cannabis Regulation and Safety Act (MCRSA), requires an independent third party to distribute a grower's or manufacturer’s product to stores. Hilary Bricken, a Hermosa Beach–based cannabis business attorney with the firm Harris Bricken, says the rule blocks the biggest growers and manufacturers from controlling the whole supply chain and, by extension, from becoming too dominant, what Bricken called the "Walmart-of-weed model." (Third-party distribution is how California’s booze market works.)

Disagreements over distribution have created some strange bedfellows. The Teamsters liked this idea, since it guarantees work for the trucking companies shipping all the pot sold in California. The California Growers Association, which represents smaller growers, also wanted distributors who would be larger and have more leverage with their buyers than small farms can.

“These manufacturers and retailers have not been treating growers well for the last 15 years,” Hezekiah Allen, head of the CGA, told the Sacramento Bee in February. “These distributors may not treat us well, either. But we’ll take the unknown evil over the known evil.”

Meanwhile, many retailers and manufacturers were satisfied with making their own arrangements for transporting product and opposed Sacramento inserting another middleman. “I don’t want to be reduced to one page in someone else’s brochure," Kenny Morrison, owner of L.A. edibles maker VCC Brands and president of the California Cannabis Manufacturers Association, told the Bee.

Last month, California reconciled its medical and recreational laws with a new law, the Medical and Adult Use Cannabis Regulation and Safety Act (MAUCRSA). And it complicates the distribution question even further. With a few exceptions, the new law allows independent distributors such as growers and manufacturers to apply for their own distribution licenses.

For a smaller grow or product company, this could mean facing a difficult choice between trying to distribute its product statewide on its own, or trying to make itself attractive to larger distributors, typically by reducing its prices. “Products live and die by their distributors,” Bricken says.

It’s still too early to know which kind of business the new system benefits, Bricken says. “Just because you’re your own distributor doesn’t mean you’re going to be successful.”

In L.A., where the city has yet to license businesses and is facing heavy criticism from the industry for its proposed regulations, the situation is even more opaque. If it isn’t resolved, Bricken says it could create a scenario where L.A. dispensaries aren’t able to acquire legal product.

Sturges Karban, CEO of Marijuana International Corporation, a Commerce-based distributor, says the company is more focused on building its capabilities in Northern California and San Diego than in L.A. “We built a model that can operate with any version of the regulations we’ve seen so far,” he says, “as long as there’s a clear legal framework.” So far, in L.A., there isn’t.


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