- Cultivation + Processing + Provisioning Center = Vertical Integration
- Vertically integrating allows for increased profit margins but may have a higher overhead cost
- State and local regulations will affect your vertical integration options
Owning a facility that can be used for a vertically integrated facility can be very lucrative. Whether you’re looking to buy or sell, this is an option to consider because it can save you money and has the potential to make more money too.
What is Vertical Integration?
One company owns Cultivation + Processing + Provisioning Center = Vertical Integration!
By definition, vertical integration is “the combination in one company of two or more stages of production normally operated by separate companies”. For cannabis facilities, this could mean a co-located grower and processor, processor and provisioning center, or a different combination of those license types owned by the same company. A fully vertically integrated facility would be a grower, processor, and dispensary all under the same ownership.
Co-location vs. Vertical Integration
Simply put, co-location is two or more license types on one parcel whereas vertical integration is two or more license types under the same ownership. A vertically integrated facility may co-locate depending on municipality regulations. Multiple licensees who are not vertically integrated may also be able to co-locate depending on municipality regulations.
Why Vertically Integrate?
Retain more profit in house
Vertically integrated facilities have the ability to bypass a major step in the sales chain. If you’re a vertically integrated facility and co-located on one parcel, all of your harvests may be transferred to your in-house processor and subsequently to your in-house provisioning center without the need for a transporter. However, your product will still need to be tested by a licensed safety compliance facility. If you’re able to bypass using a transporter, you free from a product mark-up at each stage of production.
To break that down a little further, it costs a grower a certain amount of money to produce a certain amount of product. Because of this, he will have to a mark-up that price when selling to a processor in order to turn a profit. Consequently, a processor’s cost to produce an amount of product will result in a higher price to the provisioning center, and that mark-up is subsequently felt by the end consumer. A vertically integrated facility can sell products cheaper or at the same price without these additional costs, saving you money, making you money, and potentially saving patients’ money too.
If you choose to sell any products to other licensed facilities or transport products to your own licensed facilities located on a different parcel, you will still need to utilize a licensed transporter.
What to consider when Vertically Integrating
With a vertically integrated facility, you will see lower mark-ups and production costs, but you may be looking at a higher overhead cost. This is because while a sole grower or sole dispensary will have costs to build out their respective facilities, they each have only one need for their facilities. With vertical integration, you will need to have the capital to build out a cultivation space, an extraction space, and retail space.
Skill Set of Your Team
Experienced, knowledgeable team members in all aspects of the seed-to-sale process are crucial. Know your strengths, know what areas you need team members to fill. On the cultivation side, you need to have a skilled master grower to get you from seed to harvest. You’ll need someone with experience in solvent or non-solvent based extraction methods to process your cannabis. If you plan to make edibles you may want to look into hiring a talented cannabis chef. This extends to your retail staff too. Your dispensary staff will be the ones who are in direct contact with patients and eventually with your adult-use customers. You want them to be knowledgeable about products, policies, and how those things may affect your clientele.
The State of Michigan’s Rules
Michigan’s Medical Marijuana Facilities Licensing Act allows for vertical integration to a point. Growers, processors, and dispensaries can have the same ownership and may co-locate at the discretion of the municipality the facility is located in. Transport and safety compliance facility licensees cannot have any ownership stake in other license types, however, transport and safety compliance facility licensees are allowed to lease space adjacent to the other types of licenses
Each municipality has its own rules regarding cannabis facilities. This includes regulating vertically integrated facilities. Similar to their right to prohibit facilities entirely, a municipality may prohibit co-location and/or license stacking and vertical integration.
How to Vertically Integrate
The state’s process requires a separate application and fee for each license. For example, if you plan to grow 4000 plants, process marijuana, and have a provisioning center all located at 123 Main St. you’ll be submitting 4 license applications. The breakdown of the licenses you need: 2 class C cultivation licenses (allow for 2000 plants each), 1 processing license, and 1 provisioning center license. You’ll also be paying the $6000 application fee for each license. The good news is that all of your applications can be approved or denied at the same time. Meaning no sitting and waiting after one approval to get the next three.
Zoning is so important. Your facility must be zoned correctly, not only for marijuana but for your specific license types within the industry. You must take buffers for schools, churches, and residential property into account. These buffers differ for every municipality. Cites set their own zoning standards for what zoning districts a facility may locate in. Also, the state requires that a cultivation facility be located in an industrial or agricultural zone. Luckily we’re already on top of all this research, so contact us for help with zoning questions or to find out if you have qualifying property to sell.
Once you have your properly zoned property, you need to make sure your build-out will suit your needs. What does that look like for a fully integrated cultivation, processing, and dispensary? You will need a lot of industrial space for your plants and processing equipment as well as retail space for your dispensary. A location with more traffic is ideal to help consumers find you especially if you’re planning to move into the adult-use market next year.