The business world talks about vertical and horizontal integration in terms of mergers and acquisitions. A company looking to expand by way of acquisition can expand vertically or horizontally. In the cannabis industry, there are some companies that describe themselves as ‘fully vertical’. Does that mean they have maxed out their growth potential? In a word, no.
A company looking to expand horizontally would look to acquire its competitors. All the acquired companies would be on the same playing field, so to speak. In other words, they would sell the same products and services to the same customer base. A company looking to expand vertically does not just want to increase market share, it also wants to expand into other parts of their particular industry.
Vertical growth in the cannabis industry is based on a similar principle. It all revolves around licensing. A fully vertical cannabis company is one involved in every aspect of the business legally recognized by state law. We can use Utah as an example, given the simplicity of their medical cannabis program.
Four Types of Licenses
The owners of Deseret Wellness, a Park City, UT medical cannabis pharmacy, says the Beehive State offers four different types of licenses to entrepreneurs looking to open a cannabis related business:
- Growing – Licensed growers are the ones who actually cultivate cannabis plants. They plant seeds or clones, carry them through the growing season, then harvest and dry the plants before sending them on to the next stage.
- Processing – Licensed processors take raw plant material and transform it into retail medical cannabis products. Some of the plant material is processed to produce dry flower. The rest is subjected to extraction processes that isolate THC and CBD.
- Testing – Licensed testers are responsible for testing both plant material and finished products for purity and legal compliance. Testers are especially interested in looking for THC.
- Dispensing – Licensed medical cannabis pharmacies are the only ones allowed to sell cannabis products in Utah. As of this writing, there are only fourteen licensed pharmacies throughout the state.
Almost all the cannabis businesses in Utah possess just one license. Licenses are prohibitively expensive, and launching a new startup requires a considerable investment above and beyond the license. Most businesses just stick with one. However, there are a small number of fully vertical operators in the state.
Licensed in All Four Areas
A fully vertical cannabis company in Utah possesses all four licenses. That company cultivates its own plants, processes them, handles all testing, and operates pharmacies. Not many companies are fully vertical because there is so much involved.
The big advantage of being a fully vertical company is being able to control every aspect of your business from initial planting to retail sales. You have the ability to control the quality of your plants. You can control the quality of your CBD and THC products because you always know the source of your plant material. You can even control your prices through the economics of scale.
Being fully vertical does have its disadvantages as well. At the top of the list is regulatory compliance. Each license comes with a strict set of rules that has to be adhered to. One license keeps the rules to a minimum. Having all four licenses requires a lot more compliance.
A fully vertical cannabis company is involved in every aspect of turning cannabis plants into retail product. Interestingly enough, a fully vertical company can also expand either vertically or horizontally. There are plenty of opportunities for doing just that when it comes to the cannabis space.