Vertical vs. horizontal integration in the cannabiz
This article was written for and originally appeared in FLDispensaries.com.
Horizontal vs. Vertical Integration
One of the first things any student of finance and business operations learns is that, just as with plants, any business that is not growing is dying. But how does a business continue to grow once it has run out of space or reached its production capacity? Just as with plants, there are two ways a business can grow — horizontally and vertically.
Mary, Mary, quite contrary, how does your garden grow? Is Mary’s operation applying horizontal or vertical integration in order to grow? What’s the difference between the two? And why would she want to employ one or the other? In this brief article, we’ll go over the differences between horizontal and vertical integration as well as discussing the benefits and drawbacks of each system of expansion.
Plants that grow horizontally, such as along the ground, put down shallow roots, keep close to the ground, and replicate a simple structure over and over. This growth strategy allows them to take up more water and nutrients and get more sunlight without the complications that come with growing tall.
Plants that grow upwards, or vertically, send their roots down deeper into the ground and their canopy up higher into the sky, but they don’t spread out as far. Moreover, vertical plants, rather than replicating their structure over and over again, must have a variety of structures — tap roots, a trunk, boughs, branches, tops, and so on, which all work together to create growth.
It’s the same with businesses. A horizontally integrated business replicates a single type of operation over and over again in order to grow, while a vertically integrated business must build a variety of different systems that work together to create growth.
Growing a Cannabis Business
The cannabis industry is a perfect example of an industry in which businesses can choose to grow horizontally or vertically — or sometimes both.
For example, a grower or a dispensary that utilizes horizontal integration can expand and replicate its operations to increase production capacity and/or expand regionally into new markets. It can also acquire and consolidate other companies that share the same or similar business model.
Alternatively, utilizing vertical integration, a grower can get into the processing, manufacturing, and retail businesses, in which case they grow, extract, infuse, and sell their own products.
Let’s quickly look at some of the pros and cons of each as they pertain to the cannabis industry.
Horizontal Integration In the Cannabis Industry
Horizontal integration in the cannabis industry is very easy to understand. Essentially, as with ground covering vines, an operation can be replicated over and over again and spread out horizontally. For example, a dispensary business can open more and more dispensaries, or a grower can increase its canopy space or add operations in other regions.
Advantages of Horizontal Integration
One of the major benefits of horizontal integration is that a successful business model can be replicated over and over and over again eliminating the need to acquire more and more expertise in a variety of areas.
Disadvantages of Horizontal Integration
There is a downside to horizontal integration. A business that grows horizontally oftentimes must spread out geographically which might make oversight more difficult. This is especially true in the cannabis industry where oftentimes each city, county, and state has its own rules and regulations, and these can change at any given moment.
Vertical Integration In the Cannabis Industry
As explained above, a vertically integrated cannabis business is one that operates in a number of disciplines rather than just one. For example, a grower can do its own processing, manufacture its own products, and operate its own retail outlets.
Advantages Of Vertical Integration
One of the advantages of a vertically integrated cannabis operation is that management can opt to operate in one (or more) geographic locations rather than expanding into new markets every time the company wants to expand.
Another benefit, if done right, is cost savings. A dispensary that buys its products from a distributor or directly from a grower must pay a markup, whereas a dispensary that grows its own products is essentially paying for products at cost.
Disadvantages Of Vertical Integration
One of the disadvantages of vertical integration is that it requires management to have experience in a wide range of disciplines. Growing cannabis is a far different business than running a retail shop. And processing cannabis is a far different business than distributing cannabis products. Whereas a horizontally integrated grower can hire a master grower to oversee multiple operations, a vertically integrated cannabis company must hire multiple experts in multiple disciplines such as growing, processing, manufacturing, distribution, and retail sales.
Understanding Horizontal and Vertical Integration Is Especially Crucial In the Cannabis Industry
Understanding the difference between vertical and horizontal integration is especially important in the cannabis industry. This is because each state’s cannabis regulations are different. And even within each state, sometimes counties or individual municipalities have their own rules and regulations to follow.
Some states require vertical integration. In these states, retailers must grow and manufacture their own products. And some states actually forbid vertical integration. If you own dispensaries in these states, you’re not allowed to operate a cultivation facility.
A good example of a cannabis company that is growing horizontally is Columbus, Ohio-based Growth Brands. In July of 2019, Growth Brands acquired multistate operator Moxie which operates 250 cannabis dispensaries in Arizona, California, Nevada, New Jersey, and Pennsylvania.
A good example of vertical integration is Florida where cannabis companies were originally required to be vertically integrated — that is to grow, process, and manufacture all products that they sell in their dispensaries. (The vertical integration requirement may be changing due to legal challenges.) The three top licensed producers/retailers in Florida are Trulieve, Curaleaf, and Surterra Wellness.
We hope this short article has made the difference between vertical and horizontal integration in the cannabis industry clear. If you have additional questions on this topic we’d be happy to answer them.