Project: Marijuana Market Viability and Supply Chain Process Summary

Delivered March 29th, 2019. Contributors: Rosalyn F., Sweta S., ChristineD and

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What is the supply chain from flower to product for edible marijuana products, and what resources exist for each step?

According to an exploratory study done in 2017, the supply chain for edible marijuana products begins with growers, is passed to distributors, processed by value-added producers, and then distributed to retailers. Through the process, there are several licenses that are required which are mandated by each state depending on the legality of recreational versus medicinal use and zoning, tax, and retail laws. In California, producers of edible marijuana products need to obtain a Type N, 6 or 7 license and be operating out of a legally sanctions kitchen located in a "green zoned" area. Below we have provided a deep dive into our findings. 
OVERVIEW
Because legalization of marijuana and cannabis products in the United States is such a big current issue that is handled by each state separately and not on a federal level, the supply chain is not widely researched or concrete. According to several sources, the production of marijuana in legalized states has become increasingly expensive and difficult to break into. This is because the regulations are constantly changing while states are trying to find the best way to legalize and manage both medical and recreational growers and suppliers. In 2016, there were 141 changes to recreational producer regulations. We assume that because of these changing regulations, the supply change is not widely researched because it is constantly changing. 

According to an exploratory study of the cannabis supply chain done in 2017, marijuana is grown by licensed and regulated growers, tested, distributed to licensed and regulated value-added producers if the company out sources, and then again distributed to retailers. In general, most edible producers are not vertically integrated and have a supplier for the plant. Unfortunately, due to the changing regulations and differences in laws from state to state, there was no additional information found regarding additional or more detailed steps to the process. 
GROWERS
Many growers are vertically-integrated companies that produce products from seed to retail; however, in recent years with the emergence of distributors in states like California, more growers are emerging as suppliers. There are a few things for growers to consider when developing their business. Growers can get licensing for medical or recreational marijuana, produce indoors or outdoors, produce commodity or specialty plants, and much be "Clean Green" certified. The biggest barrier for growers is the compliance regulations placed on them by the state. According to several sources from different states, cannabis has been treated like alcohol in terms of regulations. Due to purchasing limits, advertising and packaging restrictions, and the two-tier system (medical versus recreational), a compliance department is essential for the success of the business to deal with any complications.

 Growers need to have a large enough location to allow for all stages of growing from cloning or tissue cultures to harvesting. This requires heat sources, water and nutrients, and either natural or artificial light sources. Additionally, growers have to track every gram that they produce through a system of identification numbers assigned to each plant and product including roots and fan leaves which are produced into a mulch. Testing is performed during the whole process by state-licensed labs and in-house employees.

In California, the current licenses that could be acquired for growers include the following:
Type 1: Cultivation; Specialty outdoor;
Type 1A: Cultivation; Specialty indoor;
Type 1B: Cultivation; Specialty mixed-light;
Type 1C: Cultivation; Specialty cottage
Type 2: Cultivation; Outdoor; Small.
Type 2A: Cultivation; Indoor; Small.
Type 2B: Cultivation; Mixed-light; Small.
Type 3: Cultivation; Outdoor; Medium.
Type 3A: Cultivation; Indoor; Medium.
Type 3B: Cultivation; Mixed-light; Medium.
Type 4: Cultivation; Nursery.
Type 5: Cultivation; Unlimited
DISTRIBUToRS Logistics services are provided by state-licensed distributors to transport goods for producers and sellers. Even though California has only had recreational legalization for under 2 years, they have developed a system for distribution by licensing distributors separately than producers and retailers. This has allowed distributors to work with several companies in all aspects of the supply chain rather than within one vertically-integrated corporation. 

In this case, regulating and operating in the same model as alcohol distributors is actually a good thing. Because this means that each producer must handle testing and tax in-house, distributors don't need any additional licensing. Because the industry is so new on its own, the only resources found for distributors was legalized real estate for storage and legally compliant trucks. 

In California, the current licenses that could be acquired for distributors include the following:
Type 11: Distribution.
Type 13: Distribution Transport-Only.
VALUE-ADDED PRODUCERS
According to state data, in 2018 only 28 companies held the most basic state license allowing them to put marijuana in a brownie. Edibles producers need to have a state-licensed production kitchen in a state-licensed area called a "green zone" — generally in industrial parks — as well as workers comp and liability insurance, local permits, and testing and distribution licensing. The biggest barrier for producers is real estate and zoning laws. Over 65% of California has banned the commercial production of marijuana edibles and where it is legal the cost is outrageous. Additionally, taxes for edible producers range from 22.25% to 46.25%. Finally, additional state-mandated lab testing and child-proof packaging is now a requirement for edible producers in California.

In California, the current licenses that could be acquired for edibles producers include the following:
Type N: cannabis oil additive
Type 6: Manufacturer 1.
Type 7: Manufacturer 2.
Type 8: Testing.
Type 9: Non-Storefront Dispensary (delivery).
Type 10: Storefront Dispensary.
Type 12: Microbusiness.
Type 14: Cannabis Event Organizer.
RETAILERS
Marijuana manufacturers in California generally don't need much of anything in comparison to the other links in the supply chain. All that is really required is a type 9, 10, or 12 license. However, it is rather difficult to obtain these licenses. Individuals with felony convictions can not obtain any type of marijuana business licenses. Businesses have to pay a $5,000 fee and provide proof that the real estate is legally zoned for marijuana sale and is not within 600 feet of a school.

In California, the current licenses that could be acquired for retailers include the following:
Type 6: Manufacturer 1.
Type 7: Manufacturer 2.
Type 8: Testing.
Type 9: Non-Storefront Dispensary (delivery).
Type 10: Storefront Dispensary.
Type 12: Microbusiness.
Type 14: Cannabis Event Organizer.

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Industry Leaders, Edible Marijuana Products

Seven industry leaders in edible marijuana products in California are Kiva, Cheeba Chews, Korova, The Venice Cookie, Kushy punch, Bhang, and EdiPure. Although a direct answer for the key industry leaders in edible marijuana products in California was unavailable, we were able to triangulate a list of the industry leaders which have major market share in the edible marijuana products category in California. Below is the detail of our methodology, calculation, and findings.

METHODOLOGYInitially, we tried to look for the information through news articles, news reports, press releases, business news, and reports from Forbes, CNN, NBC, BBC, and others for the industry leaders in edible marijuana products in California based on revenue. But this only provided details about edible marijuana products, companies, and the top companies based on market share. Then we were able to find a pre-compiled list of top edible brands in California based on market share for 2017.

Using the list, we tried to look for the revenues through different news articles, press releases, business news, and reports obtained from Forbes, CNN, NBC, BBC, etc. We also looked into the cannabis industry reports, news, and articles from sites such as MJ Biz Daily, BDS Analytics, and Cannabis Business Times but nothing was found on the brand's revenue. This search could only provide information on their products.

Then we tried looking for revenue of each of the brand through their respective websites and annual reports. But this strategy was also not successful and we were only able to find information about the company and their products. 

As we already had the market share for each of the brands in California, we then tried looking for the total edible marijuana sales in California in order to triangulate the desired information. From this strategy, we were able to provide revenue of each brand based on their total edible marijuana sales in California and the market share of each brand. To get the total sales/revenue of edible marijuana products in California, we decided to get the total sales of marijuana in California multiplied by the percentage of edible marijuana users. Below are the detail of our findings and calculation.

INDUSTRY LEADERS THAT HOLD A LARGE MARKET SHARE IN EDIBLE MARIJUANA PRODUCTS California marijuana (cannabis) sales for 2017 was $2,760,000,000 (please note that we used 2017 data to match with other data which were from the year 2017.) 55% of marijuana users in California use edibles.

Therefore, the total sales of edible marijuana products in California in 2017 = 55% of $2,760,000,000 
= $1,518,000,000 
1. KIVA The company has 9% market share in edible marijuana products in California and therefore, total sale/revenue would be 
= 9% of $1,518,000,000 = $136,620,000

 Scott Palmer and Kristi Knoblich are the founders of KIVA Confections. Kiva produces mints and gummies as well as several varieties of chocolate. Edible products offered by the company include Kiva Bars, Camino Gummies, Petra Mints, Terra Bites, and Singles.
2. CHEEBA CHEWS The total sale/revenue on edible products is estimated at $128,030,000.
Cheeba Chews has 8.5% market share in edible marijuana products in California and therefore, total sale/revenue would be 

= 8.5% of $1,518,000,000 = $128,030,000 in revenue

One of the first legal infused edibles in California is Cheeba Chews. Each Cheeba Chews is of 10 mg for safe and easy dosing. These are being tested for potency, pesticides and more. Some of Cheeba Chews edible products are Sativa Chocolate Tuffy, Pure CBD Chocolate Tuffy, 1:1 Chocolate Tuffy, Indica Chocolate Tuffy, Hybrid Chocolate Tuffy, Hybrid Caramel, Indica Strawberry Tuffy, Sativa Strawberry Tuffy, Sativa Mixed Fruit Gummies, and Indica Mixed Fruits Gummies.
3. KOROVA The total sale/revenue on edible products is estimated at $121, 440,000 in revenue. Korova has 8% market share in edible marijuana products in California and therefore, total sale/revenue would be 
 8% of $1,518,000,000 = $121, 440,000 in revenue

 Korova Edibles does not have questionable ingredients. It is a company that was built upon the core philosophy of helping people by Ashley Goldsberry and Gerlach. The edible products of Korova include oatmeal cookies, vegan oatmeal, sativa toffee, chocolate chips, and others.
4. THE VENICE COOKIE The total sale/revenue on edible products is estimated at $106, 260, 000. The Venice Cookie has 7% market share in edible marijuana products in California and therefore, total sale/revenue would be 

 7% of $1,518,000,000 = $106, 260, 000 in revenue

The Venice Cookie has a combined flavor of chocolate chips and cranberries that has a crunchy sprinkling of sea salt. It has a 10 milligrams of cannabis-oil THC per cookie. Some of the edible products of the company are Honey Mustard Pretzels, Savory Pretzels, Classic Pretzels.

5. KUSHY PUNCHThe total sale/revenue on edible products is estimated at $75,900,000 in revenue. The Kushy Punch has 5% market share in edible marijuana products in California and therefore, total sale/revenue would be

 5% of $1,518,000,000 = $75,900,000 in revenue

Kushy Punch is a product of MedMen which operates in Southern California. It offers strawberry-flavored sativa gummies. 
6. BHANG The total sale/revenue on edible products is estimated at $68,310,000 in revenue. Bhang has 4.5% market share in edible marijuana products in California and therefore, total sale/revenue would be

 4.5% of $1,518,000,000 = $68,310,000 in revenue

Bhang is a high-quality edible that contains an incredible cannabis-free taste. It tastes like chocolate and not cannabis and not like other edibles. Other products of the company include Dark, milk, toffee, prestzel, and peanut chocolates.

7. EDIPURE The total sale/revenue on edible products is estimated at $60,720,000 in revenue. Edipure has 4% market share in edible marijuana products in California and therefore, total sale/revenue would be

 4% of $1,518,000,000 = $60, 720,000 in revenue 

Edipure is one of the first edible brands in the US is Edipure. It specializes in custom-shaped gummies and a large variety of hard candies, chocolates, and original confections. Some of Eipure's products are California Love Orange Creamsicle, California Love Orange Creamsicle, California Love Strawberry Lime, Cherry Lime Leaf, and others.

OTHER helpful FINDINGSFor 2017, the sale of marijuana is estimated to be $2.76 billion in California. The sale would be $3.79 billion in 2018 and $4.46 billion in 2019.
For all marijuana user in California, 55% are edible users.

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Market Trends, Edible Marijuana Products

The key trends in the edible cannabis market in California involve the demand for more product variety, more focus on specialty products, increasing health consciousness among consumers and the inclusion of cannabis-infused products in a popular list of food trends. With regard to market saturation, the general assessment from several reports points to a huge opportunity for entrepreneurs to enter the market, since the demand is high and the number of players are decreasing due to the tight regulations being imposed on the industry.
METHODOLOGY
We first searched for directly available data on the key trends around the edible cannabis sector in California by looking for reports from industry sources such as BDS Analytics, Investing News, Greentreprenuer, and similar sites; publications such as Forbes, Business Insider, and others; media outlets such as CNBC, Huffington Post, and other relevant sources. Based on this search, we were able to find several reports that list the top trends in the edible cannabis market in California. We then consolidated these trends from the various trends lists that we found from BDS Analytics, Investing News, Ello Insights, and Leafly. We concluded that these are the key trends since these lists mentioned them as the key happenings and drivers in the market. As for the market saturation, we found several reports from the sources above that gave some insights on the market saturation and the opportunities for new entrants in the market. 
EDIBLE CANNABIS TRENDS IN CALIFORNIA
The legal cannabis edibles sector in California is projected to reach $3.7 billion in 2018 and around $5.1 billion in the year 2019. This is seen to post a serious competition to the beer industry. The California edibles sector has experienced the strongest growth in the industry. This was propelled by several factors, such as the presence of new consumers and those health-conscious users who prefer the smoke-free experience.

Edible cannabis made up 18% of Californian cannabis licensed retail revenue two months after the full legalization happened in February 2018. This figure was seen to rise further as the recreational sector becomes more mainstream. Furthermore, the edibles market growth seen in Washington and Colorado after legalization may also happen in California in the near future. 

There are various elements that drive the cannabis edibles sector to come out on top as a real growing division within the cannabis market. One is the rising health and wellness industry. Globally, the global functioning food segment is expected to rise to $255.10 billion by the year 2024. Furthermore, the health and wellness market's priorities revolve around the consumers' wellness habits needs. In this regard, there are many attributes that are the same in both the healthcare market and the cannabis industry. Because of health concerns, the majority of the consumers in the industry prefer the edible form compared to the other common means of using the product, such as vaping or smoking.

Consumers are also seeking for more product variety in the edibles market in California, Colorado, and Arizona. Currently, the market shares of the best-selling cannabis edible products in those three states only reach 4%. This is low compared to the shares of other popular brands like Coke that has reached around 18%. Brands should then listen to their customers' pulse and provide a vast variety of cannabis edibles in order to achieve solid market success. 

As consumers become more knowledgeable on the various cannabis products, brands are now targeting those users who are after certain effects on their bodies. These effects can include anxiety-reducing, "for fun only", and other benefits. This can then provide cannabis brands with a plethora of marketing opportunities. As an example, the leading brands in California and Colorado are already promoting cannabis products that provide certain benefits to their customers, such as energy boosters and sleeping aids. More brands are expected to follow suit and offer more mood-altering or experience-focused varieties. These types of products are seen to dominate the stores' shelves and grab a sizable market share. As an added boost to the market, cannabis edibles also got included in the list of food trends for 2018 by the Specialty Food Association. As the demand grows, more cannabis-infused food items are expected to appear in the market.
EDIBLE CANNABIS OPPORTUNITIES IN CALIFORNIA
A year after the legalization of adult cannabis-use in California, the industry has experienced massive growth in the state. California has since become the leading state for cannabis sales, with around $2.51 billion in revenue just for the year 2018. Sales jumped from $114.5 million in January to around $214 million in December. This is an increase of around 109%. This was driven by the rise in customer demand for cannabis products. Furthermore, the retail opportunities also increased as regulators started to grant more licenses to existing stores as well as upcoming ones. By the end of the year, the state has legalized the operations of around 484 dispensary locations and 157 delivery providers. The continuous rise in the number of outlets is expected to drive more sales in the coming years.

However, the market condition of edibles is still quite volatile despite strong sales. There were some stores that closed and some brands that were discontinued. The transition from the black market to the legal market is taking some time to stabilize. Given the strict regulations in the state, retailers are less willing to undergo transition and pay for the required taxes. Many retailers are also struggling to keep their businesses open as they try to obtain the required licenses. As a result of this, the supply of cannabis products to the users is being negatively impacted. Strict testing requirements are also causing store closures, product shortages, and price hikes. However, entrepreneurs who can abide by the regulations are in a highly favorable position to enter the industry and grab a market share. 

Nevertheless, the growth of the cannabis industry in California indicates a huge opportunity for edible products. In California, ingestible cannabis was able to grab around 14% of the market. This was an increase of 2% from the 12% market share at the beginning of the year. Furthermore, edible or ingestible products got the highest market growth from November to December of last year. This sector's market growth went up by 7% to reach $42.5 million. Candy is the top-selling ingestible form that has captured around 39% of the market. Gummies are also popular as this form has enjoyed around 81% of the state's candy market from 72% at the start of the year. The sales of this form have increased from $4.3 million in January to around $11 million in August 2018. This translates to a growth rate of 155% in just two months. This can be attributed to the tastiness and convenience of this form.

The California edibles market appears to be the most dynamic sector within the cannabis industry due to the diversity of the products under this division. For the year 2018, certain types of edibles continue to drum up sales. Overall, edibles contributed to around 10% of the state's cannabis market for 2018. This is equivalent to around $180 million worth of cannabis-infused edibles. Cannabis products are also expected to prosper in California given that its use has been in existence in Californian culture for a long time already. There were some reports that the product is so mainstream that CEOs and stay-at-home moms are known to use the product. The edibles division has always been considered as part of the trend to entice higher income consumers. Given this, California is seen to be moving ahead of the pack as the whole industry is expected to be worth $32 billion by 2022. With this big expectation, the outlook is that there will be a huge market opportunity for those entrepreneurs who are aspiring to enter the cannabis edibles sector. Furthermore, since the cannabis legalization in the state is fairly recent, there are still many opportunities for entrepreneurs to profit in the industry.