Emily Fata

Emily Fata

Founder at Diagon Ventures
Emily has worked as a bridge between entrepreneurs and investors in the cannabis industry since 2013. She approaches projects with a deep sense of curiosity and intuitively transforms data and financial projections into stories.
Emily Fata

Latest posts by Emily Fata (see all)

There are more than 200 unlicensed delivery businesses floating around Michigan, but it was Donnell Cravens, the former manager of Utopia Gardens, who did the state’s first legal delivery himself.

“The first one was very close to our shop—a patient with some mobility issues,” he said. “She was ecstatic about it.”

In February of 2017, Oregon pioneered the cannabis delivery market, issuing licenses to 100 retailers. California followed suit. More recently, Michigan greenlit three initial delivery businesses to provide cannabis directly to consumers. Colorado’s latest bill would allow medical marijuana delivery by the beginning of 2020 and recreational deliveries by 2021. Within a few years, it looks like delivery will be a ubiquitous across cannabis markets.

 “It will be a major part of the retail experience,” Cravens said. “I wouldn’t be surprised if it accounts for 30 to 40% of sales.” 

The demand for delivery is there; the thousands of illegal delivery businesses across the country are solid proof. Looking to invest or start a delivery business? Keep reading to learn how local and state regulations can impact the economics of these businesses, why I am wary on “Uber for weed” as a business model, and how to set yourself up for success in this new vertical.

Local & State Regulations Matter

Delivery market advocates emphasize that it’s about “accessibility”— making cannabis available to people without cars or patients who can’t leave their homes. A consumer report published by the delivery app Eaze, suggest that Baby Boomers were one of the fastest growing market segments, increasing 25% over the past year and spent the most per average through the app—averaging $96 in purchases per month. Cravens estimated that roughly 40% of their initial delivery orders came from elderly patients or patients without vehicles.

For patients and consumers, delivery is a major convenience, but for cannabis suppliers, the winning factor is more about customer acquisition. If the state or local regulations are prohibitive in making cannabis accessible and acquiring new customers, the economics of a delivery business might not make sense.

For example, in Oregon, the OLCC regulations only allow drivers to deliver marijuana items in the jurisdiction where the retailer premise is licensed. This limits the market size and potential new customer acquisition, when compared to a state like California or Michigan, where licensed delivery businesses can deliver outside of their zone. In some cases, this permitted delivery zone might be too small for a business to make sufficient customer acquisition and to offset the costs of adding delivery drivers to their payroll. Not to mention the costs of gas, vehicle maintenance, and the online delivery platform required to remain compliant with seed-to-sale requirements.

On the other hand, for retailers that can deliver freely within the state and qualify for a license, delivery could be a major customer acquisition tool. Implementing free delivery, as long as the order exceeds a certain value, is just borrowing the “free shipping” marketing technique from the e-commerce industry.  In a research study at Wharton business school, marketing professor David Bell discovered that a free shipping offer that saves a customer $6.99 is more appealing to many than a discount that cuts the purchase price by $10.

“It’s naturally going to increase—we’re going to see a bump in revenue, gaining access to a wider range of people.” said Cravens. “It opens us more. It pays for itself—just a convenience.”

Cravens estimated that over half of the delivery orders in the first few weeks for Utopia Gardens were from new patients, and that many patients were going over the delivery minimum of $50.

Misconceptions on “Uber for Weed”

The delivery “middleman” in cannabis is often compared to Postmates or UberEats (or even Uber), which I think is misconstrued. (Of course, the unlicensed businesses delivering cannabis across the country can call themselves the “Uber for weed” until they get caught.)

So far, most legal “middle man” services in cannabis offer software as a service, rather than boots on the ground transportation of cannabis. Eaze, a delivery app in in Los Angeles, facilitates delivery transaction on its online platform but doesn’t actually do the delivery. They charge their partner dispensaries a monthly licensing fee to use their software, according to Elizabeth Ashford, Global Director of Communication at Eaze.[1] Likewise, back in Michigan, Cravens, was receiving orders through the delivery software platform Dutchie, but he actually did the first three deliveries himself, before handing them off to fellow employees at Utopia Gardens.

Colorado’s delivery legislation—HB1234—faced some pushback from dispensary owners, such as Green Solution, Roots RX, and Local Product, specifically for the clause that would permit middle-man delivery services. “The app is a virtual dispensary, and the app doesn’t mention the dispensary it comes from,” Jonathan Salfeld, owner of Local Product of Colorado, in an interview with Westword.

To Salfeld’s point, Eaze’s website and app is organized by products, rather than displaying a specific dispensary’s inventory. This allows customers to see the array of products in multiple dispensaries in their region at once, but it does create confusion regarding what business is responsible for the delivery.

Of course, the industry may evolve to a point where these middleman businesses do perform the delivery. But within the legal cannabis businesses, retailers must consider additional logistics and security practices that don’t matter as much when you’re delivering a pizza or Thai food. In most states, cannabis delivery drivers must undergo extensive training and background checks, making it much less conducive to gig economy workers. A delivery business must have a few trained and dedicated employees, not thousands of part-time workers who can log on to the app for a few hours a week.

Further, in most states a business would need to first have a retail or distribution license in order to set up a delivery business, which makes setting up a middleman delivery business more capital intensive and complex. There is opportunity to be profitable in cannabis delivery, just don’t try to emulate the ride share or food delivery model!

Should I offer delivery?

If you’re looking to apply for a delivery license for your business, invest in some strategic planning. There is no one-size fits all answer to whether a delivery business makes sense for your business. Just as a dispensary and cultivation facility are two different businesses (even if they’re vertically-integrated), adding delivery to the spectrum opens a new can of worms in terms of compliance, logistics, and costs.

Understand the regulations in your state/municipality and understand your supply of products. Does your business have enough product to meet this additional demand? Do the financial metrics make sense? Can you afford to add delivery drivers to the payroll, even if delivery hours are not consistent? Run the numbers, determine the cost of offering this additional service, and develop a pricing structure that makes sense for customer acquisition offset the cost. In cannabis, it’s common to feel  left behind about the newest business model (whether it’s CBD-infused pizza or a celebrity-themed line of edibles.) As always, stay consistent in your products and quality above all. And if you have more questions, get in touch for a consultation.

 

 

[1] Eaze CBD Wellness is a separate business; its business operations are not mentioned in this article.