An increasing number of California marijuana businesses – particularly retailers – have been forced to diversify their revenue streams or become vertically integrated, all in the name of cutting costs and staying afloat.
That’s according to Jerred Kiloh, the longtime owner of The Higher Path, one of a few hundred licensed cannabis shops in Los Angeles, but he’s been in the business since well before the regulated market launched to replace the medical gray market that had flourished for nearly two decades before it. Kiloh’s also the president of the United Cannabis Business Association, one of the state’s largest marijuana trade groups.
In the past few years, competition has gotten so fierce and costs have skyrocketed so much, with taxes eating away at profits to the point of total unsustainability, Kiloh said. He’s among many cannabis shops that have had to open secondary mainstream businesses in order to keep the dispensary operational.
“We’ve had to open up like three separate businesses that support The Higher Path just to stay open, because The Higher Path doesn’t make money,” Kiloh said. “I have a hemp store next door that sells like $60,000 a month in product, and I make more profit on that $60,000 a month in revenue than I do with $600,000 in revenue at The Higher Path.”
Kiloh noted that plenty of other companies have pursued similar cost-cutting strategies for years – ever since the state’s cannabis regulatory scheme was implemented in 2018.
“I have to have five or six other sources of income and other business models … to subsidize my losses at the retail side,” Kiloh said. “That’s what all these other businesses are doing. They’re finding other places to make money outside of the retail space, or they’re finding other businesses that utilize their customer base … to prop them up.”
“It’s survival,” he said.
That’s in stark contrast to the goals laid out by the original California licensing model, Kiloh noted. That framework offered state licenses for independent cannabis farmers of varying sizes and styles, manufacturers, distributors, retailers, delivery services, testing labs, even events. But that separation through the supply chain creates too much added cost for companies like his, Kiloh said. That forced many shops to either begin growing and packaging their own marijuana or turn back to the mainstream business world for financial support, as Kiloh has.
“If you vertically integrate, you can pay yourself 5% instead of someone else 15%, and then there’s incremental little bits of money that equal up to sustainability. Or at least less losses. That’s what everyone is having to do,” Kiloh said.
“The only way I’m still in business is I tripled the amount of vertical integration as a percentage of my revenue. I had to do that,” Kiloh said. “And what’s happening now is, brands are getting less and less shelf space, because retailers can’t afford to have a 50% profit margin. We need a 60%-65% profit margin, and the only way (is vertical integration).”
The market conditions have, in short, “isolated everyone to be independent,” Kiloh said.
“But nobody can be independently successful,” he lamented. “Unless you can operate at every level within vertical integration, which means, you have to be a marketer, a packager, a cultivator, everything across, a distributor, logistics, retail. If you don’t wear all those hats, you don’t have an opportunity to even survive, let alone thrive.”
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