Provinces can save time and money using online cannabis distribution systems

Building and managing warehouses and supporting infrastructure for cannabis distribution systems is not necessary in the digital age, says industry

As provinces and territories are beginning to come up with distribution systems for legal cannabis, some industry advocates are saying these governments are still stuck in a previous century.

Large, expensive warehouses and a layer of brokers between cannabis producers and retailers will only add to the costs for provinces and territories, as well as the cost of the product, making it harder to compete with the black market.

While each of Canada’s ten provinces have a system in place for alcohol distribution run by the province—with large warehouses that then distribute alcohol to retail locations across the province—these systems were established decades ago and were developed to deal with a large, bulky and heavy product.

Cannabis and cannabis products, on the other hand, tend to be much lighter and smaller than alcohol, and those licensed to grow cannabis are already required to maintain large and very secure vaults for all their products. These vaults are often rated to security levels surpassing prisons and banks in Canada.

With newer technology that can allow online product tracking, and the much smaller and lighter nature of cannabis products compared to alcohol, there is an opportunity for provinces to streamline their distribution systems while still benefiting from added revenue and addressing the need to monitor, control and track sales.

While taxes are often focused on as the biggest revenue generator for the province, the largest source of revenue is actually in the markup by distributors. The LCBO, for example pays a base price of about $6 to the supplier for a bottle of whisky, while charging a shelf price of about $27. Other spirits show similar markups.

John Prentice, the CEO of Ample Organics, a seed-to-sale tracking service used by numerous licensed medical cannabis producers in Canada, says he sees a big opportunity for online distribution that can actually save the province money in setup costs.

“Online distribution represents the biggest opportunity facing regulators today,” says Prentice. “We have a chance to introduce systems… to eliminate the administrative and financial burden that will be incurred with dedicated distribution centres.”

These cost savings will not only help ensure a rapid implementation of a distribution systems, says Prentice, but also create a more competitive end price for consumers.

“There is no need to ship product, store it in a warehouse, ship it again to a retailer, and then sell it to customers. It is inefficient, costly, and vastly complicates overall compliance and reporting within the industry. It does not create skilled jobs and it is completely counterintuitive to the core reasons we’re legalizing cannabis here in Canada. It’s 2017 and we’re talking about self-driving cars, drones, and martian expeditions—why are we talking about archaic distribution models?”

Dan Sutton, the managing director at Tantalus Labs, a BC based licensed medical cannabis grower, says he thinks the issue is that policy makers are simply under-informed and too busy to understand the solutions currently available. He says it’s important for the industry to provide those solutions to the government.

“There can be a lack of technical literacy amongst policy makers who are not on the front lines of the software industry. They need guidance from cannabis and tech firms alike to demonstrate the exceptionally consistent identity verification, supply chain transparency, and secure reporting modules that derisk this distribution more effectively than retail or government distribution. Private industry needs to teach here, and inspire justified confidence in the secure future of parcel distribution through decentralized digital marketplaces.”

An online, digital distribution system would actually be more safe and secure than physical warehouses, says Sutton.

“Digitizing as much of the supply chain control mechanism as possible will make the system substantially more strict, and non-compliant actions far easier to identify.”

“Digital compliance that reconciles the movement of cannabis from producer to retailer is not complex, and eliminates the need for the massive up front public cost of government controlled distribution. Healthy provincial taxes should be levied and increased over time, but there is no material way centralized warehouse distribution adds value to producer, retailer or end user.”

Licensed cannabis producers like Tantalus Labs are currently only allowed to retail their products to registered consumers through online sales, usually delivered by Canada Post or similar services. Online sales for medical cannabis will remain in place once recreational cannabis laws are in place. The federal government has stated they intend to allow Canadians in provinces and territories without a retail system in place by the time cannabis is legal to be able to buy cannabis online directly from licensed producers. However, this access will not be available in provinces or territories that establish their own retail systems.

One advocacy group representing dispensaries and currently unlicensed growers, the British Columbia Independent Cannabis Association, has called on the BC government to use an online system for distribution and tracking, as well. In their submission to the BC government’s call for input on legalization, the BCICA calls on the province to create a “digitized tracking system” for government reporting, and to avoid “centralized warehousing” of cannabis.

“Under the suggested system,” reads the submission, “physical product would not be centrally warehoused, but it would be possible to have centralized ‘distribution’ through technological seed-to-sale product tracking.”

Prentice says that if the government has any hope of competing with an unregulated black market, keeping operating costs low will be important. Removing the cost of creating and maintaining physical warehouses can help significantly lower overall costs, which is passed on to the consumer, while also saving taxpayer money.

“Traditional distribution models require extensive capital investment, labour, logistics, and administrative oversight,” says Prentice. “The adoption of an online distribution model will completely eliminate the need to build, staff, and manage these facilities.

“If the objective is the elimination of the black market, controlling incurred costs will be critical,” he continues. “By leveraging technology and ‘just-in-time’ (JIT) delivery, like most major retailers and manufacturing companies, product can be shipped directly to brick-and-mortar storefronts from the producer or manufacturer. From a compliance perspective, this is ideal because it allows regulators full visibility and inventory reconciliation across the national supply chain. Furthermore, it limits dependence on a specific producer to provide inventory for provincial distribution by opening a national wholesale marketplace. This will help keep prices competitive and keep black market product out of the market.

“An electronic distribution system also has the capability of reconciling inventory and validating business activities. If every gram of incoming inventory is reconciled against every penny of sales, it becomes substantially more difficult for a legal cannabis retailer to participate in the black market, whether they are diverting product out the back door or selling black market cannabis in a licensed establishment.”