Cannabis dispensaries may be next in line for delivery wars.
Food orders for DoorDash, UberEats, and Grubhub increased dramatically during the outbreak. Drizly, an alcohol delivery app, has seen a rise in sales. Then there’s Eaze, a cannabis delivery app located in California that has seen a 70 percent spike in new user signups. According to the firm, a marijuana order was placed every eight seconds in California last year. According to BDSA, the legal market in the United States earned more than $17 billion in sales in 2020, led by California.
Eaze boasts 800,000 clients and has delivered over 7 million packages in California since its start in 2014, but it isn’t the only company in the space. There are a few cannabis delivery services that serve the entire state, and there are many others that cover smaller areas. In California, MedMen and Caliva provide delivery, while dispensaries across the country provide their own delivery services to respective communities where it is permitted.
There is red tape even where adult and recreational adult-use marijuana distribution is permitted. For starters, each state’s employment rules and product hand-off process for drivers varied. Drivers must be W2 workers of dispensaries in California, for example. There are also regulations for the delivery vehicles themselves: in California, the vehicle cannot be open, such as a scooter, and there are camera rules in Massachusetts.
Despite the regulatory barriers, Uber CEO Dara Khosrowshahi recently stated that his company may expand beyond ride-hailing to cannabis delivery. In a recent CNBC “Tech Check” interview, Khosrowshahi said, “When the road is clean for cannabis, when federal regulations come into play, we’re absolutely going to take a look at it.”
Uber’s First Significant Acquisition
For the time being, Uber is concentrating on food, with UberEats, and its first step into controlled substances, booze, with the Drizly acquisition.
Lantern, a Drizly sister firm, handles cannabis delivery. Lantern was born out of Drizly, but once the Uber-Drizly merger is through, the cannabis delivery app will become its own company. In March, Lantern became the first company in Colorado to offer adult-use cannabis delivery.
“We’re happy that the march toward federal legalization is advancing, and that big delivery players like Uber are paying notice,” Lantern president Meredith Mahoney told CNBC via email.
Could cannabis consolidation be on the cards, if M&A was Uber’s response to a burgeoning alcohol delivery market? Perhaps, but regulation, according to Eaze spokesman David Mack, will remain a huge difficulty. Laws prohibiting the delivery of cannabis with alcohol or food could be a stumbling block for consolidation. California, which has set the standard for marijuana regulation in the rest of the country, outlaws the delivery of cannabis in conjunction with food or alcohol.
Getting into the cannabis industry in the United States also means getting into a business that is linked to a narcotic with a history of racial inequity. The playing field for legal cannabis is far from even, with Black Americans 3.6 times more likely than white Americans to be jailed for marijuana-related charges. In fact, rapper and business magnate Jay-Z established a $10 million fund to encourage minority cannabis entrepreneurs who could otherwise be left behind by the industry’s boom. Delivery applications could reduce the expense of opening a storefront while also increasing exposure for women- and minority-owned businesses. Eaze provides a “social equity” menu for Black-owned local retailers and dispensaries, claiming that the option increases brand awareness and revenue.
There could be a slew of delivery applications and logistical companies vying for a piece of the cannabis delivery pie. Despite its name and roots as a logistics and transportation software for transporting snacks and supplies around a college campus, Gopuff does not distribute marijuana. Gopuff, which was placed No. 36 on this year’s Disruptor 50 list, delivers alcohol and smoking equipment like rolling trays and papers in over 600 American cities, but the business says it has no intentions to add cannabis goods to its platform. Late last year, it purchased BevMo!, a West Coast liquor shop business with 300 locations. Also lately, Uber and Gopuff established a delivery cooperation for “critical” items.
Logistics and Distribution of Cannabis
Recently, hip hop singer and original Dipset member Jim Jones announced a deal with The Parent Corporation, a vertically integrated cannabis company, to manage distribution and manufacturing in California for his own cannabis company, Saucey Farms & Extracts.
“As a small to mid-sized business,” Jones explained. “We wouldn’t ordinarily be able to provide distribution on our own.”
The Parent Company went public in Canada via a SPAC earlier this year, trading on the NEO Exchange under the ticker TPCO, and it has ties to another famous cannabis investor, Jay-Z.
Jones said to CNBC in a text message, “I fully predict that similar businesses will follow suit in the next months and years.”
FastAF, a last-mile logistics and delivery platform similar to Gopuff, but smaller and with fewer markets, could be one of such companies. Despite the fact that it, like Gopuff, operates in weed-friendly California, FastAF does not yet provide cannabis items.
FastAF functions as an online boutique, collaborating with companies such as Goop, Aesop, and Nike. FastAF’s parent firm Darkstore already sells CBD goods and cannabis accessories, and Lee Hnetinka, founder and CEO of FastAF, believes both categories are in high demand.
FastAF intends to enter regulated products with alcohol delivery in the near future, but there are a few hurdles to overcome when it comes to cannabis. The first is the disparity between jurisdictions: “When we’re ready to bring cannabis to market, we want to throw everything we’ve got behind it. “We strive to carry our partner brands in all of our markets,” Hnetinka explained.
Payments are the other, and possibly more significant, obstacle for Hnetinka.
Marijuana-Related Crime and Money
Marijuana is legal in 35 states to differing degrees, but because its sale, distribution, and possession are still illegal on the federal level, banks in the United States are wary of doing business with the cannabis industry. Money laundering, according to the American Bankers Association, is any money that may be linked back to a marijuana-related enterprise. Indeed, cannabis banking is such a problem that Eaze’s former CEO resigned and pleaded guilty to bank fraud as part of a conspiracy to defraud banks out of over $100 million in marijuana purchase payments.
As a result, the green industry is mostly a cash-based industry. However, the Financial Crimes Enforcement Network (FinCEN) of the United States Treasury reported 684 banks and credit unions offering banking services to marijuana-related enterprises in 2020. Over 170,000 Suspicious Activity Reports relating to banking in the industry were recorded by FinCEN, although more than three-quarters of them were concerning institutions judged to be in compliance with the applicable state’s marijuana company legislation. Still, it’s a challenge because state-by-state policy differences complicate and stifle the industry’s expansion.
That’s where the Secure and Fair Enforcement (SAFE) Banking Act comes in for lawmakers. The law, which was passed by the House but is now in the Senate, would create a safe harbor for financial institutions that provide services to marijuana-related firms. In a 2020 analysis, accounting firm Elliot Davis noted out that the plan does not shield card networks from federal punishment, so even if it passes the Senate, the SAFE Act leaves cannabis firms largely cash-reliant.
According to Cowen Research, the cannabis market in the United States will produce $85 billion in sales by 2030. According to Governor Cuomo’s projections, cannabis may produce $350 million in year tax revenue and up to 60,000 new employment in New York alone. Since January 2018, California has earned $1.8 billion in cannabis income, according to a cannabis delivery app. According to Eaze, delivery accounts for 10% to 15% of the legal market in the state. The key to a healthy delivery industry, and several competitors, according to Eaze spokesman Mack, is legalization legislation that anticipates delivery as part of a state’s cannabis economy.
President Biden and Federal Legalization
Cannabis is still classified as a Schedule I narcotic by the federal government, along with heroin and ecstasy, since it has a “high potential for abuse,” according to the DEA.
Transporting cannabis over state boundaries is still illegal, even if a business or dispensary is operating legally in its home state. As a result, each jurisdiction’s cannabis ecosystem lives in isolation, and delivery companies confront yet another hurdle: establishing a new state requires basically starting over, with a new network of suppliers and delivery services, as well as navigating a new regulatory framework.
Legalization on a national level would remove the majority of the barriers to entry for cannabis, particularly cannabis delivery. But President Biden hasn’t pushed for a review of the laws that made marijuana illegal in the first place, according to GLJ Research’s Gordon Johnson, who believes that a rally in the publicly traded cannabis space earlier this year, which included the Alternative Harvest ETF and cannabis stock Tilray, was fueled by hope that Biden would have done more on the issue by now.
If Biden does not sign an Executive Order decriminalizing, descheduling, or rescheduling marijuana, Johnson says the SAFE Banking Act, or whatever legislation New York Democratic Sen. Chuck Schumer proposes, will be the industry’s only regulatory chance. Descheduling the drug would boost investor interest and resources, but it’s still a dangerous proposition.
Tilray has a price target of $0, and Johnson sees little hope for the industry in the long run, believing that marijuana will continue to be a low-margin business with problematic economics. Johnson’s fears about the “green rush” of cannabis investments are reflected in Eaze’s rocky financial trajectory. Last year, Techcrunch reported on Eaze’s financial difficulties and subsequent business turnaround to increase profits.
Low profit margins and different entrance restrictions may explain why cannabis venture capital financing peaked in 2019. If the government legalizes marijuana on a national level, logistics and delivery companies will have fewer barriers to entering the $85 billion sector, which may reignite investment interest. Until then, margins, banks, and players are limited by the size of individual states.
Despite the difficulties, celebrity interest remains high. Snoop Dogg’s Casa Verde VC firm continues to invest in marijuana start-ups, while Jay-Z recently signed an agreement to produce 900,000 pounds of cannabis for his own brand, Monogram.
Smaller players in the market, such as Saucey Farms & Extracts, are optimistic that legal barriers will diminish, and that as they do, more enterprises will be interested in providing cannabis to consumers. “As the cannabis sector matures and regulations loosen, distribution will become a top priority for most businesses,” Jones said.