Ancillary Businesses
Non-Plant-touching Businesses in Cannabis and Hemp Require Guidance Navigating a Dynamic Future
The combined medical and legal adult-use cannabis industry is expected to reach $30 billion by 2025, according to the industry intelligence company New Frontier Data. Cannabis producers will, in turn, invest a large part of this income into ancillary businesses needed to run their operations.
The rapid growth in the cannabis industry isn’t the only reason ancillary businesses are gaining popularity. Companies that don’t touch plants themselves generally have an easier time with banking. In fact, 90% of ancillary businesses serving the marijuana industry have access to banking, compared with 76% of plant-touching companies according to Marijuana Business Daily’s 2019 Marijuana Business Factbook.
A seemingly endless number of opportunities exist in the industry for companies that provide goods and services to cannabis producers, all while never touching the plant. At first, these businesses appear to bypass the licenses and regulations required by growers, processors, and retailers. However, due to their close proximity, support services must be aware of and comply with complex regulatory practices to be successful.
Gateway Proven Strategies (GPS) is committed to helping ancillary and plant-touching businesses navigate challenges for lasting success. Here are a few things you should know about the way ancillary cannabis companies operate, and how GPS can help these businesses navigate a highly regulated, quickly evolving industry:
Building a Reputation of Compliance
The “Picks, axes, and shovels” cliche doesn’t describe the unique position ancillary businesses face when considering the constantly shifting landscape of legal cannabis.
“The services of just about every ancillary cannabis company are in some ways reliant on regulations,” says Deanna Callahan, Director of Global Operations for Gateway Proven Strategies. “ Even things like HR compliance requirements may differ for the cannabis industry. Ancillary cannabis operations that ignore regulation changes aren’t going to be in business is very long.”
With fewer licensing hoops to jump through and the previously mentioned banking advantages, ancillary businesses don’t face compliance issues directly compared to their plant-touching companions, but as Deanna Callahan explains, “If ancillary businesses hold equity in a cannabis touching company, there may be tax implications or legal risks. Otherwise, it’s just a risk of your reputation.”
Security
Every step of the cannabis production and sales process requires some form of protection, as a result of this, a large portion of plant-touching startup and operating costs are spent on security. However, effective security for cannabis isn’t as simple as installing cameras and hiring a few guards. These ancillary businesses must also have a deep understanding of the unique assets they protect.
To meet compliance requirements, cannabis companies are increasingly turning to tech. “Technology has definitely fueled cost efficiencies,” says Derek Porter, Director of Cannabis Security Experts, and Chief Security Officer at Gateway Proven Strategies. “You can have one surveillance officer pretty effectively watch ten sites.”
Non-specialized security companies might lack the knowledge and experience required for the cannabis industry. According to Porter, “There’s a static, wrong way to do it, and there’s a dynamic, algorithm-heavy software-based way to do it.”. Some companies are choosing to develop proprietary software and techniques to make security systems more efficient.
“There’s a delicate balance in finding the right approach,” says Porter, “a guard company wants to sell you guards, an alarm company wants to sell you alarms. A consultant figures out where the weak points are, where the strong points are, and creates a cost-effective plan to move forward with implementation with multiple vendors that protect the people, assets, fit within the entire capital model, and scale very easily.”
An all-encompassing view of security is essential for plant-touching businesses who wish to optimize their operations.“Gateway Proven Strategies is on the cutting edge with regards to security infrastructure with cannabis and hemp”, Porter remarks.
Marketing
Creating distinct brand identities has been of great concern across the entire cannabis industry. Ancillary marketing services and experts are developing new ways for consumers to face cannabis. One marketer who is looking to leverage unique identities in the cannabis space is Jennifer Whetzel, who is the founder of Ladyjane branding, takes a unique approach to customer personas covered in this podcast. Ancillary businesses in the marketing field are moving past stereotypes and developing mature, diverse brands that appeal to wider audiences. Advertisement regulations are a massive challenge for marketers in the hemp and cannabis industry.
Legalized states are developing their own marketing regulations, and marketers need guidance to assure the messages they put out are in compliance. Because of the variations in state-by-state regulations, a large knowledge base is needed for marketers who want to expand their businesses into new markets. There are many articles out there covering the ancillary business of cannabis marketing, so let’s look at some of the more overlooked ancillary opportunities.
Nonprofit and Education Organizations
Ancillary services have grown beyond traditional business, and the opportunity for ancillary nonprofits has risen with legalization, especially surrounding education and sustainability.
“These nonprofits could really change the perception and bring facts to light in a global fashion that we need to create an industry that’s sustainable and here to stay,” says Ceci Zak, Chief Operating Officer at Gateway Proven Strategies.
Notable examples of cannabis-focused nonprofits include MAPS, the Multidisciplinary Association for Psychedelic Studies who have been conducting studies on Medical Marijuana. Many research-oriented nonprofits are filling the gaps left by reluctant colleges and universities who fear the loss of federal funding. Even organizations like the National Cannabis Industry Association are making waves in the ancillary space, providing scholarships and opportunities in an industry that is just beginning to develop.
Extraction Equipment
CBD and THC-containing foods and cosmetics use concentrated extracts to create more reliable, consistent products. Production of modern hemp and THC Cannabis concentrates require special, oftentimes costly, extraction equipment. This has created an opportunity for ancillary businesses that procure extractors, laboratory equipment, and the solvents used in the concentrate production process. Extraction equipment suppliers must not only know about the legalities of the specialty equipment they sell, but they also must meet HAZMAT requirements for solvents and products they supply.
One problem often encountered with extraction equipment is whether or not the extraction of cannabinoids is listed in the manufacturer’s instructions. Fixing this issue usually requires the approval of licensed engineers. In many states, buildings and rooms containing extraction facilities must be built to standards that meet industrial fire code requirements and also must be approved by professional engineers. Ancillary extraction equipment suppliers and services who specialize in cannabis need an in-depth understanding of the regulations of the jurisdiction they operate in if they wish to build lasting relationships with plant-touching extractors.
Cultivation Supplies
Agriculture supplies have been deemed essential during the recent COVID-19 pandemic, which has ensured the success of ancillary businesses that provide tools for growing cannabis. One notable example is GrowGeneration, who, according to a recent press release is “considered an ‘essential’ supplier to the agricultural industry, supplying the nutrients and nourishment required to feed their plants.” Ancillary businesses like this are the backbone of a plant-based industry and have proven to be lucrative. Everything from soils, nutrients, and pesticides must follow strict regulations, and many states list specific products that are allowed for the cultivation of cannabis. Ancillary agriculture supply businesses must keep their products up to date with regulations to ensure success.
Packaging Sustainability
An obvious ancillary opportunity in cannabis is in packaging, but the unique aspects of cannabis provide this category more challenges and opportunities. Customers who purchase cannabis are often left with packaging that is not easily reused or recycled. Regulations prevent most cannabis retailers from accepting used containers. Canadian based recycling company Terracycle has created a packaging recycling program for used cannabis packaging. By partnering with retailers, ancillary recycling services can cash in on the valuable plastics, glass, and metals that would otherwise be thrown away. This type of recycling is directly impacted by regulations, and well-intentioned recyclers must keep a close eye on local laws in order to stay in business.
A huge market exists for cannabis packaging companies who make products that are user friendly, recyclable, and above all, regulation-compliant. Ancillary businesses in the field of cannabis packaging have traditionally favored the lowest price, however, as the industry matures, brands are looking for environmentally friendly solutions that appeal to consumers. Sana Packaging is one company making packaging using hemp-based plastics, which are then used to package THC-containing cannabis products. The potential of hemp plastics has not been fully realized, and this type of ancillary business could certainly be successful in industries beyond cannabis.
Just the Beginning
Ancillary companies and plant-touching businesses mutually benefit from trusting relationships with each other. Consultant services like Gateway Proven Strategies seek to cultivate these networks throughout the entire cannabis industry. “We can help create the market environment and find the reality of the opportunity,” says Ceci Zak. “The second area we can help in is understanding the legal and the regulatory. What are the critical success factors that a company needs to recognize from a legal and regulatory perspective.”
Good relationships and regulation compliance are useful, but businesses also must have a clear message and voice. “The other arena that we can help in is finding the clients or partners” Zak continues, “We know who all the players are and can help put together their target client potential.” An ancillary company that can articulate what values it provides will have a great advantage over others who don’t. Zak says that Gateway Proven Strategies finds “Not only the network but also what the value proposition is for those clients who look at these ancillary companies as a new partner opportunity.”
Ancillary companies in the cannabis industry have a bright future. In order to succeed, they must operate within the constraints of a dynamic regulatory and business environment.
The information in this article does not, and is not intended to, constitute legal advice, but rather give an overview of challenges in the ancillary cannabis business.
Contact GPS today to discuss your ancillary business goals with experts who have built several in this thriving cannabis industry!