California marijuana companies – already facing labor shortages, high taxes and regulatory red tape – are now contending with supply-chain gridlock, forcing many to reassess and revamp procurement strategies as margins shrink.
The constraints, which have gripped the global economy, are a combination of pandemic-fueled labor woes, shipping and product delivery delays as well as rising prices on everything from raw materials and equipment to fleets and utilities.
“Everything is costing a whole lot more, especially on the industrial side,” said Will Brophy, head of operations of Nabis, a cannabis wholesale distributor in Oakland.
One eye-popping illustration: Las Vegas-based Hara Supply, one of the world’s largest pre-roll distributors, has seen container shipping costs from India jump from $3,000 before the pandemic to $25,000 today, a whopping 733% increase.
That price surge comes as inflation is accelerating nationally.
In November, the U.S. consumer price index climbed 0.8% for the month and 6.8% year-over-year, pushing the key inflation gauge of goods and services to a 39-year high.
The logistics crunch and rising costs, no doubt, are affecting cannabis operators from coast to coast, but nowhere is the effect more immediate than in California: More than 40% of the nation’s maritime imports pass through the adjoining ports of Los Angeles and Long Beach alone.
Nabis, for its part, faces significantly higher costs for its third distribution center, which the company plans to open this summer.
The planned hub is an 86,000-square-foot facility in the Central Valley, nearly doubling Nabis’ warehouse space in L.A. and Oakland combined.
Nabis has seen construction, renovation, maintenance and fleet costs rise rapidly the past six months, while procurement cycles on some products have been delayed weeks.
In only one example of many, totes were typically delivered within a few days; now they’re taking two to four weeks, Brophy said.
“The cost of shipping has gone up. The cost of steel has gone up considerably in the last year,” he added.
New vehicles also are hard to find while used vehicles cost more. Refrigerated trucks are scarce as well, a reverberation of the global microchip shortage.
“There’s a lot of hidden costs that come with inflation in the general market,” Brophy said.
Scrambling for parts and materials
Nabis is far from the only California cannabis operator feeling the pinch of the nation’s supply-chain problems.
Atlas Seed, a Sonoma County-based supplier of cannabis seeds, saw its margins plummet the past year because of skyrocketing material costs.
“Some materials are now twice as expensive or nearly impossible to procure, from packaging materials to drip tape for our irrigation systems,” said William Hancock, the company’s co-owner and sales director.
An oversupply of marijuana flower in California has also cut into sales by reducing seed demand and prices.
In 2020, “we experienced a seller’s market for cannabis flower and were able to make a 70% to 80% profit margin,” Hancock said.
But last year, he added, profit margins sank 80% on average.
Copper prices surge
The price of copper tripled during construction of 4Front Ventures’ recently opened 170,000-square-foot cultivation and processing plant in the Los Angeles suburb of Commerce.
The Phoenix-based multistate operator has also dealt with vape hardware shortages for months and prolonged delays at ports.
“There are these massive unforeseen shipping delays,” said Josh Krane, 4Front’s vice president of operations in California.
“I have machines waiting, I have packaging waiting. I have everything but raw ingredients for edibles waiting in those ships right now.”
The problem is widespread enough that it’s also affecting ancillary companies, such as San Francisco-based InSpire Transpiration Solutions, which specializes in heating, ventilation and air conditioning (HVAC) systems.
Even though the company’s supply chain is primarily domestic, InSpire has been dealing with global parts shortages, particularly microchips used in condenser fans and programmable controllers.
“Everyone is competing with big tech and the automotive industry for these parts,” Chief Operating Officer Bryan Hesterman said.
Supply-chain constraints hit InSpire last summer on several fronts.
Pandemic-related factory closures, truck driver shortages and the suspension of service guarantees by the nation’s largest delivery providers have delayed the company’s pickups and deliveries for months, according to Hesterman.
“This makes it difficult to set clear expectations with our clients on delivery schedules,” he said.
Searching for solutions
With cannabis product packaging materials – such as paper, corrugate and plastics – increasing 25%-60% last year, suppliers have had to get creative to mitigate costs, contends Jesse Dixon, director of strategic planning for China-based GPA Global.
The packaging manufacturer, which operates a facility in the San Fernando Valley, is now buying raw materials in bulk and simplifying packaging to lower costs.
The company is also leveraging supply-chain partnerships with other global manufacturers to avoid “unaffordable freight costs,” while relying on domestic production in Southern California and Massachusetts to redesign packaging and manufacturing solely for the U.S. market.
“Our Los Angeles facility has performed miracles to support California brands which desperately need a source for quick-turn packaging,” said Dixon, who’s based at GPA’s Chatsworth operation just outside L.A.
4Front is now ordering hardware from Asian and domestic suppliers six to nine months ahead of production, according to Krane.
Beyond sourcing earlier, 4Front also has signed agreements with some vendors to store inventory and absorb some of those carrying costs.
“We’re constantly trying to shop new vendors,” Krane said. “The real name of the game has been trying to lock down and find already domestically landed pools of inventory.”
Las Vegas-based pre-roll manufacturer Hara Supply has relied on its nine manufacturing plants in India to fulfill cone orders for more than 100 California brands, packagers, distributors and resellers.
Through the course of the pandemic, Hara has managed to boost overseas production from 3 million pre-roll cones per month to more than 20 million for the California market alone, according to founder Bryan Gerber.
“Because we’re not buying capacity from someone like the other cone manufacturers or cone brands, we were able to prioritize customers,” Gerber said.
Nabis doesn’t plan to revert to just-in-time manufacturing, a common industry practice in which production is geared to meet demand, rather than creating surplus inventory.
Now the company is trying to stock up on raw materials and set up other contingencies.
“Folks recognize the supply chain isn’t infallible,” Nabis’ Brophy said. “We’ve had to move up our procurement process in our warehouses considerably to account for a multiweek procurement cycle for certain products.
“Some of these precautionary measures we’re taking now are probably going to stay in place for quite a while.”