To be clear, the group has no position on the topic of legalization. It doesn’t advocate for it or support any political groups that work towards full legalization. However, if legalization does occur, the group is getting prepared to be able to sell the products and it isn’t just hemp-derived CBD products. This would be adult-use cannabis currently sold in dispensaries in legalized states.
“The idea is that you want to have a level playing field for selling legal products. What we are looking at is, if there is a legal framework, how there could be a situation for those that want to sell. That they will be able to sell it legally,” said Jeff Lenard, VP of Strategic Industry Initiatives at the NACS. Lenard shared a document outlining the group’s goals for addressing the sale of federally legal cannabis.
Mark Singleton, the owner of Singleton Investments, who describes himself as being on Senator Mitch McConnell’s speed dial, believes cannabis will be federally legal within nine months. “Kentucky hemp farmers aren’t satisfied with the 2018 Farm Bill,” he said. “They can’t sell their product beyond the state lines and this has them very unhappy. If McConnell wants to get reelected, he will need to fix that and the only way that can happen is through the descheduling of cannabis.”
If that happens, then the convenience stores will put their plan into motion. Luckily for McConnell, the USDA ruled in a recent bulletin that hemp could cross state lines. This helps him with the farmers, but then it introduces another problem. How does law enforcement easily detect the difference between a truck load of hemp crossing state lines versus a truck load of cannabis? It’s very difficult and so the USDA’s ruling could end up forcing McConnell’s hand to deschedule cannabis.
Singleton suggested that if that happens, then the Federal government would take on the oversight and pull that power away from states. If cannabis were then treated like tobacco under this scenario, the convenience stores’ argument is that they should be able to sell it. Lenard said, “We’ve got years of experience checking IDs for alcohol and tobacco already. This is just another product along those lines.”
It was suggested that convenience stores are motivated to replace dwindling cigarette sales with cannabis. Cigarettes sales account for one third of all convenience store purchases. Food is number one, followed by non-alcoholic beverages. However, Lenard said that while cigarette smoking has declined, the sales are steady because of price increases. The upside of adding packaged cannabis sales at the convenience store is that consumers can add the soda and snacks to go along with the purchase, so it’s a win-win for the stores.
There Goes the Industry
There’s a saying “Be careful what you wish for,” and that couldn’t be more true than in the cannabis industry. If cannabis was descheduled and treated like tobacco, it would undo the industry that has been created over the last five years. It could destroy the dispensary model and all the millions spent towards building it.
It may take some time to transition from state-run programs to federal, but that would be the inevitable progression. The states would probably maintain a smaller oversight group, but they could save money if they pass on the work to the Federal government.
Don’t think the states will relinquish control to the feds? The Federal government will make the case that diversion is happening while the states are in charge and they can’t seem to control it. That’s why the Federal regulators need to take over. Or the states could get punished in some way for not relinquishing control. Remember how states were punished if they didn’t raise the drinking age to 21? Eventually they all capitulated.
No More Multi-State Operators
If cannabis were descheduled, it could cross state lines. That means all the millions of dollars spent by multi-state operators to create single state operations would be flushed down the drain. The state licenses wouldn’t be as valuable if they were extended to convenience stores. On one hand, this means the MSO could quickly reorganize and centralize and make themselves more efficient. They could write off those costs as losses. So there are some benefits.
The question is whether an MSO can compete with a tobacco company that has access to convenience and big box-store shelves. Kevin Murphy, CEO of Acreage Holdings, said, “If you aren’t already preparing for this, then you are going to lose. This is another reason why our deal with Canopy Growth (CGC) will put us in the best position for success for years.” A different cannabis company CEO confirmed that they too were strategizing for such an outcome by entering states where the licensing is capped and won’t be extended even for convenience stores. He also said they are positioning their brands to be sold in big box stores like Walmart (WMT) or convenience stores. Basically anywhere cigarettes are currently sold.
It’s no wonder a dispensary could be worried about this scenario. A consumer could fill up for gas, buy some chips and a package of pre-rolls. That’s pretty convenient. Dispensaries will probably still exist on a smaller scale. They would carry all the small craft brands, but the consumer would have to make that trip a destination. It probably isn’t as easy a location to get to and at the end of the day, the majority of people will just grab a six pack of Budweiser and not go to a special beer store for more expensive microbrew labels.
Power in Politics
Singleton said that the NACS is one of the most powerful lobbying groups in Washington DC. “Nothing gets passed without their stamp of approval,” he said. “They will argue that it’s convenience store jobs vs. marijuana jobs and McConnell will side with the NACS. Certainly not the marijuana industry.”
When posed a question about this scenario, Presidential hopeful Senator Kirstin Gillibrand confirmed that this could be the ultimate outcome. “Yes, cannabis products could end up behind the counter at Walmart with the cigarettes,” she said. Even as she co-sponsors cannabis legislation, she agreed that it was likely the Federal government would assume oversight. “The industry will go where all industries go — to wealthy men. This is why I’m fighting to protect it now — before that happens.”
“This Will Kill Dispensaries”
“This will kill dispensaries,” said Singleton, “And the cannabis industry is either unaware of it or in denial.” Indeed. When Gillibrand made her remarks, she was in a room full of cannabis industry insiders and no one flinched or even reacted to the gravity of her comment. The CEOs that are addressing this potential outcome seemed to be doing so in the utmost quiet. No one in the industry is speaking about this out loud.
If it seems that Singleton is anti-cannabis, he isn’t. In fact, he is developing his own vape product. He’s raising money for it now. The reason why he feels confident about his product while proclaiming doom for the cannabis dispensary industry, and the industry at large, is that he feels he has access to the convenience store shelf. If cannabis companies want to remain relevant when cannabis is descheduled, they had better be lining up relationships with big box retailers and convenience store chains now.
Everyone in the industry should be looking at how they can stay relevant and current in this new environment. Smart companies and employees will want to look at this scenario and determine where they fit and whether they can survive such a change.
The ETFMG Alternative Harvest ETF (MJ) was trading at $32.89 per share on Monday afternoon, up $0.81 (+2.52%). Year-to-date, MJ has gained 1.12%, versus a 8.73% rise in the benchmark S&P 500 index during the same period.
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