Marijuana regulators approve major shift in delivery model

THE CANNABIS CONTROL COMMISSION agreed to a major change in how marijuana delivery companies can operate, in response to an outcry from potential entrepreneurs who said the model initially envisioned by their regulations was financially unworkable.

But while delivery businesses are cheering the shift, some existing shop owners are worried that the move will upend the entire retail industry, by letting delivery companies essentially function as retailers without the expense of running a store.

“It’s going to be undercutting any brick and mortar establishment,” said David Torrisi, president of the Commonwealth Dispensary Association, which represents retailers.

Marijuana delivery is the newest segment of the state’s marijuana industry, and there are 37 pending applications for licenses. CommonWealth previously reported that potential entrepreneurs worried that they would be unable to stand up a sustainable marijuana delivery business.

As initially envisioned by the commission, delivery companies would operate as couriers. They would have to contract with marijuana retailers to deliver their products, in a model similar to Uber Eats or Grubhub, which contract with restaurants.

But business owners said with the expenses involved in complying with security regulations – such as requiring GPS tracking and two people in each car – there would be no way to recoup their expenses, much less make a profit, through either delivery fees charged to consumers or through commissions charged to retailers.

A trade group representing delivery companies, the Massachusetts Cannabis Association for Delivery, had asked to be allowed to buy marijuana from wholesalers and warehouse it. This would let companies buy marijuana at the lower wholesale price from manufacturers or growers, then package it and sell it at a higher retail price directly to consumers.

The delivery model was envisioned by the commission as a low-cost way for entrepreneurs to get into the marijuana industry, with licenses given exclusively for the first few years to “social equity” applicants — individuals from minority communities and people disproportionally affected by the war on drugs. The exclusivity period was going to be two years with an option for a third year; commissioners are now considering extending it to three years with the option for a fourth.

At a meeting Friday, the Cannabis Control Commission unanimously voted to authorize two license types for delivery companies. One will be the courier model and the other will allow companies to buy wholesale and warehouse it.

Commissioners said they were swayed by the enormous amount of public comment on the issue.

Commissioners noted that the decision involves two competing interests: the courier model has a lower barrier to entry, but it may not be financially sustainable. Commissioner Britte McBride said during the comment period, she heard “a bit more tolerance” for raising the barrier to entry than she initially anticipated.

Commission chairman Steve Hoffman said potential business owners voiced support for each type of model. Commissioners ultimately decided that it was their role to create both regulatory models, and let entrepreneurs decide which to pursue.

“That’s a business decision people need to make for themselves,” said Commissioner Shaleen Title.

Devin Alexander, who is trying to start a delivery company called Rolling Releaf, said he will pursue the model that lets him buy wholesale because he thinks it is more profitable, scalable, and attractive to investors. Alexander said consumers will benefit because more competition at a retail level will lead to better products.

“For them to vote unanimously on it was mind-blowing to me,” Alexander said. “My birthday’s this Saturday, and this is the best birthday present I could have gotten.”

But Torrisi said while the Commonwealth Dispensary Association has yet to take a formal position on the decision, he has concerns about its long-term implications for marijuana stores. He compared it to online retail giant Amazon lowering prices and creating convenience for consumers – but forcing large brick and mortar retailers like Sears and Borders into bankruptcy.

Torrisi said a delivery company could offer lower prices without the expense of a physical store and could draw customers who are looking for convenience and quick delivery. It could also cost the industry jobs and reduce tax revenue for municipalities, if fewer stores open up and one warehouse can deliver to multiple communities. This would most hurt standalone retailers, since companies that both grow and sell marijuana could still sell their products wholesale to delivery companies.

“This could turn the whole marketplace on its head in a few years,” Torrisi said. “In today’s environment, people are less and less likely to go to a retail brick and mortar when they can get something delivered to their house.”

Not all retailers oppose the idea. Amanda Rositano, president of NETA, one of the state’s largest cannabis retailers, said NETA had been talking with delivery companies about partnerships but had been unable to find a workable business model, since customers would not accept a major price markup to pay for delivery. “It was becoming abundantly clear there was not a sustainable way for those organizations to stay in business with this model,” Rositano said.

Rositano said NETA, which also grows marijuana, could sell its products to a delivery company either retail or wholesale. She came to support the wholesale model because she believes it will let more social equity entrepreneurs enter the business and be successful. “What we don’t want as a business is to enter an agreement with a company and that company to shut down because they can’t stay in business,” Rositano said.

The new rules are not yet a done deal. The Cannabis Control Commission still has to write, review, and vote on the final regulations, and many key details must still be worked out.

For example, if a delivery company is now classified as a retailer, it may no longer be able to apply for a license in any municipality that reached its cap on how many retailers it will host. Regulators are also expected to consider whether to limit the size of delivery companies’ warehouses.

Chris Fevry, president of the Massachusetts Cannabis Association for Delivery, said the association believes delivery companies should not be classified as retailers because they do not have the same impacts on a community as a store that is open to customers.

Asked about the impact on physical stores, Fevry acknowledged that there will be more competition. But he believes there will still be interest in cannabis stores, just like people go to liquor stores. “Delivery is just addressing a different segment of the market that retailers are simply not doing,” Fevry said