As the Marijuana Business Conference came to an end in Las Vegas last week, a new business structure was mooted for the cannabis industry. Franchising. Some industry players are considering starting cannabis dispensary chains that would be the McDonalds and Starbucks of the cannabis industry.
The idea of franchise businesses in the cannabis industry is appealing at several levels.
First, consumers in America have been trained to consume products from trusted brands. That is why McDonalds and Starbucks get more clients than independent burger or coffee shops. Franchises in the cannabis industry would tap into the brand loyalty already instilled in buyers.
Secondly, a cannabis franchiser would save many cannabis investors from making the expensive mistakes that the pioneers in the cannabis industry have made. The cannabis industry is quite young, so the collective pool of experience in running cannabis enterprises is relatively shallow.
Creating cannabis franchises would help those who have created tried and tested cannabis industry systems to share (for a fee) their experiences and roadmap to success. The franchisees would benefit by starting off with a business model that has a proven track record of success.
However, some hurdles may still stand in the way of franchising as a business model for the cannabis industry in the U.S.
First, the cannabis industry is fragmented. Each state has its own rules regulating the cannabis market. It may therefore be hard for one business model to succeed in different jurisdictions whose laws differ widely. Maybe this could explain why the franchise would be very expensive to acquire. Extensive work needs to be done to tweak the model so that it fits within the state and local regulations governing the cannabis industry in different areas.
Secondly, many jurisdictions restrict the number of cannabis dispensaries or retail outlets that can be opened within a given area. Some local regulations even put a cap on the number of cannabis business licenses that can be granted to a single entity. Such requirements are intended to foster competition and prevent one business from controlling the cannabis market. How would cannabis franchisers navigate such regulations?
Thirdly, federal laws currently restrict cannabis from crossing state lines. This can present a major operational challenge to a franchiser since he or she would need to set up a vertically integrated business (cultivation, manufacture and sale/distribution) in each state where it intends to acquire franchisees. What is the minimum number of franchise outlets that would be needed to justify the expense of setting up that integrated infrastructure?
The problems above can certainly be thought through and solutions found, but it isn’t something that can be fixed in a short time. However, the franchise idea is a good one and shows that the cannabis industry is here to stay.
Youngevity International, Inc. (NASDAQ: YGYI) and American Premium Water Corp. (OTC: HIPH) look forward to the passing of enabling cannabis laws at the federal level since that would be one of the factors that makes it easier for cannabis entrepreneurs to create nationwide franchises.
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