Cannabis distribution companies in Germany and England received much attention and funding in early 2022. The growing revenue led investors to the concept of funding cannabis distributors without looking at the long-term viability or drivers behind the model. 2023 is already showing the cracks in these models, most of which stem from a short-term solution designed during early development periods and unclear regulations.
Short-Term Solutions for a Long-Term Market
The early stages of pharmaceutical cannabis in Europe created space for startups, as larger pharmaceutical distribution companies preferred to sit on the sidelines at this point.
Each country has slightly different early-stage cannabis distribution solutions, and each is trying to fill a need that large-scale distributors are not meeting.
EU Medical Cannabis Distribution Model Quirks
Distributors in any industry need to find the right products to distribute, formulate a solution to import those products, register the products, and deliver those products to the point of sale. Many other services can also add value.
Medical distribution has some added quirks. Pharmaceutical distribution has been developed for decades in Europe; the region is home to roughly 97,000 pharmacies.
Drug distribution companies generally have large robotically assisted warehouses that can receive and distribute medicines through a fleet of trucks, automobiles, and salespeople who monitor the inventories at pharmacies.
These are massive, efficient logistical networks that operate on thin margins. High-volume items, like antibiotics, have margins of 10%, while newer and low-volume items have a margin of 35%.
Pharmaceutical Cannabis Distribution Considerations
Since cannabis is treated as a narcotic, additional registrations and requirements exist to register, store, and transport cannabis products.
Cannabis products require specialised and registered narcotics bunkers and transport.
These products fall into the 35% margin category since the market is small, new, and highly regulated — assuming one of the large, registered European narcotics distributors chooses to distribute cannabis products. A few are already servicing the industry.
Distribution companies must register cannabis products and drugs for sale in the country of distribution. Because the distributors register the drugs, they control the drug’s distribution in that country.
In the case of cannabis, each product requires individual registration, whether it’s a specific variety of flower or an extract formulation.
Registering a product costs money, so distributors must decide which products to spend money on based on potential volumes, margins, and success.
However, the cannabis industry is still relatively small, so cannabis distributors may be unable to cover those fees or be willing to make the long-term decision to bring a given product to market due to up-front costs.
To further complicate matters, cannabis distributors want to tack on 100% markups. This markup is far higher than those in other industries, and the cannabis producers are also locked into a singular distributor.
Self-Owned Cannabis Distribution Licence Solutions
Many of the larger and more well-known cannabis companies have their own distribution licences. The models vary, but there are three basic structures:
- Some cannabis companies own their distribution licences. Self-ownership allows the flexibility to register products internally. They can then move their products directly from the manufacturing facility to cannabis distributor warehouses for further distribution.
- Other cannabis companies use their distribution licences to register their products and use a “spoke and wheel” distribution model. Here, they deliver their product directly to large pharmaceutical distributors who store and transport it. The “spoke and wheel” approach allows these cannabis companies to drive sales themselves and use specialised cannabis distributors.
- Finally, some cannabis companies do all the registration, warehousing, transport, and sales. Keeping all distribution in-house is by far the most expensive model.
The Benefits of Standalone European Cannabis Distribution
As a producer, forming your own distribution licence isn’t overly expensive.
Having a distribution licence will allow you to register your products easily and use existing distribution chains to distribute your products.
Producers must be careful about who owns their product registrations and the margin they are giving up, as opposed to capturing that margin with a relatively low spend on the services provided.
How Standalone Licensed Cannabis Distributors Operate
Standalone cannabis distributors are trying to accomplish an undercapitalised version of what large-scale and efficient pharma distributors do.
Some are simple offices with a distribution licence and a qualified employee or contractor who helps register products and coordinates with a traditional pharmaceutical distributor for logistics.
Other standalone cannabis distributors have a warehouse and can operate on a small scale, receiving and distributing limited quantities of cannabis products.
More advanced groups have a warehouse and offer additional services such as sales support and good manufacturing practice (GMP) repackaging services for a fee.
All cannabis distributors want a 70% to 100% markup plus additional fees for any specialised services they provide.
Cannabis Distribution Service Drawbacks and Pitfalls
Flower is a very commoditized market, driven by patients and pharmacies. Distributors only need to identify good products and keep selling to the higher-volume pharmacies.
This isn’t a sales-driven model that increases the producer’s producer’s market share; instead, it’s simply a placement service.
Most producers must invest in their sales staff to promote brand recognition and product loyalty.
With no consumer brand loyalty to specific producers, cannabis companies are vulnerable to market price compression.
Cannabis companies must also maintain competitive margins, as distributors always look for new producers willing to enter the market at a lower price.
As 2023 gets underway, many producers and distribution companies have gone out of business.
Producers are falling into the trap of accepting low prices to move their products, and distributors need help attracting capital to support a broken model.
The Future of European Cannabis Distribution
Producers are waking up to the relative ease of obtaining a distribution licences to register their products.
Big pharma distributors are getting more comfortable and excited about the prospects and profits of pharmaceutical cannabis.
Cannabis distributors are realising they must provide more services at a reduced price and margin to attract producers and keep themselves profitable.
The cycle that forces producers to build sales teams and invest in distribution licences for product registration purposes will inevitably lead to cannabis companies seeking out the most economical logistics solutions to reach the most patients.
In the early days, this will likely be a combination of cannabis distributors’ clients plus their own sales efforts. In the future, these companies will probably own sales efforts and use traditional and efficient distributors.
In a year or so, we will likely see a few well-capitalised standalone cannabis distributors.
These cannabis distributors will eventually merge with large producers to capture the majority of the market in these legacy early markets, like Germany.
Some outliers may compete head-to-head with large-scale distributors, since smaller producers may need those services.
Countries that join the medical cannabis industry later on may never see a standalone cannabis distributor again after the lessons we learn from the early stages of pharmaceutical cannabis in countries with older markets.