It’s 2020 and people expect to be able to buy nearly anything online, including cannabis. And in California, where delivery is legal statewide, but about 75% of cities have prohibited brick-and-mortar cannabis retailers, tech companies are racing for their piece of the Golden State.
“It’s actually a very target-rich environment because there are large parts of the state where there are no retailers, so delivery is really the only way,” says Elizabeth Ashford, a spokeswoman for Eaze, the San-Francisco-based company that facilitates cannabis sales through its online marketplace.
While medical marijuana delivery has been legal in California since 1996, the world of cannabis e-commerce for anyone above the age of 21 truly began with recreational legalization in January 2018. Now, numerous companies with a variety of business models are providing Californians with legal cannabis from licensed businesses.
“The value proposition to consumers is you push the button and weed is delivered to your home,” Ashford says. “That’s magic, but the other part of that magic is that you’re getting products that have been tested and meet all of the state’s requirements.”
While it might be as simple as pushing a button for consumers, bringing marijuana from a screen to a person’s home is far more complex for businesses.
How is it Legal?
Eaze is perhaps California’s biggest online seller of cannabis. The company has roughly 130 employees, offices in San Francisco, Los Angeles and San Diego and zero cannabis licenses.
“The reason why is that there is not a license that we could hold for what we do — there is no technology license,” Ashford says. “We are partners with the retailers who hold licenses themselves.”
Eaze isn’t the only online marketplace operating without a cannabis license; in fact four out of the five companies who participated in this article facilitate cannabis sales online without being licensed by the California Bureau of Cannabis Control.
Matt Singer, the CEO of tökr, an online marketplace that started serving Los Angeles in October 2019, explains that his company simply arranges sales for licensed cannabis businesses. No employees at tökr touch cannabis, and the logistics of delivery are handled by the company’s licensed retail partners.
Singer says tökr does not do any credit card processing or cash handling because that would break California’s rule on who can handle money and transactions. The retailers handle all the money.
HERB is another online marketplace in Los Angeles that partners with licensed retailers and operates as a tech platform. HERB co-founder and CEO Bobby Vecchio says since the city does not have delivery licenses, it is allowing his company to do business by working with other licensees until stand-alone delivery licenses are made available.
“We’re biding our time and essentially establishing a firm legal foundation here, and once we have that we’re going to be branching out and hitting other dense metropolitan areas and replicating the success we’ve seen in LA,” Vecchio says.
Ted Lichtenberger, the CEO and co-founder of Flower Company, says his business also operates as a tech platform, but fulfills orders on behalf of his other business, West of West, which handles cannabis directly and holds licenses for distribution, manufacturing and non-storefront retail.
“West of West has a lot of different components to it,” Lichtenberger says. “It has been able to partner with delivery partners around the state to act as the last mile fulfillment center.”
Ganja Goddess, the same company with a retail store in Seattle, is one of very few online marketplaces with a cannabis license. It operates as a traditional online marketplace. The company takes orders from its website, processes the transaction, packages the product and delivers it directly to consumers. Co-founder Zach Pitts says the business is licensed for distribution, manufacturing and as a non-storefront retailer.
But while these businesses vary from non-cannabis-touching tech platforms to traditional e-commerce, the business owners all say they are operating in full compliance with local and state regulations. The California Bureau of Cannabis Control was contacted for this story but it did not respond to questions about e-commerce business models by the time of publication.
How are they making money?
As a licensed cannabis company, Ganja Goddess generates revenue by simply selling directly to consumers. But non-licensed online businesses take different paths.
Like many software providers, Eaze leases its technology to licensed cannabis businesses for an annual rate. The more licensed businesses that use Eaze, the more revenue and market penetration the company has across California.
“There is a delivery fee, but the software is licensed to the retailer and that’s how we function as a business,” Ashford says. “There’s a small amount of money that we collect from the retailers to do marketing and advertising through the portal. But we don’t make money off of each delivery because we are not allowed to under state law.”
But other technology platforms don’t follow Eaze’s business model.
Tökr earns revenue from facilitating consumer cannabis deliveries through state-licensed cannabis partners in California.
“We do not want to work with a ton of brands, and we do not want to show our consumers multiple, multiple, multiple options and make them feel overwhelmed,” Singer says.
Vecchio declined to disclose how HERB makes money.
Lichtenberger says the Flower Company is “like a wholesale cannabis club.” The Flower Company is funded by annual membership fees from consumers who want to buy cannabis at reduced prices. Lichtenberger’s licensed business, West of West, procures cannabis from producers at a higher rate than most retailers and then it gets sold through the Flower Company’s online website at near cost.
For $119 a year, Flower Company members get access to reduced items such as $59 ounces, that Lichtenberger says would sell for $120 at retail.
“That’s if retail is making a 100% markup and most retailers are making much more than that,” Lichtenberger says. “We compare very well to folks in the regulated market and even to street prices.”
Lichtenberger says Flower Company members spend between $500 and $15,000 annually.
How does it work?
In traditional e-commerce, an order is created online, then it is forwarded to a fulfilment center where it is packaged and then sent out for delivery. And for the most part, that’s how online cannabis companies in California fulfill their orders, except they need to check IDs. The fulfilment center can be a retail store, a distribution center or a vehicle on the road with an assortment of cannabis products.
Singer says tökr uses the “ice-cream-truck model,” where drivers for the company’s retail partners keep up to $3,000 of product in their car and assemble orders as they are dispatched. Tökr chief operating officer David Mukpo says the company verifies IDs with the aid of a company called Veritas, which does a background check on the customer using their name and phone number.
“We can verify up to 85% of the person’s identity just off the person’s phone number and their full name,” Mukpo says. “The fallback to that is that they upload a picture of their ID and then it gets verified that way.”
Singer says once the ID is verified, tökr uses a logistics software that tracks the location of drivers and dispatches the order to the nearest driver with the inventory to fulfill the order.
Ashford says there are two ways that Eaze has completed approximately 4.6 million deliveries since the company started in 2014: by dispatching drivers from licensed locations and also by using the “ice-cream-truck model.”
“The nice thing about that is that you can cover a lot more distance and you are able to pack a case in the morning that you can anticipate will reflect the kind of orders that will come in,” Ashford says of the latter. “There are a lot of regulations around that, but it is allowed under the law.”
Ganja Goddess has one of the more straightforward e-commerce businesses. An order comes in online from a verified legal adult, it’s then sent to one of the company’s two distribution hubs (Northern and Southern California) where it is packaged and delivered within 24 hours by one of the company’s drivers.
The Flower Company follows a similar fulfilment pattern, except the responsibility of processing the transaction and making the delivery is handed off to West of West. Orders typically take 2-5 days to be delivered. Lichtenberger says his company rewards consumers who are willing to wait longer with lower prices than competitors such as Eaze, HERB and tökr, who all promise delivery within an hour.
Vecchio says HERB is able to fulfil orders in roughly an hour by focusing solely on Los Angeles. He says HERB cross-checks the order and verifies the age of the purchaser within two minutes.
“As soon as that’s done it’s dispatched to one of our fulfilment hubs across the city where a driver packs the order, ensures everything is correct, hits the road and about 30 minutes later they are at the person’s house dropping off the order and then heading back to the hub for their next order to repeat the process all over again,” Vecchio says, adding that all of the company’s hubs are licensed retail stores.
Digital Gold Rush
Although Eaze has expanded into Oregon, Ashford, along with Singer, Lichtenberger, Pitts, and Vecchio all say they are laser-focused on building out their online businesses in California.
“I think the big picture is to be as comprehensive as possible in California,” Ashford says.
And while many companies are keeping an eye on Colorado’s new interest in online sales and delivery, Vecchio is more than happy to keep growing his business in Southern California.
“The city of LA is larger than Colorado and dwarfs its business size,” Vecchio says. “It’s the largest market in the world for cannabis.”