How the global supply chain crunch is costing the cannabis industry time and money
As ships pile up at the ports and thousands of containers wait for trucks and drivers, even the fastest-growing industry in the world is feeling the effects of the COVID pandemic’s supply chain slowdown with packaging supplies and pre-roll cones — two staples for cannabis producers throughout North America — among the goods most impacted by the slowdown.
Despite planning for supply chain concerns as early as January 2020, the Honest Marijuana Co. found itself forced to make a terrible choice between two business-altering options: change a core element of its brand or under-deliver on promised orders.
The Colorado-based cultivator and manufacturer packages its organically grown cannabis in sealed tin cans, sourced from China. When the slowdown hit, the cans stopped coming through. As shipments finally arrived, the cans came in — but they didn’t have covers.
“All of it was just a tremendous juggle,” says Serge Chistov, the company’s chief financial advisor.
It was a scenario playing out across the entire industry. Data from Seattle-based MainStem, a supply chain software company that manages purchasing and supplies for “everything but the bud,” saw 95% of its clients experience supply chain slowdowns on ancillary products, which was made worse with 25% of users saying they consumed more cannabis during the pandemic.
And all of it was forcing cannabis industry executives to make painful decisions to try to avoid losing any additional time, money or market share in a business that evolves and sees new players enter every day.
Calling it a “death-like choice,” Honest decided the best course of action was to maintain its product and brand integrity, but ship less product to retailers, rather than changing its signature packaging.
“Because of our commitment to the customer, we did not go and sell the product without packaging and took tremendous losses in the past year and a half that only now we’re starting to climb out of,” Chistov says. “It was a painful transition.”
On the other side of the country, another executive with foreign-sourced packaging and other materials faced similar problems and an unexpected roadblock.
“It’s definitely been challenging for us and any other cannabis companies, especially those that rely on resources from abroad,” says Theory Wellness CEO Brandon Pollock, noting that factory shutdowns, shipping delays and port backups have not only raised costs, but also forced the company to order supplies in bulk and store them to avoid manufacturing disruptions. “It’s generally just caused us a lot of headaches and frustrations.”
But even planning ahead, spending additional money and working with local suppliers didn’t prevent the vertically integrated company with six dispensaries in Massachusetts and Maine from feeling the crunch as it worked to keep its popular cannabis-infused seltzer on the shelves.
The company uses a waterproof label on its cans, “and apparently there’s only one company in the entire world that makes the adhesive for that label, and they were based out of China and got shut down (because of COVID),” Pollock says. “So we had to go through this process where we had no correct labels and the label company couldn’t even get the glue.
“It really shows you how fragile in some ways the supply chain really is,” he says. “If there’s one crack in the system, it can kind of shatter the system. I think that’s what’s happening, not just in cannabis but with different companies that are out there.”
And as the cracks get deeper, the cannabis industry is finding itself in the unexpected position of reining in growth as delays and expenses increase on everything from packaging to pre-rolls, forcing companies all across the country to seek out new, closer-to-home sources to meet demand.
Calling itself “first and foremost a logistics company,” DIZPOT, headquartered in Phoenix, is one of the five largest suppliers of cannabis packaging in the world, as well as other supplies for the cannabis industry. The company even has an office and warehouse in Shinzen, China, and sources glass, plastic, mylar bags and boxes for use in every U.S. cannabis market from all over the world, including China, India, Pakistan, Indonesia, Vietnam and Colombia.
“We produce millions of packages each month,” says co-founder and CEO John Hartsell. “We move boxes around the entire world via the sea, air and around the U.S. over trucks and trains so our No. 1 asset to the industry is our knowledge of logistics.”
But even DIZPOT could not avoid taking a hit when the pandemic began to cripple the global economy. Hartsell says the supply chain changed dramatically, putting an “undue burden” on the movement of goods, with issue after issue compounding the problem.
“Not only were you having issues getting your good into a container and onto a vessel, once those goods were here at port, was there a chassis to put your container on? Was there a truck to hook that chassis to? Was there a driver to get on that truck?” he says. “And so all of those issues combined have created significant delays and longer lead times and longer timelines for receiving any goods, regardless of what industry.”
The Delta variant of the coronavirus caused even greater delays, as Chinese companies reduced their workforces and workdays by half to fight the disease.
“There was just no reasonable timeline that could be conveyed to you on when your products could be put on a vessel,” Hartsell says.
MainStem’s data from November 2021 bears this out, showing a 200-300% increase on manufacturing times and a 300-500% increase on shipping times.
“All of these things are compounding and making things significantly worse on the entire chain,” says MainStem CEO Alen Nguyen. “Something that may have taken 45 to 50 days is now taking four to five months.”
Nguyen says most cultivation supplies are made in the U.S., so delays on those are shorter, but “things novel and specific to cannabis” that are imported have created a ripple effect that will eventually affect the consumer, especially fans of pre-rolls, which use hand-made cones sourced mostly from a handful of factories in Indonesia. When those factories shut down due to COVID, thousands of workers stopped making the cones, creating a huge backup on demand.
But even with the factories back open and working to meet the demand, the cones are still being delayed because the ports cannot handle the additional influx of ships and containers, many of which are being purchased at a premium by larger businesses and industries, leaving cannabis companies to continue to wait.
“While the cannabis industry is growing rapidly, it’s still small compared to a Target or a Walmart so they take a lower priority in shipping containers,” Nguyen says.
DEALING WITH IT
But with demand for cannabis products continuing to grow, cannabis companies with the extra money to stock up on packaging — and the space to store the additional inventory — are doing just that to try and keep supplies flowing, paying whatever extra they have to in order to keep product on the shelves.
For Simon Nankervis, CEO of The Source, a vertically integrated cannabis company in Nevada, that means looking further into the future than before, as packaging that used to have a 30-day turnaround now takes 90 days or more to get to his facilities. But even that’s a guess.
“What no one will confirm is when goods will land because at this time what we are seeing are significant delays into the ports. And then because of the backlog of product coming into the country, there’s also a backlog on customs clearance,” Nankervis says, noting the average delay is now 12 weeks. “At the end of the day, there’s just a shortage of labor everywhere and because of that shortage of labor there’s a significant slowdown.”
Nankervis says the greatest impact to his company has been on cash flow, because of the need to purchase extra supplies, but says the impacts are even larger on the construction side, where costs and delays on raw materials are creating a whole different set of issues.
“It’s definitely not small money,” agrees Pollock. “It’s hundreds of thousands of dollars of extra inventory, as well as warehouse space. We’re running extra warehouses now that arguably, if we could run leaner, we wouldn’t need. So it definitely ties up cash as well as our team members who have to manage that inventory.”
For items they couldn’t get — like the glue for Theory’s seltzer labels — they looked elsewhere, switching temporarily to a different label-maker, which he says negatively impacted the product’s quality, though only for a short time.
A New Normal?
For Chistov and Honest Marijuana Co., changing the package wasn’t an option, though he says the company is also seeking out new suppliers of its tin cans, finding partners in South America instead of across the ocean.
“It is a huge, industrialized world, and I believe these things are here to stay,” he says of the supply chain problems. “When China coughs, we already hear it.”
Nguyen says the issues have also caused MainStem to work harder to help customers understand their own needs to ensure they are placing proper orders and then find ways to help customers get those items, such as placing orders at the factories instead of distributors, something he says can help the suppliers too.
“It’s not just one way, it’s also giving the suppliers the insight into what demand is going to be so they can properly plan for manufacturing,” he says.
But Hartsell at DIZPOT says while he expects there to be issues through at least summer 2022, he does not believe this is the “new normal” for the industry, noting a decline in November in the cost of moving goods. But for now, he says, his company continues to pay a premium in order to reserve shipping space to ensure customer product gets to the states as soon as possible, adding “which frankly not just doubled or tripled, but more than quadrupled our cost to move good across the ocean.” DIZPOT is now also using longer supply chain agreements, planning purchasing needs up to two years ahead of time in order to ensure the company has on hand what customers need.
Pollock, whose company is also dealing with major increases in construction costs, says the supply chain crunch has caused Theory Wellness to look again for more local suppliers, whether that means in their communities, states or country. Pollock says even if the locally produced item costs more, it may make sense because of reduced shipping costs or times.
“Hopefully it’s opening up a lot of eyes and hopefully there’s some entrepreneurs who are seeing this and want to say, ‘All right, let’s start a packaging company in Michigan or Ohio and take an old factory and start supplying the industry domestically,’” he says. “I think that’s what’s interesting about our industry: we do have a reliance on the global supply chain, but the majority of our valuable products are produced locally, which I think is really cool. I think it’s good for everybody.”