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What is in Store for the Cannabis Sector in 2023?
Cannabis Business Insights | Friday, February 03, 2023
2022 was a mixed bag for the cannabis industry. While new markets showed healthy growth, legal cannabis sales declined in many mature markets, slowing, or even reversing, growth in those markets.
FREMONT, CA: In 2022, the cannabis industry had a mixed performance. New markets experienced strong growth, but many existing markets saw a fall in legal cannabis sales, which slowed or even reversed growth there. Even if some of this may be attributed to similarities the broader economy encountered after COVID-19, it nevertheless led to several businesses across the industry being affected by layoffs, cash shortages, and increasing debt.
While recreational sales began in numerous other states, three more states passed laws legalising cannabis for adult use. The Biden administration initiated federal reform by forgiving simple marijuana possession crimes and ordering a study of the classification of cannabis under federal law. The Medical Marijuana and Cannabidiol Research Expansion Act was also passed by Congress.
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The U.S. cannabis sector exhibited symptoms of slowing down in the face of regulatory and economic hurdles, including falling demand, after experiencing a sales surge during the early stages of the pandemic. Consequently, established markets for legal cannabis across the nation are experiencing a supply shortage that is driving down both wholesale and retail prices.
For instance, it has been estimated that wholesale costs in California have fallen by as much as 95 per cent after the state passed a law legalising marijuana in 2016. And over the past two years, the retail cost of an ounce has dropped from around USD 400 to under USD 250 in Massachusetts. Meanwhile, the underground market's competition, high taxes, and other restrictions continue to be a problem for legal retailers. Numerous of these issues, like the decline in cannabis costs at the wholesale and retail levels, are projected to continue through 2023.
Congress failed to enact serious cannabis reform once more in 2022, and federal legalisation is unlikely to happen in 2023. President Biden stated that absolving individuals of federal charges related to simple marijuana possession. In addition, the president requested that the designation of cannabis as a Schedule I substance, the most serious classification under federal law, be reviewed by the Secretary of Health and Human Services and the Attorney General. Reclassifying to Schedule II would be beneficial for the medical marijuana sector generally, despite some negatives. For instance, it would probably permit medicinal cannabis to be cultivated in one state and sold in another.
The declaration represented the biggest change in federal cannabis policy since the Controlled Substances Act (CSA) was passed in 1970, but its ramifications took time to materialize. It is unlikely that the administrative assessment of cannabis' legal status under federal law will be completed in 2023. The majority of pardons will also need to take place at the state level rather than the federal one because state cannabis convictions outnumber federal convictions by a large margin.
The Medical Marijuana and Cannabidiol Research Expansion Act (MMCREA) was the first cannabis-related reform legislation that Congress passed on its own. By removing federal limits on the study and the cultivation of research-grade cannabis, the bipartisan law opens the door for deeper investigation into cannabis' potential medical benefits (which are presently conducted exclusively at the University of Mississippi). The MMCREA also supports the creation of CBD- and cannabis-based medications that are FDA-approved.
The Secure and Fair Enforcement (SAFE) Banking Act, which would offer protections to financial institutions and various other professional service firms doing business with state-legal cannabis businesses, is also anticipated to be reintroduced in 2023. This measure is anticipated to garner the most attention. The bill has now been approved by the House seven times and is supported by both parties and businesses.
The States Reform Act (SRA), which would decriminalize cannabis at the federal level while giving states control over prohibition and commercial regulation, is another potential candidate for reintroduction.
Nearly four years have passed since the FDA declared that cannabidiol was subject to regulatory control. The EPA has yet to fully address CBD regulation despite repeated requests for regulations from lawmakers and industry partners, leaving manufacturers and distributors in the dark. This will most likely start to change around 2023. Up until this point, the FDA has mainly focused on food and beverage items that make unfounded health claims when it comes to CBD enforcement. However, recent changes in the agency's internal and external approach to policing CBD products and other cannabinoids may be a sign of things to come in 2023 and beyond.
For instance, the FDA appointed senior public adviser Norman Birenbaum, an expert in cannabis policy, to the Center for Drug Evaluation and Research. Observers in the industry believe that this may be a sign that the government is finally preparing to create a regulatory framework for CBD and other products derived from cannabis. Additionally, in the first half of 2022, the FDA sent warning letters to businesses that marketed goods containing Delta-8 THC, an intoxicating cannabinoid derived from hemp that is now available in several states on the black market. The FDA also sent out several warning letters to businesses marketing foods and drinks with CBD.
In more than a dozen states in 2022, lawmakers and voters passed more than 40 cannabis-related reform bills. Three states—Rhode Island, Maryland, and Missouri—passed legislation legalizing and governing the adult-use market. While everything was going on, Mississippi legalized medical marijuana. Additionally, recreational cannabis sales began in 2022 in Rhode Island, New Jersey, and New York. Connecticut also started its retail sales earlier this month. Maryland and Missouri retail marketplaces are anticipated to open later this year. Currently, 39 states have some kind of cannabis legalization, with 21 states (plus the District of Columbia) allowing adult recreational usage.
For instance, lawmakers in Minnesota submitted two proposals that would legalise cannabis for recreational use. The recently elected governor of Minnesota, a well-known supporter of cannabis legalisation, has said that legalisation may take place in the state in the upcoming year. Moreover, Pennsylvania just elected a pro-cannabis governor and saw Democrats capture the State House, increasing the likelihood that legalization would be enacted in the Keystone State in 2023. Oklahoma will have the chance to legalize cannabis for recreational use. Legislators in many other states, including Indiana and Kentucky, have already submitted several measures in the first few weeks of 2023 to liberalise cannabis regulations. Ohio's legislature is also exploring a bill to legalize recreational cannabis.
The first step to legalization is only the beginning. The implementation of state-legal cannabis programmes can be challenging, drawn out, and not always go in a straight line. For instance, New York launched its adult-use program roughly two years ago, with the first sales only taking place at the end of December at a single location. Only 36 retailers in the state have received provisional licences as of yet. The approval of 318 conditional licences by regulators for adult-use cultivators and processors has fueled worries that there may not be enough state-approved retailers and that producers may be experiencing an overstock problem. Competition from the legacy market has also slowed down the early expansion of the New York market.
The dormant commerce clause (DCC) of the U.S. Constitution forbids their licensing requirements. Constitution, which forbids states from discriminating against interstate commerce by favoring citizens of their state over others, several other states' cannabis programmes, including New York's social equity component, are being legally challenged. A divided panel of the 1st U.S. Circuit Court of Appeals ruled that the Maine legislation requiring local control of cannabis enterprises is unconstitutional and that the DCC applies to the industry, which is unlawful under federal law. A New York federal court used the ruling as justification to partially block the state's Conditional Adult-Use Retail Dispensary (CAURD) program. The decision calls into question states' authority to protect their cannabis industry from out-of-state competition. The 2nd and 9th Circuits may decide to weigh in on this matter in 2023. (as the same Michigan-based applicant has initiated litigation in New York and California on this ground).
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The wholesale services for recreational cannabis are transitioning from early-stage operations to a more developed and organized industry. This change is driven by legal advancements, shifting public perceptions, and increasing consumer demand. As a result, the way cannabis products are transported from cultivation and manufacturing facilities to the shelves of licensed retailers is being restructured.
The Role of Wholesale Services
Wholesale services are the linchpin of the recreational cannabis supply chain, acting as the crucial intermediary between producers and retailers. These services facilitate the bulk transfer of a wide array of cannabis products, ensuring efficient distribution and market access. The essence of wholesale lies in volume, enabling cultivators and manufacturers to move large quantities of their output and allowing retailers to source diverse product portfolios from multiple suppliers. This symbiotic relationship is fundamental to maintaining a well-stocked recreational cannabis market.
Effective wholesale operations encompass a complex web of activities. This includes inventory management, ensuring products are stored under optimal conditions to preserve quality and potency. Logistics and transportation are paramount, requiring specialized infrastructure and protocols to handle sensitive products while adhering to stringent regulatory requirements. Order fulfillment and invoicing also fall under the purview of wholesale services, necessitating robust administrative systems to manage high volumes of transactions accurately and efficiently. The emphasis on efficiency in these operations is critical, as it directly impacts cost-effectiveness for both producers and retailers, ultimately influencing consumer pricing and market competitiveness.
Product Diversification and Specialization
The recreational cannabis wholesale market is characterized by a remarkable degree of product diversification. Beyond traditional dried flowers, the wholesale channels actively distribute a vast array of cannabis formats. This includes various forms of concentrates such as oils, waxes, shatters, and live resins, catering to consumers seeking higher potency or different consumption methods. Edibles, ranging from gummies and chocolates to infused beverages, represent a rapidly expanding segment that appeals to consumers seeking discreet and smoke-free options. Tinctures, topicals, and pre-rolls also form significant categories within the wholesale landscape, each requiring specific handling and distribution strategies.
This diversification has led to a degree of specialization within the wholesale services sector. Some wholesalers focus on specific product categories, developing expertise in their handling, storage, and distribution. Others may offer a comprehensive portfolio, aiming to be a one-stop shop for retailers. The ongoing innovation in cannabis product development, including the exploration of minor cannabinoids and novel delivery systems, continually shapes the offerings available through wholesale channels, requiring wholesalers to remain agile and adaptable to emerging trends.
Technology and Infrastructure in Wholesale
Technology plays an increasingly vital role in streamlining recreational cannabis wholesale operations. Advanced inventory management systems are crucial for real-time tracking of products from their point of origin to their destination, ensuring accuracy and reducing discrepancies. Enterprise resource planning (ERP) platforms are being adopted to integrate various aspects of the business, including order processing, financial management, and compliance reporting. These integrated systems enhance operational efficiency and provide valuable insights into data.
Furthermore, digital marketplaces and online ordering platforms are becoming more prevalent in the wholesale space. These platforms simplify the ordering process for retailers, offer greater transparency in pricing and availability, and facilitate broader market access for producers. Data analytics, derived from sales trends and inventory movements, are also being leveraged to optimize supply chain planning, forecast demand, and inform purchasing decisions for both wholesalers and their clients. The ongoing investment in robust technological infrastructure underscores the industry's commitment to efficiency and scalability.
Operating within the recreational cannabis wholesale sector necessitates unwavering adherence to a complex and evolving regulatory landscape. Compliance is not merely a formality but a fundamental aspect of every wholesale transaction. This involves tracking and reporting of products at every stage of the distribution process, often from "seed-to-sale" systems mandated by regulatory bodies. Wholesalers must ensure that all products they handle meet stringent testing standards for potency, purity, and contaminants, as established by local and regional authorities. Packaging and labelling regulations are also critically important, dictating everything from child-resistant features to specific information that must be displayed on consumer products.
Beyond basic compliance, quality assurance is a paramount concern for wholesale services. Maintaining the integrity and quality of cannabis products throughout the supply chain is crucial for ensuring consumer satisfaction and maintaining a strong brand reputation. This includes maintaining controlled environmental conditions during storage and transport, such as regulating temperature and humidity, to prevent product degradation. Strict protocols for handling and sanitation are also implemented to minimize the risk of contamination. Wholesalers often implement their internal quality checks, complementing external regulatory testing, to ensure that only the highest standard of product reaches the retail market. This commitment to quality builds trust and fosters sustainable growth within the industry.
The recreational cannabis wholesale services sector is transforming into a sophisticated component of the growing cannabis industry. With legalization and a diverse consumer base, the market demands efficient supply chain solutions. Wholesale services manage a wide range of product types and utilize advanced technology to optimize their operations. They adhere to regulatory compliance and quality assurance, which play a crucial role in ensuring product integrity and safety, thereby reassuring the market. The industry is poised for sustained growth, driven by the adoption of technology, product innovation, and regulatory compliance.
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Vertical integration in the cannabis industry involves a single company controlling multiple stages of the supply chain, from cultivation and processing to manufacturing, distribution, and retail. This "seed-to-sale" model has been a prominent strategy for many cannabis companies, particularly in the early stages of legalization. However, its efficacy and financial returns, especially in the Canadian market, have been a subject of ongoing debate.
The Canadian Context: A Shifting Landscape
Since the legalization of recreational cannabis in Canada, the industry has undergone significant structural evolution. In the early stages, many leading cannabis companies pursued vertical integration to maintain complete control over their value chains, from cultivation to retail. However, recent industry analyses indicate a shift away from this model as market dynamics mature and operational realities take hold.
A growing number of Canadian cannabis firms are now embracing specialization, focusing on core areas such as cultivation, processing, or brand development. This strategic realignment is driven by the need to enhance operational efficiency and allocate resources where they can yield the highest returns. Notably, vertically integrated operators in Canada have often struggled with profitability, especially when compared to their U.S. counterparts. These discrepancies are attributed mainly to differences in market scale, regulatory frameworks, and tax burdens. U.S. companies, for instance, tend to benefit from a larger addressable market and a more favorable path to profitability.
As the Canadian cannabis supply chain continues to evolve, there has been a notable increase in business-to-business (B2B) service providers offering specialized functions, such as extraction, co-packing, and distribution. This trend enables cultivators and consumer-facing brands to outsource non-core operations, further diminishing the need for complete vertical integration.
Nevertheless, a few companies continue to maintain vertically integrated models, albeit with a refined focus.
Is Vertical Integration Worth the Investment in Canada
For Canadian cannabis companies, the decision to adopt or maintain a vertically integrated model is multifaceted, hinging on factors such as strategic objectives, financial resources, and market positioning. For larger, well-capitalized firms, vertical integration can still yield notable advantages, providing greater control over the supply chain, enhanced product quality, and the potential for long-term profitability through economies of scale. However, for smaller or emerging players, the substantial capital requirements and operational complexities often outweigh these benefits. In such cases, a more pragmatic approach may involve focusing on core competencies and forming strategic partnerships with specialized B2B service providers. This trend suggests that while vertical integration remains theoretically attractive, its practical value must be assessed in the context of a dynamic and highly competitive industry landscape.
While vertical integration can provide unparalleled control and potential cost efficiencies, the significant investment, operational complexities, and the evolving dynamics of the Canadian cannabis market mean it's not a universally beneficial strategy. Companies must critically assess whether the benefits truly outweigh the drawbacks and if their resources are best allocated to owning the entire supply chain or if a more specialized approach is better suited for long-term success.
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The journey of cannabis from cultivation to consumption, sometimes known as "seed to shelf," is a complex one in which quality assurance is crucial. As the industry evolves, two factors have emerged as the foundations of customer trust and product safety: thorough laboratory testing and compliant, innovative packaging. At the convergence of these two disciplines, brand credibility is being redefined while also protecting cannabis users' health and well-being.
The Cornerstone of Safety: Accredited Laboratory Testing
Before any cannabis product can be packaged and made available to consumers, it must first undergo a crucial stage: independent, third-party laboratory testing. This process serves as the industry’s primary safeguard against harmful contaminants, ensuring the accuracy of all product information and forming the foundation of consumer safety and trust.
Accredited laboratories operating under internationally recognized standards, such as ISO/IEC 17025, conduct comprehensive analyses to verify potency, purity, and transparency. Potency and consistency testing involves detailed cannabinoid profiling to quantify the levels of key compounds, including THC, CBD, and minor cannabinoids. Accurate dosing is particularly vital for medical users, and such testing ensures that product labels reflect accurate composition, providing consumers with reliable and consistent experiences.
Purity assessments, meanwhile, address the inherent bio-accumulative nature of the cannabis plant, which readily absorbs substances from its growing environment. Labs therefore screen for a wide range of potential contaminants, including pesticide residues, heavy metals such as lead, arsenic, and mercury, microbial impurities like E. coli and Salmonella, as well as mold and yeast, as well as residual solvents that may remain from extraction processes—especially in concentrates. In addition, many laboratories perform terpene profiling to identify aromatic compounds that influence a product’s flavor, aroma, and potential therapeutic benefits, enhancing the overall product profile.
The culmination of this meticulous testing is the Certificate of Analysis (COA), a document that details all findings and verifies compliance with safety and quality standards. By providing easy access to the COA—often through QR codes on product packaging—brands promote transparency, empower consumers to make informed purchasing decisions, and reinforce credibility in an increasingly regulated market.
The Dual Role of Packaging: Protection and Compliance
Once a cannabis product has been certified for quality and safety through laboratory testing, its packaging assumes a crucial role in maintaining those standards while ensuring regulatory compliance and effective brand communication. Modern cannabis packaging is designed to meet stringent state-mandated safety requirements, featuring child-resistant and tamper-evident mechanisms to prevent accidental access and reassure consumers of product integrity. Precise and accurate labeling further reinforces transparency, displaying lab-verified information such as THC and CBD content, ingredient lists, allergens, packaging dates, and mandatory health warnings. To protect minors, packaging must also avoid visually appealing designs such as bright colors or cartoon imagery. Beyond communication, packaging materials themselves safeguard product quality by preventing contamination, moisture, and UV exposure, thereby maintaining the potency and freshness of the product.
Driven by both regulation and environmental responsibility, the cannabis industry is embracing sustainable and innovative packaging solutions. Brands are increasingly adopting eco-friendly materials, such as compostable pouches, recyclable containers, and biodegradable options derived from hemp, to minimize their environmental impact. Concurrently, innovative technologies such as QR codes and NFC tags are being integrated into packaging, providing consumers with instant access to Certificates of Analysis (COAs), product information, and brand stories. This convergence of compliance, sustainability, and digital innovation underscores how modern cannabis packaging serves as a strategic tool for ensuring safety, transparency, and fostering consumer engagement.
The connection between accredited lab services and innovative packaging is synergistic. Lab testing defines the intrinsic quality (what's inside the product), and packaging preserves that quality while communicating the verified information and adhering to extrinsic standards (safety and regulatory compliance).
By mandating accredited lab testing, states ensure products are safe and accurately labeled. By enforcing strict packaging laws, they guarantee that this information is clearly presented and that the product is secured from children and tampering.
For a consumer, a high-quality cannabis product offers a consistent experience, is free from harmful contaminants, and comes with a clear, verifiable label. By prioritizing both ISO-accredited testing and compliant, sustainable packaging, the cannabis industry moves decisively away from its illicit-market origins. It embraces its future as a trusted, accountable, and professional sector of consumer goods.
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