Thursday, April 11, 2013

Required/Prohibited Vertical Integration

Should a supply chain be required to be vertically integrated? Should it be prohibited from being vertically integrated? Colorado is contemplating the former for Marijuana retailing and the latter applies to the alcohol supply chain policy. In the words of  Warren Edson, attorney for the newly legitimized marijuana industry in Colorado:

"Medical marijuana is one of the few industries, if not the only industry, where retailers are forced to own the whole line of production," he goes on. "It's a huge pain in the ass to run a business like that -- and to force that model into retail is ludicrous, particularly given that Colorado voted to regulate marijuana like alcohol, and alcohol is just the opposite."
How so? Edson points out that "at a recent city council meeting, they did a nice job of talking about the history of prohibition, and how you're not allowed to be an alcohol distributor and a manufacturer. They thought it would be an easier way to regulate and control if they were separate -- yet some members of the medical marijuana industry and some of the legislators act like vertical integration is easier."

Value may be created from some level of integration and from some level of outsourcing. The firms in the industry would know best and have incentives to exploit it. There may be a public interest in regulating recreational drugs which could be made easier from one form of supply chain versus another. But it is not likely that what makes it easiest for alcohol makes it hardest for marijuana.


  1. Does the three-tiered system for alcohol distribution really make it easier though? I believe it was more of an after-effect from the repeal of prohibition, and now it is so institutionalized (in culture and law) that it will be nearly impossible to break. But, in England there is no such system, and so you end up with beer manufacturers that run their own pubs. There are downsides to that too, but in some ways I would think it encourages maximum efficiency out of the producer/retailer. What I would worry about with marijuana is that this setup of required vertical integration would lead to one or two companies that become very efficient, then they start gobbling up all the less efficient operations, and then the possibility of that bigger operation becoming corrupted due to the nature of the marijuana business (i.e. links to drug cartels, etc.). Then you have a major drug war, a la Mexico, inside US borders. So, in some ways, I would almost prefer a three-tiered system to disaggregate the entry points into the industry and keep each player small (like retailers of high-gravity beer, wine, and liquor are in Tennessee now).

  2. Ironically, the Brits mandated that "tied" pubs carry at least two brands of beer. The result has been a dramatic decline in output.

    If proven, the causal link would be that tied pubs are efficient, and that eliminating that option lead brewers to use less efficient ways of distributing beer, which resulted in a decline in output.

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