NEWS & PRESS
The Pros and Cons of a White Label Cannabis Business
July 29, 2022 | Education
The barrier to entry for new cannabis brands is high. Between eye-watering research and development, licences, and equipment costs, starting up is a real feat. In the past few years, industry experts have predicted the rise of white labelling in cannabis–a way for businesses without manufacturing facilities to buy wholesale off-the-shelf cannabis products to brand themselves.
Avoid some licensing headaches
Obtaining the correct licences is one of the biggest challenges of opening a vertically integrated seed-to-sale cannabis business. When you enter the business at the post-manufacturing stage, you don’t have to worry about the growing and processing licenses and regulations.
However, some people assume that if you aren’t a manufacturer or a retailer, you don’t need a license, but that isn’t the case. Of course it varies by state, but in California, for example, the California Code of Regulations (Section 5032) forbids licensees to ‘conduct commercial cannabis activities on behalf of, at the request of, or pursuant to a contract with any person who is not licensed under the Act.’ In that case, you might need to find a creative solution to obtain any type of cannabis license to work with your manufacturer.
Be a master of your trade
If you have a passion for cannabis and you understand branding and merchandising but not cultivation, it might feel more expedient for you to partner with a business that has already locked it down.
Avoid keeping all of your eggs in one basket
Vertically integrated businesses are at the mercy of their crop yields, whereas white label businesses can be more nimble and purchase goods from different suppliers.
Lower start up costs
Conservatively, it will be unlikely to cost you less than $500,000 to start up a seed-to-sale cannabis business. It’s a high-risk business that really benefits the few that are first through the door. With a white label cannabis business, you can start a small business for perhaps 10% of that (although bear in mind you won’t be able to run it out of your home).
Section 280E of the Internal Revenue Code forbids businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking” of Schedule I or II substances. This includes salaries and marketing and advertising costs. Businesses that sell white label goods need strong branding and marketing to create a point of differentiation from others in the market. When you can’t deduct any of those costs from your taxes, it can make your effective tax rate much higher than a non-cannabis business.
Limited to what’s in your state
While there are a number of trustworthy manufacturers in the space, you’re limited to working with businesses in your state. Perhaps easier if you live in California than in Maine.
Less control over your supply or quality control
If you lovingly create a brand that evokes care and quality, your supplier has it in their hands when they’re manufacturing your product. If they let their standards slip, change their production methods, or let some trim through, it’ll be your brand that’s impacted.
Across the US, cannabis production is increasing and demand isn’t keeping up. Dispensaries are overrun with brands wanting to get through the door. You’ll need a quality product at an amazing price to cut through so margins can be thin.
You don’t have a moat
Without anything proprietary, there’s very little to stop another company doing the same or very similar as you. Your competitive advantage is your brand, and it’s only so protectable.
What’s your sharp edge?
Your sharp edge is your USP. Something that only your brand offers. That’s hard to achieve with a white label product, but necessary to have in a very saturated market. In a business selling white label goods, your brand story and marketing are everything.
In addition, whether you’re selling direct-to-consumer or to dispensaries, if you have the same goods as other companies in the space, you need to make sure you have the right product-market fit, the ability to drive traffic or interest, and the right sales and pricing strategy to make it a success.
White label vs. private label
Private label products might be a compromise between these two types of operations. Private label is where you outsource your manufacturing, but you give the company specifications of exactly what you want. With private labeling, you could go for a more unique product, like a low THC lemon curd bar, or a special herbal smoking blend.
It is more of a partnership agreement. It is much more expensive than white label, but could give you more of a foothold in the market. You will have to invest more in research and development, more in contract fees, and you may require a certificate of analysis before the product can be legally transferred to your business.
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