Why Retailers, Craft Cultivators, and Asset Light Brands Need to Understand Contract Manufacturing

Why Retailers, Craft Cultivators, and Asset Light Brands Need to Understand Contract Manufacturing
Despite rapid developments in the last decade, it's easy to lose sight of the fact that global cannabis is very much in its infancy stage. The cannabis industry's evolution is constrained by what limited solutions exist, thus far resulting in a lack of efficiency and structure. As adult use cannabis is approaching the ten year mark in some markets, the dynamics are shifting. In most cases, what worked from 2014 to 2021 does not work in mature states anymore.

More than ever, consumers expect a high-quality product at a competitive price. While price may be less important for a small percentage of buyers, the majority of the market places value on both quality and affordability. In cases where price is less of a concern, it is because these consumers are specifically seeking out a unique quality that cannot be found elsewhere.

In the past, brands would establish their own operations by acquiring the necessary assets to produce, purchasing the raw inputs, and taking on the liability and overhead that comes along with manufacturing. This allowed them to be competitive on store shelves, especially when profit margins were higher and price compression had not yet become a factor. In fact, in the early days of the cannabis industry, when it was less crowded and less available across the US, brands with their own manufacturing operations thrived due to the demand. But as more states have legalized cannabis and accessibility has increased, so has saturation. For many brands, it no longer makes sense to take on asset liability due to the changing dynamics and unit economics of the industry. Brands that have adopted this way of operating are called asset light brands.

Contract Manufacturers

Since the late 1800s, there have been businesses specializing in serving asset light brands. These businesses are known as contract manufacturers, but they are also referred to as contract packagers, toll producers, co-packers, co-mans, white label producers, and various other names. Contract manufacturers pool demand from various brands to produce finished products more effectively and efficiently. They offer value to a range of operators from asset light brands to dispensaries looking to create their own private label and craft cultivators looking to optimize their B grade material.

In cannabis, the evolution of contract manufacturing has unfolded in multiple ways. We’ve seen some brands who built their own operations early on extend their available capacity via contract manufacturing for other labels in the market with similar end product needs. We also saw the brand licensing model take off which in essence was another form of contract manufacturing, where brands licensed their intellectual property (IP) to local producers who manufacture a wider range of products or brands, and then pay a royalty back to the IP holder.

Last, we’ve seen sharp operators (whose expertise lies in manufacturing) setup shops simply as a service provider to brands. All they do is contract manufacture. They use their expertise to more competitively produce and stay away from the competition that happens in the market and on-shelf.

In our opinion, we believe this third model is where the market is heading and that it will be a widely accepted and common means of powering the future state of the cannabis industry. This is how it works in all other emerging consumer packaged goods (CPG) categories, so why wouldn’t it eventually be the same for cannabis?

What is an Asset Light Brand?

While "asset light" might be a buzz term in recent years, it is a model that has been used by conventional CPG companies for decades and has been the primary model for emerging CPG categories throughout the 2000s.

So what does it mean? Just like it sounds, asset light brands are businesses that operate without the traditional tangible assets necessary to produce the products they sell. They do not own any equipment, have a manufacturing facility, or need to worry about the labor involved in producing their goods. Essentially, they are sales and marketing companies that focus on developing innovative products, acquiring new customers, and building a brand.

A photo of a notepad with writing that says "marketing" then an arrow pointing to "sales" then an arrow pointing to "growth"

In many cases, brands do not have sufficient throughput to justify investing in operations and all associated expenses. Running equipment at 20% asset utilization is not a sustainable business strategy 99% of the time. Asset light brands use strategic contract manufacturers to produce the products they sell, effectively eliminating the usual burden and expense of entering the CPG industry.

Retailers

Another entirely separate channel of demand for contract manufacturing is retail dispensaries who are interested in providing their own branded products. This is a way for dispensary operators to capture more margin, own their consumer, and deliver further value to their community through products their shoppers know they can trust.

A photo of a retail dispensary shelf with cannabis in jars

No different from the rest of the cannabis industry, retail remains a hyper-competitive segment in most markets and we’ve seen sharp operators forge their own paths when it comes to innovation. Most understand the importance of serving a local community and building a loyal following, and some have chosen to do this through the retail experience, including stores becoming a hangout for local patrons. Others have leaned into understanding the products that their customers are seeking most and have chosen to bring those products to their customers under their own logo via white label production. This can range from flower, to edibles, to custom vapes including hardware and oil, to the wide range of concentrate SKUs.

Craft Cultivators

The contract manufacturing model is becoming increasingly popular among craft cultivators who want to optimize their crop. Craft growers prioritize delivering high-quality buds (A and A+) to their customers, but sometimes end up with lower grade flower (B and C). By partnering with contract manufacturers, growers can focus on what they do best: growing, and send their B and C grade to be processed into other form factors including vapes, concentrates, edibles, and other products. This enables them to maximize profits from their plants and continue serving their community with an expanded portfolio of products matching the quality that their customers have come to expect.

Cannabis vape cartridge in gloved hands

Looking Ahead

Embracing contract manufacturing in the cannabis industry is changing the landscape by allowing entrepreneurs to launch their brands without needing a lot of money upfront. This accessibility not only promotes industry growth but also increases competition among a growing number of brands on store shelves. The fixed production costs and the ability to focus solely on product sales, brand establishment, and team expansion highlight the advantages of this approach. Additionally, the willingness of contract manufacturers to handle smaller production runs effectively eliminates the last barrier to entry, especially for custom-packaged cannabis products.

Ultimately, by adopting the contract manufacturing model, businesses can strategically allocate their resources towards product innovation, customer acquisition, and brand building, without the burden of manufacturing facilities. This successful approach, proven in other consumer packaged goods categories, is now gaining significant traction in the cannabis sector. As the industry matures, understanding and effectively utilizing contract manufacturing will be crucial for retailers, craft cultivators, and asset-light brands, providing a critical advantage necessary to thrive in this highly competitive market. If you're interested in learning more about what contract manufacturing can do for your business or brand, we'd love to chat. Fill out the form below to get in touch!

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