August 29, 2014

Week in Review: Retailers, Growers at Odds Amid Supply Shortage in Washington State

 By Chris Walsh

After a rocky start to recreational marijuana in Washington State, many entrepreneurs on the front lines of the industry assumed the market would settle down fairly quickly.
Unfortunately that’s not the case.

Supply remains extraordinarily tight – many licensed cultivators are still awaiting their first harvest – while demand continues to rise as new recreational shops open. That’s causing friction between two groups that must work together for the industry to succeed: store owners and growers. The situation is quickly reaching a boiling point. As we reported earlier this week, several retail shops are banding together to fight what they say is price gouging by some licensed cultivation facilities. The stores claim that growers are taking advantage of the supply shortage, charging much more than is reasonable and forcing overall prices for consumers into the stratosphere.

Their solution: form a “retail association” that will give preference to growers who deal with the stores fairly, while putting those that charge exorbitant prices last in line for shelf space. It’s a controversial response to the problem, but it does have support from some growers. “The retailers forming a cooperative is a good idea,” Brian Stroh, owner of the state-licensed grower CannaMan Farms, told Marijuana Business Daily. “The main retailer (behind the idea of the association) is my main customer. I have very good relations with them and understand the troubles they’re experiencing.” Stroh said he has gone out of his way to implement fair and consistent pricing – unlike some of his peers.

“I believe that I was one of the first companies to publicly disclose both my pricing and my rationale behind it,” Stroh said. “I am a tier-one producer providing hand-trimmed, connoisseur-grade cannabis. I will always have higher prices as I have positioned my company as a premium brand. But my open price, my current price and my foreseeable future price are all the same at $8.83 a gram.” The plan by retail shops to fight back against certain growers, however, could lead to unintended consequences with federal authorities and put them on the wrong side of price-fixing and antitrust regulations.

The Federal Trade Commission defines price fixing as “an agreement (written, verbal, or inferred from conduct) among competitors that raises, lowers, or stabilizes prices or competitive terms.” The retailer consortium could cross over into that territory if it’s not careful, especially if the stores all agree to place products from some growers in the back of their stores. “An individual retailer may place product as they choose – assuming it doesn’t violate a contract provision with the processor that controls product placement,” said Ryan Agnew, an attorney in Seattle who works with cannabis companies. He added, however, that “a group effort to punish processors would run afoul” of antitrust regulations.

In terms of the retailers’ complaints against growers, Agnew said the standard forces of supply and demand are at work, and eventually prices will come down when more cultivation sites come online. But he said retailers seem to have unrealistic expectations of how the market should work under the current circumstances. “The thing that bugs me is that some retailers have taken to believing that market stabilization was magically going to occur in the first quarter of a new system built from scratch,” Agnew said. “I’m especially troubled because they are the same folks tasked with selling product and helping the industry thrive. Regardless, the current situation is creating bad blood and fraying business relationships in a market that needs cohesion and unity as it finds its feet.

http://mmjbusinessdaily.com/week-in-review-supply-issues-still-dog-washingtons-recreational-marijuana-industry/