How mature is the North American cannabis franchising space? | Global Franchise
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Friday 7th October, 2022

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How mature is the North American cannabis franchising space?

Insight

How mature is the North American cannabis franchising space?

Cannabis is big business. Over the last decade or so, legalization has helped propel the produce of this plant into everyday life and business, but has it been the same for cannabis franchising?

Cannabis is big business. Over the last decade or so, legalization has helped propel the produce of this plant into everyday life and business, but has it been the same for cannabis franchising?

Words by Raghav Patel, digital content writer at Global Franchise

The marijuana market has had some time to find its feet and crystallize since the heady year of 2012, when the U.S. saw its first cannabis legalization amendments and initiatives in the states of Colorado and Washington, respectively. Since then, 14 states have chosen to legalize cannabis, with the state of Vermont doing so through its legislature, unlike any other state.

Jerry Nadler, who serves as the U.S. representative for New York’s 10th congressional district reintroduced the Marijuana Opportunity Reinvestment and Expungement Act (MORE Act), removing cannabis from the list of controlled scheduled substances and expunging any prior cannabis-related convictions.

Cannabis is already a growing sector, currently valued at around $19.8bn globally with it forecasted to reach $97.35bn by 2026. The power of branding in cannabis could be felt while it was illegal and brands will continue to play an important role in cannabis business in the years to come as budding entrepreneurs want to dip their toes into this market.

“The wide range of what is happening in this industry from a customer experience, I think is something that is begging for franchising. And the entry for investors to get in, is also begging for franchising,” said Justin Livingston, vice president of franchise development at cannabis dispensary franchisor, Unity Rd.

“People want to get into this, they see the money, they see the good that can happen. They see the impact it can have on the community, they see the generational wealth that is available to really change lives for years and years to come.”

State of the U.S. franchising market

Cannabis has steadily grown in popularity over the years, penetrating a little more into the mainstream every year. According to Gallup, seven per cent of Americans smoked marijuana in 2013, compared to 12 per cent in 2019. The global pandemic saw many cannabis dispensaries be considered essential businesses, putting them on parity with the likes of banks, supermarkets and hospitals.

Dispensaries are still the most visible and customer-facing cannabis businesses around, and naturally this makes them the most attractive to franchise. Though, these are two areas closely governed by federal law and require a deep insight to safely navigate the legal landscape. Unity Rd has been navigating this space for some time and sees lots of opportunity.

“Retail is really where the opportunity is, there’s an enormous amount of opportunity in cannabis to support the dispensary business, on the manufacturing side, packaging side, cultivation side and processing side,” said Livingston.

“But I think when it comes to franchising, the real opportunity here is in the retail side,”

“We think of Amsterdam, when we think of where you can go and use the product that you purchased. And that’s really in its infancy here, more an idea than anything else. But I think that’s probably next in line for franchising.”

Unity Rd. opened its first franchisee location in Boulder, Colorado in June. The store is managed by Nate Wetzel, a former housebuilder, indicating that this is a franchise business like any and attracts people from all walks of life.

In addition to mismatching state and federal laws, many jurisdictions offer a limited number of licenses to operate cannabis dispensaries, limiting the number of marijuana dispensary franchisees that can operate in a single jurisdiction. Coupled with complying with different laws in different states, many cannabis businesses see franchising as too complex and undefined to begin foraying into.

Recent and future regulatory developments

The MORE Act’s passing is the American cannabis industry’s single most important rallying point, currently. The act, if passed, would remove cannabis from the list of scheduled substances, removing marijuana laws from the federal lawbook, and leaving it in the hands of states.

However, the Senate is still finely balanced without an overt Democrat majority, meaning there is no guarantee of the Act passing.

The bipartisan SAFE Banking Act is a similarly important piece of legislation that has yet to become law. Many dispensaries and cannabis businesses are unable to deposit their funds in certain banks due to federal restrictions. This bill allows states to decide their own laws and penalties, leaving a degree of ambiguity for national, multi-state operators who would prefer a common code and set of practices.

“People are understanding not only the recreational benefits, but the vast medical benefits. The whole idea is changing, and the opposition is quieting,” said Livingston.

“The advocates are starting to get some pretty big wins from one state to the next. And so, from a legislative standpoint, what we see is there are things happening to create safer banking practices. While cannabis is federally illegal, banking is very difficult to negotiate,”

“Creating processes where our retailers can take credit cards and operate much more like a normal retail business as opposed to having to find ways to do it with debit cards, and ATMs and cash is really exciting and going to create a much more normalized environment.”

It’s also important to know that cannabis’ federally illegal status means a franchised dispensary has to contain all of its operations and business in the state. Products cannot be shipped across state lines, nor can store supply be grown in other states. 280E of the IRS tax code also does not allow dispensaries to deduct operating costs and apply for tax credits due to marijuana’s status as a scheduled substance.

The Canadian cannabis landscape

Canada is much further ahead on this issue and legalized in 2018, meaning the recreational use of marijuana was no longer a violation of federal law. A number of Canadian marijuana franchises have opened, including the likes of the Ontario-based Sessions Cannabis, which has have over 40 locations in the state.

Prohibition, a company that started out as a shop in a small Montreal flea market selling smoking accessories is today a franchised business with 26 locations across multiple provinces, and is still seeking more franchisees with new locations lined up. Smoker’s Corner is another franchised smoking accessories company with over 10 franchised locations across Nova Scotia, Alberta and British Columbia.

Inner Spirit Holdings, through its retail brand, Spiritleaf, was the Canadian Franchise Association’s first cannabis business and is up to 70 locations across Canada, with 13 franchised and seven corporate locations. In July, Sundial Growers acquired Inner Spirit Holdings, making it one of the largest cannabis verticals in Canada as well one of the biggest retail operators with over 100 locations across the country.

While Canadian cannabis franchisors still have to deal with differing state laws and limited licenses, regulators and lawmakers have been more lax than in the U.S. and consequently, the cannabis industry has grown significantly in the country with cannabis franchising making significant leaps too.

“Some of the things that I hope to replicate here in the U.S. that we would do, the ease of entry [in Canada] is great,” said Livingston.

And it wasn’t always the case in Canada, but the ease of entry and the focus on getting people into business seems to be a bit more of a priority, whereas the barriers of entry here are just extraordinary,”

“So, I hope to see a little bit of that kind of equalization where we can learn from our neighbors from one state to the next, even one municipality to the next, but certainly, our neighbors to the north.”

When regulations/laws crystallize and coherently coalesce across provinces, we will see the true extent of the cannabis franchising industry. Right now, Canada’s cannabis industry is still somewhat suppressed by laws and regulations.

The global cannabis environment

Before franchising can even be considered, cannabis itself must be legal. While some countries have made significant progress, it’s still illegal in most countries around the world, though that may slowly be changing.

Singapore, arguably the most virulently anti-drug nation recently confirmed the use of medical cannabis for the second time in the country’s history. Full-blown legalisation is unlikely to be on the cards in the near future, but it represents the direction of travel.

Thailand represents Asia’s best hope for recreational cannabis legalisation. It was only this year that laws were passed that allowed the purchase of medical cannabis from licensed retailers and the right to grow up to six plants at home for personal use.

Thailand even held forums on World Cannabis Day, as the country seeks to promote medical cannabis and allowed cannabis business owners to present their non-psychoactive cannabis products.

However, it isn’t smooth sailing towards the direction of legalization. New Zealand held a referendum in 2020 to ask their citizens whether or not they wanted to legalize the sale, use, production and possession of recreational cannabis, to which 50.7 per cent of voters voted against legalization. This fell in line with most opinion polls in the country that was unsure on recreational cannabis but voiced support for medical cannabis.

Cannabis: a potential retail giant

“People want to get into this, they see the money, they see the good that can happen. They see the impact it can have on the community”

The cannabis franchising sphere has enormous potential to become a ubiquitous part of the North American retail experience, offering what may become an ‘essential’ product and competing with food and beverage for dominance in franchising. The popularity of the drug itself has not waned, nor is likely to.

However, significant stumbling blocks remain in the U.S. While many states have decided to legalize cannabis and many politicians have proposed changes in federal legislation, they seem to keep failing at the last hurdle. It’s also a highly sensitive issue, one that many politicians feel isn’t worth expending political capital on.

The story is different in Canada. The potential for franchising to explode is there, and have already made themselves known across the entire country. With a further opening up of regulations and licenses, Canada’s cannabis franchise industry could end up being the biggest players in North America when legal issues are ironed out.

Cannabis has made incredible headway in the last decade, however still has baby steps to take in most territories and needs to establish itself as a safe and viable business in newly-legalized countries.

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