What Will the Future of Cannabis E-commerce Look like after Federal Legalization?

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With an influx of states transitioning to adult-use markets and the U.S. Senate signaling its intention to move forward on cannabis reform, federal legalization is imminent. Industry stakeholders and mainstream business leaders alike are preparing for the seismic shift that legal cannabis will likely experience once federal prohibition ends.

In the near future, the cannabis industry may finally have access to interstate commerce and mainstream financial and banking services. These long-awaited changes will not only generate windfall profits but also have a tremendous impact on cannabis retail, especially within the e-commerce space.

The ongoing pandemic has undoubtedly accelerated the entire retail industry’s transition from brick-and-mortar to digital shopping experiences. Considering how demand for food and grocery delivery is expected to grow by $44 billion and $215 billion, respectively, over the next four years, it’s evident that consumers are now more dependent than ever on e-commerce and the convenience economy. Once cannabis becomes federally legal, brands and retailers will likely see national demand dovetail with the industry’s burgeoning e-commerce ecosystem and create truly novel cannabis shopping experiences.

Brand discovery driven by marketplaces

Federal legalization will finally allow brands to cross state lines without expensive licensing agreements or completely starting over as operators in new markets. Consequently, the rise in interstate commerce will also give rise to a surge in new brands, which creates an even more competitive retail environment.

What makes this new scenario so competitive is the relative lack of direct-to-consumer marketing channels available to cannabis companies. Despite the industry’s legal status, cannabis marketing will still be highly regulated like alcohol and tobacco. Highly trafficked advertising platforms including Facebook and Google operate by internal guidelines and may continue to prohibit cannabis companies from advertising on their platforms.

Fortunately, this is exactly why marketplaces will be the optimal environment for brand discovery. From my experience in beauty, another industry that is characterized by high brand saturation and exceptionally personalized products, the marketplace model is one of the most effective ways to engage with consumers.

The majority of beauty customers currently purchase and discover products through marketplaces like Sephora or Ulta, which are able to leverage both micro and macro retail insights to make accurate product recommendations based on specific consumer preferences and retail trends. Although most cannabis e-commerce companies are relatively young, by the time the industry becomes federally legal, they will have national retail insights from millions of consumers and offer the same tailored shopping experience that’s currently available in mainstream retail.

Expect a certain level of fragmentation for cannabis retailers 

Even with the end of prohibition, cannabis will operate in its own lane for the foreseeable future. Senator Chuck Schumer has already expressed his desire to bar Big Alcohol and Tobacco from claiming a significant stake in the industry, and it seems highly unlikely that regulators will permit consumers to order edibles, Cheetos and beer through a single delivery platform.

Mainstream delivery platforms only recently started offering alcohol purchases, with the most notable development coming from Uber’s acquisition of Lantern’s sister company, Drizly, earlier this year. While Uber recently disclosed its interest in expanding to cannabis delivery, the industry may have to wait a few more years to see a mainstream acquisition of that scale take place.

Of course, ordering cannabis isn’t the same as ordering takeout or groceries, and this kind of fragmentation will actually allow cannabis e-commerce platforms to become specialists that cater to consumers’ specific needs. Consider the countless number of products to choose from given the range of consumption methods, cannabinoid profiles, dosages, flavors and effects.

After the floodgates open, many consumers will be brand new to the industry and need a guided, highly curated and user-friendly experience when they first start out. While attitudes are quickly shifting around cannabis, there are still stigmas attached to consuming cannabis, and it’s critical for e-commerce platforms to provide positive first impressions and the right product recommendations so that consumers feel like they are buying something safe, effective and mainstream.

The financial windfall that comes with a relative sense of normalcy

Federal legalization will also lift a huge financial burden off the shoulders of legal brands and operators through the repeal of 280E. This tax code currently prevents legal cannabis businesses from deducting most operating expenses from their taxes and has been an enormous barrier to growth for the regulated industry.

The rise of interstate commerce could also decrease the need for vertical integration, which enables more companies to specialize in one part of the supply chain and create economies of scale. Under this future business model, national operators can invest more resources into their proprietary brands and outsource cultivation or manufacturing to specialists.

While industry experts expect the SAFE Banking Act to pass before federal legalization does, the compounding effect of both SAFE and legalization will quell any lingering reservations that financial institutions may have about working with cannabis businesses. This allows e-commerce platforms to finally process credit and debit card transactions and access capital like normal businesses.

The confluence of all of these regulatory tailwinds ultimately creates a proliferation of brands, lower-priced products and increased accessibility. In the post-legalization world, consumers will have even more incentives to try different brands when prices are lower and products can be conveniently accessed online.

E-commerce platforms have the opportunity to play a decisive role in the future of the industry in this country; the greatest task ahead of us is to anticipate our own consumers’ needs and deliver next-generation retail experiences for a truly next-generation product.

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