The marijuana industry has seen rising interest among producers and investors ever since the state of Colorado legalized possession, production, distribution and sale of marijuana sales in 2013. One of the major challenges that stakeholders face in legalizing a hitherto illegal substance is the careful monitoring of its production, distribution, sale and consumption. Startups have mushroomed to ensure that high-quality product is grown and delivered safely to the end consumer, leading to the formation of a $6Bn legal cannabis market in the US and Canada (as of 2017). The $55Bn market potential (including the US black market) has not gone unnoticed by traditional investors. Cannabis-based ventures have gained the attention of alcohol and tobacco companies. In this context, establishing source credibility (and hence ensuring final product quality) is essential to support the 26% CAGR predicted for the legal cannabis market between 2017 and 2022. Enter Metrc (Marijuana Enforcement Tracking Reporting Compliance), a system that was built expressly for use by regulators to track the produce from seed to consumer.
Source Credibility Through Supply Chain Software
The $55B market has not gone unnoticed by investors.
Metrc was founded in 2014 in Lakeland, Florida by CEO Jeff Wells, inside Franwell, a company that aims to “…be the leading global provider of supply chain driven track and trace technology…” Metrc is financed entirely by Franwell, which applied its core trace and track technology to formulate a turnkey solution for cannabis market regulators.
Early reports in 2014 from Colorado indicated that the regulatory monitoring technology adopted in the state allowed for accurate quality control and ensured that the safety of the end consumer was prioritized as envisioned by the legislature. The extent to which such success stories facilitated the spread of the deregulation wave across the country may not be measurable, but the continued success of Metrc as the regulatory software of choice buttresses its credibility.
States of Affairs
As of this writing, the recreational use of marijuana is legal in 9 states in the US and has been decriminalized in 9 others, while another 13 states have legalized marijuana for medical uses (Here’s the Wiki article for updated reading). Reports indicate that more states are expected to join this list by 2020. Of the 31 existing jurisdictions, 11 have partnered with Metrc for regulatory solutions. (An updated list is available on the company website). A 2017 report estimates that Metrc stands head and shoulders above the point-of-sale (POS) and regulator software competition in the US, including MJ Freeway and BioTechTHC, raking in $15M to $24M in revenues.
MJ Freeway is the largest global cannabis technology company and has tracked more than $10B(self-reported) in sales with clients in Australia, Canada, Europe, South America, Switzerland, and the United States in 23 states and the District of Columbia. Similarly, BioTrackTHC currently holds nine government contracts and operates across 32 states, Washington D.C., Puerto Rico, Australia, Canada, Jamaica and New Zealand.
As more states legalize/decriminalize cannabis use, the experience of these firms is bound to make them frontrunners in future regulatory projects as well.
Metrc’s tracking model is based on uniquely identified RFID tags which are produced at Metrc’s factories and shipped to licensees. Every individual marijuana plant above the state-stipulated cut-off height is required to be tagged. Additionally, to ensure traceability across the supply chain, every package transporting the dried and cured product is also required to be tagged. The tags are priced at $0.25 per piece for packages and $0.45 per piece for plants. This tag follows the plant through its entire life cycle till sale to the end consumer. The regulatory authority sets out stringent rules for reporting sales. At the core of these rules is the requirement that every sale be accompanied by the corresponding tracking information.
Striking the Balance
The Metrc reporting system is housed at a central database controlled by the state regulator and the company makes APIs available to POS systems used across the supply chain. The hybrid model of sales reporting is superior to purely state-based or purely free-market based regulatory reporting since it gives individual members of the value chain freedom to choose their POS software so long as they comply with the central regulatory APIs. With the expansion of the cannabis retail market and the accompanying fragmentation of the POS software market, Metrc’s dominance of the POS software market has reduced over time.
Another challenge for the regulatory system is to balance public health outcomes with public access objectives. This is achieved by setting caps on sales permitted to individuals and regulating the ratio of the psychoactive component Tetrahydrocannabinol (THC) and the non-psychoactive component cannabidiol (CBD). Metrc allows for this by checking consumers’ purchase history in real time at the POS. Such a check also automatically limits the diversion of legal marijuana into the black market.
Setting Up and Settling In
As with any software system, however, teething troubles were inevitable. While some retailers faced slow speeds due to high levels of user traffic, others complained of the extra effort required for updating inventory in the reporting software. Overall, however, Metrc’s track record of implementing regulatory software systems seems to be largely glitch-free. The company’s website has detailed state-wise steps and FAQs for registering as a licensee apart from links to online resources for training.
Strategic Choices for Metrc
As more states in the US look to legalize cannabis use, the firm faces a strategic choice – are its resources better invested in strengthening its position as the leading provider of regulatory use software or should they be more aggressive in their POS software lines? The former approach would mean that the potential market is limited. The US and Canada are expected to account for 90% of the legal cannabis market even in 2022 after which fresh growth avenues for a regulatory software might be hard to come by. However, the latter approach might force the company to redefine its identity from a supply chain firm to a cannabis value chain enabler. Given that Metrc is a turnkey product solution derived from the parent firm’s supply chain inventory tracking software, the firm’s evolving strategic interests would play a part in answering this question.
Whichever approach the firm chooses, it is clear that while the field of regulatory inventory monitoring might be the site of immediate battle lines between Metrc and its competitors, the true long-term challenge of the industry may lie in monetizing the data and applying the learning from the cannabis legalization wave to other fields where such inventory tracking is desirable. It would be interesting to observe how Metrc and other players in this space evolve their business ideologies to fit this evolving need.
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