The long road to the controversial new cannabis license class.
Cannabis home delivery has been a hot topic in Massachusetts since May 2020, and will likely remain in the news for some time. This controversial new license class has been bandied about like a little white ball at the World Championship of Ping Pong [critical note: the US hasn’t made the list since 2014, when Ilija Lupulesku scored the runner-up position].
The attacks on home delivery won’t stop anytime soon. To properly understand the current state of marijuana home delivery in Mass requires a hard look at the controversies, the players, and their competing (and at times) conflicting interests. In this first installment of a multi-part series, we begin to explore what’s going on, how it might impact the various groups who have a dog in this fight, and what’s behind the controversy.
The Massachusetts law that legalized marijuana for adult-use (recreational purposes) included provisions for social equity and restorative justice; neat-sounding phrases that mean now that pot is legal, let’s not forget those folks who were disproportionately harmed by the War on Drugs. It’s uncomfortable to turn your back on someone who was arrested for possessing or selling a small amount of pot, when organized and well-capitalized business interests are now legally growing and selling the same product in a weed store. Massachusetts created an Economic Empowerment (“EE”) and Social Equity (“SE”) program to promote legal and licensed business opportunities to the program participants.
Unfortunately, in the licensing game, these programs didn’t create sufficient traction. In past articles we explored the challenges SEs and EEs encounter as they attempt to secure a coveted Host Community Agreement (HCA), the critical local document needed to apply for a license with the state’s Cannabis Control Commission. The CCC recognized these impediments and to assist SEs and EEs, and took two very laudable actions.
The Commission set aside home-delivery licenses exclusively for SEs and EEs for two years (since increased to three years), and developed a pre-certification program. Under this pre-certification program, prospective licensees could apply for a license pre-certification (like a pre-approval for a mortgage) by submitting approximately 40% of the conventional application information but without evidence of capital, evidence of site control, or a designated location, evidence of an executed HCA, or evidence of a completed Community Outreach Meeting. This process was intended to overcome the many obstacles faced by local SE and EE applicants. Once pre-certified, applicants could assure landlords and municipalities of their increased likelihood for license approval and the licensees would hopefully become more attractive targets for investment capital.
On May 7, 2020, the CCC announced Marijuana Establishment delivery applications would be available to Economic Empowerment Applicants and Social Equity Program Participants as of May 28.
The original business model
Licensed home-delivery operators were initially designed to function like Uber Eats, GrubHub, or DoorDash. Consumers would place orders with a licensed marijuana retailer and the operator would deliver the goods for the retailer. Under the comparable food service delivery model, delivery companies as those listed above charge app fees to the participating restaurant proprietors which range from 13% to 40% (often 30%) of the retail charge of the subject customer order.
The regulations then in effect required that home delivery operators have a written home delivery services agreement (defined as a Delivery Agreement) with participating retailers for whom the delivery agent would provide services (evidence of Delivery Agreements were not required for pre-certification). The initial regulations also provided that while home delivery was not a retail license, it would count against the three-license retail cap (this restriction has since been lifted). This provision was, ostensibly, to prevent the largest operators from owning the home-delivery process and furthering any advancement to market monopolies.
Many Massachusetts retailers saw this requirement of a Delivery Agreement as a way to exert control over the prospective licensees. Over the ensuing weeks, as numerous applicants began to solicit established retailers, retailers insisted on owning part of the delivery business* and requiring that the home delivery licensees not serve any other customers except the subject retailer, but that the retailer could contract with multiple home delivery operators. Some even insisted on a provision that the retailer have the option to buy the delivery business when the exclusivity period expired. Under the proposed scenario, in economic terms, the retailers would hold all of the pricing power. Retailers would contract with multiple delivery providers but limit each provider to that one retailer as their sole customer. [*The typical request was 9.99% because issues of control are not activated until an owner has a minimum 10% ownership interest in the licensee.]
From another direction, the popular alcohol home delivery service Drizly was launching a similar marijuana service under the name Lantern. Lantern offers “free cannabis delivery, from dispensary to your door.” Under the Lantern model, Lantern will accept consumer orders for cannabis products through its website, pass those orders to participating retailers for a fee equal to approximately 25% to 30% of the retail value of the consumer order, and delivery agents would deliver the orders for a small flat fee, paid by the retailer or consumer (but not Lantern). To make the Lantern proposition more attractive to retailers requires Lantern to find delivery agents willing to work for just a delivery fee and no sharing of the order value captured by Lantern.
While the CCC was working hard to develop a delivery model with opportunities for SEs and EEs, many of the established licensees (not all, just many) attempted to derail the process by exerting excessive demands that would relegate delivery operators to essentially an Uber driver for pot. The wealth creation and profits would stay with the established operators while the crumbs would flow to the SE and EE community.