Herbl, previously a key cannabis distributor in California, once managed impressive sales of over $700 million and worked with over 1,000 retailers. However, despite this success, the company faced a dramatic collapse, entering into receivership in June of last year. Herbl’s success and eventual collapse offers critical lessons for other cannabis distributors who hope to avoid the same fate.
Herbl’s downfall
Herbl’s downfall can partially be attributed to the delicate nature of the mandatory distributor model in California. Under the distributor model, brands are required to use licensed distributors, such as Herbl, to sell their products. These guidelines positioned Herbl as a financial intermediary, responsible for large monetary transactions between the producers (brands and cultivators) and the end-sellers (dispensaries).
Unfortunately, Herbl faced challenges in collecting payments from retailers. This led to a cash flow bottleneck and stressed Herbl’s ability to manage its finances effectively, resulting in a default on a major loan. This was compounded by the company’s shift in payment terms from 45 to 60 days, which eroded partner confidence and raised red flags among suppliers and clients alike about the company’s capacity to fulfill its financial commitments. These financial challenges resulted in many of Herbl’s largest brand partners leaving their platform.
Amidst lawsuits from suppliers and partners, Herbl has initiated lawsuits of their own against at least ten retailers and delivery services over outstanding debts. The amounts due vary significantly, with claims ranging from approximately $22,000 from General Verde Organics, a Southern California entity, to more than $123,000 from Urban Buds, a delivery service operating in the Los Angeles area.
Broader implications for the cannabis industry
The collapse of Herbl signifies more than just the failure of a single company; it illuminates systemic financial issues prevalent in California’s cannabis industry. Distributors are required to manage large sums of money and often are forced to front the costs for retailers. This model naturally leads to significant cash flow issues when businesses begin to struggle with collecting overdue invoices. When one end of the supply chain fails to pay up, the effects can be felt all the way down.
There’s a growing conversation in the industry about restructuring this framework to balance the goals of regulation with the operational realities of cannabis businesses. This may involve revising existing laws and regulations to reduce the burden on distributors and other stakeholders within the cannabis supply chain.
Furthermore, the fallout from Herbl’s downfall may have a domino effect, particularly impacting smaller and emerging cannabis businesses. These entities often rely heavily on distributors for market access and may face increased challenges in the wake of such a significant industry shake-up. The situation highlights the need for support mechanisms and perhaps more favorable regulatory conditions to nurture the growth of smaller players in the field.
How other distributors can avoid the same fate:
- Financial risk management: Effective financial planning and risk assessment are crucial. Businesses need to avoid over-reliance on borrowed capital and maintain a sustainable debt-to-equity ratio.
- Adaptive business models: The industry’s regulatory fluctuations and market instability demand adaptability in business strategies. Distributors should be ready to pivot and adjust their models to new market realities, especially in an industry as volatile as cannabis.
- Credit and relationship management: Extending credit requires a cautious approach, including stringent credit checks and securing agreements with collateral. Additionally, building and maintaining strong relationships with retail partners and ensuring timely payments is essential for smooth operations.
- Regulatory navigation and advocacy: Staying abreast of regulatory changes and actively participating in policy discussions can help businesses adapt to legal landscapes. Advocacy for more favorable conditions and regulatory reforms is the best way to ensure the long-term sustainability of the industry.
- Operational efficiency and cost management: Streamlining operations to focus on core competencies and reducing overhead costs can enhance business resilience. This may require embracing technology and automation where feasible to help improve efficiency and cost savings. This can not only produce immediate benefits, but also sets you up for success in the face of future disruptions.
How data analytics can help
The volatile nature of the cannabis industry highlights distributors’ need for superior context in their decision-making. With the right analytics solution, businesses can gain a comprehensive “seed-to-sale” view of their operations. These insights allow them to track and manage credit lines and accounts and ensure they regulate their extended payment terms more effectively. Furthermore, data analytics platforms can provide enhanced visibility into supplier and customer relationships, which is crucial for securing long-term sustainability.
Although businesses can’t control every variable or account for every overdue invoice, the right analytics platform can provide them with the context they need to survive when these obstacles do arise.
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