Many businesses are going down the white labeling route to tap into the cannabis industry. In this post, we’ll look at how exactly white labeling benefits the industry.
What Is White Labeling?
White labeling is the process of removing the brand and logo on one product or service in place of another, hence the “white label.” This exchange is a popular practice used by large, mainstream businesses, though it’s becoming more common in the cannabis industry as companies strive to find ways to work around the complex process of cannabis manufacturing.
So, you go to your favorite upscale dispensary and the budtender offers you their own Mint Chocolate Chip flower packaged in their own unique dispensary bag. You might be surprised to find that the offered flower has nothing to do with your favorite dispensary at all. The product that the budtender is offering is the white-labeled product that could also be the product sitting on the next shelf in its own packaging at a higher price.
What happens is that cannabis manufacturers take advantage of the opportunity to get their product out in larger businesses, even if it means those products are packaged and branded under a different name.
There is also such thing as private labeling. Private labeling is very similar to white labeling. The main difference is that with white labeling the manufacturer sent out his flower to dozens of other dispensaries. But the private labeled flower was created specifically for your favorite dispensary.
How Can White Labeling Help the Cannabis Industry?
What does this mean for the cannabis industry, you may be wondering? In short, a lot. Let’s look at the key benefits of white labeling in the cannabis industry.
Low Start-Up Costs for the Manufacturer
As you start breaking into the Cannabis industry, you will soon understand how costly it is to start a cannabis business. Permits, rents, cost of the purchased product, salaries, utilities, and so on. It all adds up really fast. On top of that, you have to spend money on advertising and marketing and also spend time and effort selling your product to dispensaries. Many advertising and capital issues for a new cannabis manufacturer can be solved if the company immediately goes the white label route. No need to create your own packaging and heavily invest in online advertising. Besides, white labeling will allow you to build relationships within the industry and will introduce retailers to your brand. After some time you will figure out what sells best and what does not. You will almost immediately be able to get some cash flow and have some funds to scale up your operations. After that, you could start investing in building your own brand. By that time you will also have a solid business idea that you can successfully pitch to potential investors.
Low Overhead and Tax Savings for the Retailer
Since the company doesn’t need to be on-site for the production or manufacturing of marijuana, this means very few, if any, team members need to be included in the production process. With less overhead, companies don’t need to hire additional employees, rent out larger office buildings, or operate machinery. In other words, it saves money.
Besides, many operating activities are not tax-deductible for cannabis businesses. So, not all of the expenses that the company spends on creating the product are taken on the tax return. However, COGS ( which is a price that you paid for your product) is always deductible. So, when the retailer buys a white-labeled product, the full cost of this product is deductible. If however, the retailer wants to create its own brand, some of the operating activities won’t be deductible and it would result in higher taxes paid.
Helps Focus on Business Core
Since businesses that use white labeling are not actively manufacturing the products, this means companies can focus on other elements of growing the business, such as the marketing, research, and financial aspects. They can spend time on improving core values, planning the distribution of products, strengthening partnerships and teams, and more.
Prior to new regulations** (See Section 5032),** licensed cannabis operators were allowed to produce and distribute cannabis products on behalf of unlicensed entities. The new rule forbids licensed cannabis to conduct any business activity “on behalf of, at the request of, or pursuant to a contract with any person that is not licensed under the act”. That means that before getting into a contract you will need to consult a cannabis attorney who will help you to navigate through the rules of white labeling in California.
Whether you’re hoping to sell vape pens, edibles, herbal cigarettes, or other cannabis extract products, there’s no doubt about it: getting started can be expensive and timely. That’s why white labeling might just be the way to get your foot into the door of the up-and-coming cannabis industry.
Daria Nagal, Cannabis CPA