Uber and the Delivery War Could Be Headed to Cannabis Dispensaries

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  • Delivery of food and alcohol boomed during the pandemic, and some think cannabis is next, especially with hopes for federal legalization.
  • California-based cannabis delivery app Eaze, backed by Snoop Dogg, says that last year a marijuana order was placed every eight seconds, while the legal cannabis industry generated sales of over $17 billion in 2020.
  • Uber CEO Dara Khosrowshahi has indicated interest, though only that: the on-demand transportation leader has no formal plans even as it gets into alcohol sales.

The delivery wars could be headed to cannabis dispensaries next.

Throughout the pandemic, food orders boomed for DoorDash, UberEats, and Grubhub. Sales on alcohol delivery app Drizly surged. And then there is California-based cannabis delivery app Eaze, which saw new customer sign ups increase by over 70%. The company calculates that last year in California, a marijuana order was placed every eight seconds. More than $17 billion in sales was generated from the U.S. legal market, led by California, in 2020, according to research firm BDSA.

Eaze is backed by Snoop Dogg, has 800,000 customers, and has made over 7 million deliveries in California since its launch in 2014, but it isn't the only player in the space. There are a handful of cannabis delivery options that serve the entire state, and many more serving smaller regions. MedMen and Caliva offer delivery in California, and across the country, dispensaries offer their own delivery services directly to their community, where it's legal to do so.

Even where adult and recreational adult-use marijuana delivery is legal, there's red tape. For one, different states have different employment laws and product hand-off protocol for drivers. In California, for example, drivers must be W2 employees of dispensaries. There are also requirements for the delivery vehicles themselves: in California, the vehicle must not be open, like a scooter, and in Massachusetts, there are camera mandates.

Despite the regulatory hurdles, Uber CEO Dara Khosrowshahi recently suggested that his company could further evolve from ride-hailing to cannabis delivery. "When the road is clear for cannabis, when federal laws come into play, we're absolutely going to take a look at it," Khosrowshahi said in a recent CNBC "Tech Check" interview.

Uber's first acquisition of substance

For now, Uber is focused on food, with UberEats, and with its Drizly acquisition, its first foray into regulated substances: alcohol.

Drizly sister company Lantern handles cannabis delivery. Lantern was incubated within Drizly, but when the Uber-Drizly deal closes, the cannabis delivery app will become an independent subsidiary. Lantern was the first to launch adult-use cannabis delivery in Colorado in March.

Lantern president Meredith Mahoney told CNBC via email, "We're excited that the march toward federal legalization is accelerating, and that big delivery players like Uber are taking notice."

If M&A was Uber's answer to a booming alcohol delivery market, could consolidation be on the cannabis menu? Perhaps, says Eaze spokesman David Mack, but regulation will still prove to be a significant challenge. One snag for consolidation could be laws limiting delivery of cannabis alongside alcohol or food. California, a template for marijuana policy across the rest of the country, prohibits delivery of cannabis with food, or with alcohol.

Entering the U.S. cannabis economy also means getting into a business tied to a drug steeped in racial inequality. With Black Americans 3.6 times more likely to get arrested for marijuana-related offenses than their white counterparts, the playing field for legal cannabis is far from level. In fact, rapper and mogul Jay-Z is leading The Parent Company's $10 million fund to support minority entrepreneurs in cannabis who may otherwise be left behind by the marijuana boom.

The vertically integrated cannabis company, where Jay-Z serves as chief visionary officer, combined efforts in the sector from the artist and his entertainment agency ROC NATION, Left Coast Ventures and direct-to-consumer cannabis brand Caliva. The Parent Company went public in Canada via a SPAC earlier this year, trading on the NEO Exchange.

Delivery apps could eliminate costs associated with setting up storefronts and simultaneously offer exposure for women- and minority-owned brands. Eaze offers a "social equity" menu for Black-owned local stores and dispensaries, and claims the feature helps boost interest and revenue for brands that appear there.

Plenty of delivery apps and logistics companies could enter the cannabis delivery space. Logistics and delivery app Gopuff, despite its name and its origins ferrying snacks and supplies across a college campus, does not deliver marijuana. The app-based company, which ranked No. 36 on this year's Disruptor 50 list, delivers alcohol and smoking accessories like rolling trays and papers in over 600 American cities, but Gopuff has no plans to add cannabis products to its platform, according to the company. It did buy BevMo!, a chain of 300 bricks-and-mortar liquor stores on the West Coast late last year. And Uber and Gopuff recently announced a delivery partnership for "essential" items.

Cannabis distribution and logistics

Hip hop artist and original Dipset member Jim Jones recognized the barriers to delivery entry for his own cannabis company, Saucey Farms & Extracts, and last Tuesday announced a partnership with The Parent Company to manage distribution and manufacturing in California.

"We're a small to mid-sized business, so distribution isn't something that we'd normally be capable of providing on our own," says Jones. "I fully anticipate that similar businesses will follow suit in the coming months and years," Jones wrote to CNBC in a text message.

One of those businesses could be FastAF, a last mile logistics and delivery platform like Gopuff, albeit smaller, and in fewer markets. FastAF is not currently offering cannabis products, even though it, like Gopuff, operates in weed-friendly California.

FastAF operates like an online boutique, partnering with brands like Goop, Aesop, and Nike. It already sells CBD products and cannabis accessories, and Lee Hnetinka, founder and CEO of FastAF's parent company Darkstore, says they see strong demand in both categories.

FastAF plans to break into regulated products with alcohol delivery soon, but a few barriers remain when it comes to cannabis. One is the discrepancy across jurisdictions: "When we're ready to go to market with cannabis, we want to put all of our weight behind it. We look to carry our partner brands in every one of our markets," Hnetinka said.

For Hnetinka, the other barrier, arguably the larger one, is payments.

Marijuana crime and cash

Marijuana has been legalized to varying degrees in 35 states, but since sale, distribution, and possession remain illegal federally, U.S. banks face risks in doing business with the cannabis industry. According to the American Bankers Association, any money that can be traced back to a marijuana-related business could be considered money laundering. In fact, cannabis banking is such a problem that Eaze's ex-CEO left the company and pled guilty to conspiring to bank fraud as part of a scheme to deceive banks into processing over $100 million of marijuana purchase payments.

As a result, the green business is mostly a cash business. However, for the year 2020, the U.S. Treasury Financial Crimes Enforcement Network (FinCEN) reported 684 banks and credit unions providing banking services to marijuana-related businesses. FinCEN documented over 170,000 Suspicious Activity Reports related to banking in the industry, but more than three-quarters of them were about institutions found to be compliant with the appropriate state's regulations regarding marijuana businesses. Still, it's tricky; state-by-state policy specifics complicate and stunt the industry's growth.

For lawmakers, that's where the Secure and Fair Enforcement (SAFE) Banking Act comes in. The bill, which is currently sitting with the Senate after being passed by the U.S. House, would provide a safe harbor for institutions providing banking services to marijuana-related businesses. Accounting firm Elliot Davis pointed out in a 2020 analysis that the bill won't protect card networks from federal prosecution, so even with Senate approval, the SAFE Act leaves cannabis businesses still largely cash-reliant.

Cowen Research expects the cannabis industry to generate $85 billion in U.S. sales by 2030. In New York alone, cannabis could generate $350 million a year in tax revenue and up to 60,000 new jobs, according to Governor Cuomo's estimates. California's total revenue from cannabis since January 2018 is $1.8 billion, and cannabis delivery app Eaze says that delivery comprises 10%-15% of the state's legal market. The key to a robust delivery market, and multiple players, according to Eaze spokesman Mack, is legalization legislation that envisions delivery as part of a state's cannabis business.

Federal legalization and President Biden

Cannabis is still federally considered a Schedule I drug, on par with heroin and ecstasy in what the DEA deems a "high potential for abuse."

Even if a store or dispensary is operating legally in its home state, transporting cannabis across state lines still violates the law. As a result, each jurisdiction's weed ecosystem exists in a silo, and delivery players face yet another barrier: setting up in a new state means virtually setting up from scratch, with a new network of suppliers and delivery services, as well as a new regulatory framework to navigate.

National legalization would eliminate most of the barriers to entry for cannabis and, in particular, cannabis delivery. But President Biden hasn't pushed for a review of the laws that criminalized marijuana in the first place, and GLJ Research's Gordon Johnson says that a rally earlier this year in the publicly traded cannabis space, including the Alternative Harvest ETF and cannabis stock Tilray, was fueled by faith that the Biden would, by now, have done more on the cannabis issues.

Johnson says if Biden doesn't sign an Executive Order decriminalizing, descheduling, or rescheduling marijuana, the industry's only regulatory hope sits with the SAFE Banking Act, or with whatever legislation New York Democratic Sen. Chuck Schumer presents. A move to deschedule the drug would be a boon for investor interest and capital, but it's still a risky venture.

Johnson has a $0 price target on Tilray and sees little hope for the industry in the long run, betting marijuana remains a low gross margin business with troubling economics. Eaze's bumpy financial journey reflects some of Johnson's concerns about the "green rush" of cannabis investments. Last year, Techcrunch reported on financial challenges at Eaze and a subsequent business pivot in an effort to grow margins.

The low margins and various barriers to entry may explain why venture capital funding to cannabis businesses peaked in 2019. Should the government legalize marijuana nationally, companies in logistics and delivery would face fewer hurdles to tap into the $85 billion industry, and that might rekindle investor interest. Until then, the margins, the banks, and the players are only as big as individual states allow.

Celebrity interest remains high, despite the challenges. Martha Stewart is forging ahead with her cannabis and CBD ventures; Snoop Dogg's Casa Verde VC shop continues to invest in marijuana start-ups, and The Parent Company just inked a deal to produce 900,000 pounds of cannabis, including for Jay-Z's Monogram brand. 

Smaller players in the market like Saucey Farms & Extracts remain confident that the legal obstacles will decrease and as they do getting cannabis to consumers will be on the radar of more companies. "As the cannabis industry grows and restrictions soften, distribution will be a primary focus for most organizations," Jones said.

Correction: The Parent Company inked a deal to produce 900,000 pounds of cannabis, including for Jay-Z's Monogram brand. An earlier version of this article misstated the deal terms.

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