High gasoline prices undermining cannabis delivery firms, driving some to go electric

When Ari Cohen was planning to launch Denver-based cannabis delivery company Doobba, he hired an auto broker to help decide from among a Prius, Honda or Subaru.

“We were advised by the broker that probably Subaru Imprezas would be the best bet, and that’s what we have currently,” he said.

But that was before Russia’s invasion of Ukraine last month sent crude oil prices surging above $100 a barrel for the first time since 2014.

And Cohen is now wondering if he should have gone with the more fuel-efficient Prius.

Skyrocketing gasoline prices are putting pressure on North American cannabis delivery companies, many of which are already struggling to be profitable while paying out high regulatory fees and operational costs.

According to the American Automobile Association, the average price of regular gasoline as of Tuesday had increased to $4.24 per gallon compared with $2.88 per gallon one year ago.

The same market forces are playing out in Canada.

According to the Canadian Automobile Association, the average national price there has gone up from an average of 1.21 Canadian dollars (96 cents) per liter one year ago to CA$1.72 per liter now.

“I did model in a 30% increase in the gas prices and baked that in, but obviously it’s gone up way more than 30% in the last year,” said Cohen, who co-founded Doobba with his wife.

“So now just talking about how to solve that for ourselves. Do we add a service charge to the consumer? Do we include a fuel charge? What other options do we have?”

 Electric could be worthy investment

Owen Allerton, the founder and CEO of Highland Cannabis in Kitchener, Ontario, opened his store in January 2021, around the time a new wave of COVID-19 reared its head, sending the province back into lockdown.

With children at home, bad winter weather and other factors, he decided to offer delivery to ensure customers were able to get what they needed, charging CA$5 per delivery with a CA$25 minimum per order to ensure he could cover gas and compensation for the driver, who, by law, must be an employee.

An eco-conscious entrepreneur, Allerton invested in a Tesla X, but he also relied on gas-powered vehicles to ensure deliveries went smoothly through the first year of business.

But in December, the omicron coronavirus wave combined with bad weather to drive up demand for delivery again, this time with higher-than-ever gas prices.

“We thought, ‘This is crazy.’ We paid out four times what a monthly car payment would be,” Allerton said of the rise in gas prices.

“So we went down to Tesla and ordered a Model 3 as well. And now we’ve got two little Teslas in the fleet, as it were.

“And it’s been fantastic. The staff love driving it. I mean, it blows their minds.”

Before the store opens, Allerton takes the Model 3 to the local supercharging station, only 10 minutes from his home. He charges the other Tesla overnight at home.

He paid extra for the ‘extended range’ version of the Model 3, which gives him and his staff about 519 kilometers (just more than 344 miles) – unless it’s really cold outside, which can take 100 or so kilometers (62 miles) off the range.

The Model 3 also has handy functionality that makes delivery easier, such as:

“The prices went up just as we got the car,” Allerton said, estimating he also paid out about CA$5,000 on employee compensation and gas in December. “We got it just in the nick of time.”

Will Brophy, the head of operations at San Francisco-based cannabis wholesale company Nabis, said he and his team have started considering how they could go electric.

But semitrucks such as the Cascadia by Freightliner start at $160,000, and the current travel range on electric fleet and commercial vehicles could be too limited for the company’s needs.

Nabis has 75 vehicles that travel 50,000-100,000 miles each month throughout the state, consuming up to 20,000 gallons of fuel monthly.

Luckily, recent revenue growth has helped the company shoulder some of the costs.

But in addition to reducing costs wherever possible, the jump in fuel prices has eaten into Nabis’ buffer budget saved for unforeseen circumstances.

It’s getting to the point where Brophy might have to consider increasing delivery fees to the company’s retail customers.

“We’ve looked at adding a fuel surcharge and may still do so,” Brophy said.

“But we’re trying everything we can to make sure our costs stay low, because we know the rest of the supply chain is also getting pinched in other ways.

“And we don’t want to put undue stress on our partners. Because they’re feeling it in other parts of their business as well.”

Tougher for equity licensees

When he was a teenager, Michael Diaz-Rivera was convicted of trafficking cannabis and, because of his felony, wasn’t been able to participate in Colorado’s legal cannabis industry.

That is until last year, when Denver reserved its initial cannabis delivery licenses for people who had been impacted by the war on drugs. He left his teaching job to start Better Days Delivery.

Diaz-Rivera invested in a Nissan Leaf for his deliveries, an electric vehicle that he said doesn’t have quite the range he’d like and doesn’t fare well on colder Colorado days.

And it can be tricky trying to charge it in his area.

Even without managing high gas prices, Diaz-Rivera said it’s been a struggle to bring on retail partners, and he’s doing only about five deliveries per day.

As a result, he’s looking at other revenue-generating opportunities, perhaps selling merch or cannabis accessories or growing a B2B delivery business.

Christopher Fevry, the CEO of Massachusetts-based Your Green Package, said gas prices are simply another barrier to success in a long list faced by his company, which he co-founded with his wife, Lourdharry Pauyo.

But because there isn’t much they can do about fuel prices and electric vehicles cost $15,000-$20,000 more than gas-powered cars, he’s hoping to change other costly barriers.

Most significantly, the state’s requirement that two employees must be present in every delivery vehicle means he’s paying double the compensation, insurance and employee benefits for each delivery.

Each driver also must be equipped with a body camera, and each car has a camera recording security footage.

“There’s probably been thousands of cannabis deliveries done in California, Nevada and other states requiring one driver with no problems,” he said.

“But, right now, that’s like the biggest killer for us. Because even if the gas prices went up, if we didn’t have to pay two people in the vehicle, we could manage. We can be OK.”

Eaze is looking at the big picture

San Francisco-based Eaze was originally a delivery-only business that recently became vertically integrated.

It, too, is feeling the squeeze of higher gas prices, which the company tracks through the Eaze driver app and GPS units.

In Eaze’s largest markets, California and Michigan, the company doesn’t have to buy its own fleet of vehicles.

CEO Rogelio Choy noted insurance is prohibitively expensive anyway because of the federal illegality of cannabis in the U.S.

But, with plans to expand into Colorado and Florida this year, where owning vehicles to deliver cannabis is mandatory, the company will be considering what vehicles will work best with gas prices as high as they are.

And, so far, the company hasn’t increased fees to the consumer out of concern that it would only hurt sales.

“The customer is paramount to Eaze and we are mindful that inflation and higher gas prices similarly impact our customers, which we believe has resulted in a decline in the legal cannabis market overall from Q4 to Q1,” Choy said.

“We are evaluating how to best navigate the sharp and unexpected rise in gas prices, such as incremental surcharges, but Eaze is committed to keeping costs down for customers as much as possible.”

Advice for delivery operators

 In addition to ensuring there is a contingency for any unforeseen business expenses – something that could be particularly useful in the unpredictable cannabis industry – there are a few other considerations when it comes to gas expenses and delivery.

Electric vehicles are worth considering, but less expensive models can have a lower range and less reliable customer service and infrastructure for charging.

Rural areas might not have them at all, and cold weather also affects the range and reliability of some electric cars.

A hybrid vehicle might provide better mileage while also conserving fuel.

Ensuring contracts with partners such as retailers aren’t set in stone and could be subject to renegotiation should costs increase is one good idea.

And, finally, looking at the full picture: How increasing costs to the consumer or decreasing employee compensation could impact the business as a whole is important.

Increasing costs to consumers could mean they buy less, and employees are also struggling with higher prices at the pump whether in their personal time or commuting to work.

Before increasing prices, consider cost reductions anywhere else possible, from advocating for more affordable regulations, lower taxes or reduced administrative fees.