Eaze’s Delivery Dominance Draws Scrutiny From California RegulatorsPeter HechtApril 30, 2018
At the end of 2016, when hundreds of unlicensed delivery services operated in California, Eaze enjoyed no shortage of partners. The company promoted itself as a convenient cannabis hook-up in more than 100 cities. Customers were promised fast delivery at the touch of an app.
By insisting on standardized menus, critics say, Eaze is exerting control over cannabis inventory. And if you control inventory, you need a license.
The company has become a darling of the cannabis-tech economy. Last September, Eaze booked an additional $27 million in venture capital, bringing its total to more than $50 million, with a list of investors including the Casa Verde Capital fund, whose principals include Snoop Dogg.
The genius of Eaze lies in its business model. The company doesn’t actually deliver the product. The Eaze app merely facilitates orders, collecting a service fee on every transaction.
On January 1, 2018, though, Eaze entered a new and uncertain era. California’s newly regulated cannabis market contains far fewer delivery partners. Earlier this year, Eaze said it would drop all carriers who were unable to obtain state and local cannabis licenses.
That revenue shock may have been softened by new partnerships with licensed retailers set to gain market share abandoned by non-licensed dispensaries. The San Francisco-based Eaze inked deals to facilitate delivery from some of California’s leading licensed retailers, including San Jose’s cannabis emporium Caliva and San Diego’s Urbn Leaf.
Los Angeles: Now Open for Delivery
Now Eaze billboards, promising “Marijuana Delivered – For Super Chill Vibes,” are springing up across Los Angeles, announcing the company’s first dispensary-delivery app partnerships in the state’s largest metropolis. The opportunity in LA is vast. Los Angeles previously banned cannabis delivery, but the city now allows drivers to move products from licensed dispensaries to waiting customers. And Eaze looks poised to become the delivery leader in the nation’s second largest city.
At the same time, the company is starting to take fire from some cannabis retailers. They complain that Eaze’s business model and footprint may be shaping the California market and consumer purchases through its licensing agreements.
“They would like to use our dispensaries as ‘fulfillment centers’ for their delivery,” said Jerrod Kiloh, president of the United Cannabis Business Association (UCBA), an independent policy group for marijuana retailers. “This is where they are not a technology platform. They are not giving us a choice.”
By insisting on a standardized product menu, critics say, Eaze is exerting de facto control over the inventory of its California retail partners. And they say that may be crossing a legal line – or treading perilously close.
Lori Ajax: ‘They May Need’ a License
In a recent statement to Leafly, Lori Ajax, California’s cannabis regulatory czar, questioned whether Eaze’s increasingly dominant role may require the company to obtain a state cannabis license.
Clearly, Ajax’s position on the matter is evolving. In February, Ajax said in an interview with Leafly that Eaze was not subject to state regulation. “An internet platform wouldn’t need to get a license,” she said.
On April 23, though, her office sent a follow-up statement to Leafly, suggesting that her thinking has changed:
“To conduct commercial cannabis activity in California, a business must obtain a state license,” Ajax said. “If the Eaze business model has changed from an internet platform application assisting licensees to a more direct role where they are conducting or directing cannabis activities, they may need a state license.”
There Are No Eaze Drivers
Besides Caliva and Urbn Leaf, Eaze has signed agreements to facilitate cannabis delivery with the Perennial Holistic Center and Superior Herbal Health dispensaries in Los Angeles, as well as non-storefront retailers DCSM Inc. in San Francisco, Hometown Heart in San Francisco and Oakland, and Green Coast Management Inc. on the San Francisco Bay Peninsula.
While Eaze officials declined to discuss the details of those agreements, they confirmed that partnerships with retailers include a standardized ordering menu for delivery.
That makes some competing cannabis retailers, including delivery companies vying for state licenses, angry that Eaze’s business model may have an unfair influence on the market—and the company may be gaining an additional competitive advantage by avoiding the costs of a state license. Eaze officials counter by insisting their app is a fair and legal market blessing and a worthy consumer service.
“Does Eaze help people put together great businesses and bring together partners?” said David Mack, Eaze’s senior vice-president for communications, in an interview with Leafly. “Yes. That is what platforms do.”
That doesn’t mean the company is subject to state licensing requirements, Mack added. “There is no such thing as an Eaze driver,” he said, adding: “We don’t grow, transport, test or deliver cannabis. Fact.”
Dispensaries as Fulfillment Centers
Jerrod Kiloh, president of the United Cannabis Business Association (UCBA), disagrees. He says Eaze is pushing such hard bargains with retailers—effectively forcing them to accept Eaze’s preferred vendors and product lines—that the company has become a de facto participant in cannabis business activity.
'They are telling us what we are to pre-purchase and they said they are going to negotiate the prices for all this stuff.'Jerrod Kiloh, Higher Path Dispensary, Sherman Oaks
Recently, a Los Angeles consultant for Eaze, along with the company’s director of community, met with Kiloh and six other UCBA board members. What Mack characterized as a “Hi, get-to-know-you thing” on Eaze’s part got a frosty reception from the UCBA board members.
“It was really clear what their business model was,” Kiloh said of the April 5 meeting at a Los Angeles café. “They (said they) would like to use our dispensaries as ‘fulfillment centers’ (storing product) for their delivery.”
“They are telling us what we are to pre-purchase and they said they are going to negotiate the prices for all this stuff,” said Kiloh, operator of the Higher Path dispensary in the Los Angeles community of Sherman Oaks. “I don’t get any choice of what product they have, what they deliver.”
‘Delivery Is the Future’
Kiloh’s opinion isn’t universally shared within the industry. Sky Siegel, general manager for the cannabis delivery fleet for the UCBA-member Perennial Holistic Center in L.A.’s Studio City, said he is exceptionally pleased with the dispensary’s Eaze partnership.
“Delivery is the future,” says Siegel. His dispensary’s 100 delivery drivers, Siegel says, are now exclusively filling orders through the Eaze app. “We’ve got people who would never want to step into a dispensary with a big green neon cross. We have people able to engage with cannabis in a way they never could before: You build a shopping cart. You push enter and your order is on its way.”
Siegel says his dispensary pays Eaze a licensing fee, and Eaze reimburses Perennial for delivery driver wages and mileage expenses. He says the dispensary earns an additional profit stream from the arrangement, on top of retail sales of separate as well as product selections for walk-in customers.
Kiloh says Eaze representatives told his board the company would reimburse drivers’ wages at Los Angeles’ minimum wage rate – which is $12 for companies with 26 or more employees and $10.50 for smaller businesses. Eaze’s David Mack declined to discuss those arrangements.
Terms Come Under Scrutiny
The terms of Eaze’s partnership agreements are drawing interest from the California’s Bureau of Cannabis Control, the state’s chief regulatory agency.
And at a contentious April 16 hearing in Sacramento before the state Assembly Business and Professions Committee, an official with California’s oldest operating storefront cannabis dispensary pointedly took issue with Eaze.
“This business is engaged in negotiating wholesale purchases, receiving orders verifying eligibility, recruiting drivers and essentially coordinating the supply chain,” said Sabrina Fendrick, director of government affairs for the Berkeley Patients Group dispensary, which opened in 1999. “There is not a single license number to be found on the (Eaze) website.”
Spurring Legislation in Sacramento
In a follow-up interview, Fendrick confirmed that her testimony was meant to suggest that Eaze should be licensed and regulated as an actively participating cannabis business in California.
'If you’re processing transactions and triggering cannabis delivery, at what point is it just a third-party pass through?'Sabrina Fendrick, Berkeley Patients Group dispensary
“If you’re actually processing transactions and triggering delivery of cannabis, at what point is it just a third-party pass through?” she said.
Fendrick’s testimony came during a hearing on Assembly Bill 2899 – legislation that seeks to require that advertisements for California cannabis businesses list the state license number for the business. The bill by Assemblywoman Blanca Rubio, a Democrat from the San Gabriel Valley near Los Angeles, was largely inspired by Weedmaps, the cannabis listings site whose refusal to take down ads for unlicensed delivery companies has riled California officials.
Ajax wrote a Feb. 16 letter to Weedmaps CEO Doug Francis, declaring that the company was operating in violation of state cannabis laws because “your website contains advertisements from persons offering…cannabis products for sale that are not licensed to conduct commercial cannabis activity.”
The Weedmaps Bill
Francis and Weedmaps President Chris Bills responded in a letter March 12, urging state and local governments to license more cannabis delivery business. They declared: Weedmaps is a “technology company and interactive computer service” that “is not a licensee subject for the Bureau’s purview.”
(Full disclosure: Leafly lists California cannabis retailers on the company’s dispensary finder. In March, Leafly stopped listing California dispensaries that do not have a state license.)
While Weedmaps was battling the state, Eaze submitted a letter in support of Rubio’s bill mandating state license numbers in advertising. But during the hearing for the bill, an Eaze lobbyist in the room was taken aback when Fendrick suddenly – and broadly – criticized Eaze’s business model. Fendrick said users of such online platforms have no idea where their cannabis is coming from.
“Contrary to what the previous speaker said,” said Traci Stevens, a Sacramento lobbyist for Eaze Solutions Inc., “we work through licensed retailers. Everything we have is legal. And we have not been working illegally in this market. Thank you.”
After the hearing, that same day, Eaze published the names of its retail delivery partners and their temporary state license numbers on its website for the first time.
‘Customers Want’ Standard Menus
Mack, Eaze’s senior vice-president, told Leafly that Eaze has “a good working relationship with regulators, and [we] are actively engaged in the policy making process,” even though company officials disagree with the idea that their business model may be subject to state oversight.
Mack also defends the app’s standardized cannabis ordering menu, saying it neither unfairly leverages the market nor intrudes on what other cannabis businesses want to do. “Standardization is what helps us provide consistent experiences for customers that want to purchase cannabis from these dispensaries,” he said. “It’s part of the overall choices customers have.”
Then: 10 Drivers. Now: 115.
In February, Will Senn, operator of Urbn Leaf in San Diego, told Leafly that his store’s partnership with Eaze allowed the dispensary to go on hiring spree that expanded its fleet of delivery drivers. In December 2017, Urbn Leaf employed 10 drivers. By February, that roster had grown to 115. He said a “very robust delivery operation” was bringing tremendous growth to the dispensary’s business.
'Grubhub doesn’t tell restaurants what kind of food to prepare, or negotiate wholesale food prices.'Jacqueline McGowan, K Street Consulting
But Jacqueline McGowan, director of licensing and business development for K Street Consulting, a Sacramento cannabis lobbying firm, said the Eaze model is seen as offensive by some other retailers. She contrasted the Eaze model to those for popular restaurant delivery sites. “Grubhub, doesn’t tell restaurants what kind of food to prepare, or negotiate wholesale food prices,” she said.
Kiloh said his dispensary won’t partner with Eaze. He said the arrangement required by the app intrudes on his ability to forge his own business relationships and choose his own product inventory.
“None of this made sense for a dispensary to have to give up on their own products” for delivery, he said. “To sell our own, we would have to have a whole separate set of drivers, dispatchers and a whole different menu.
“They (Eaze) said we can deliver from their menu,” Kiloh added. “Well, what about our menu?”