Steep taxes, excessively tight licensing procedures that have many well-established businesses suffering, numerous contradictory local regulations and testing bottlenecks have burdened the start of the new recreational cannabis market in California.
The state of California is the great green hope. It's called upon to become the largest adult-use cannabis market in the world, the one making more money from the sale of weed. But the picture, after over 6 months from the legalization of recreational marijuana, is not as rosy as one could expect.
During the second quarter of 2018, California state and local governments received $74.2 million from taxes on the cultivation ($4.5 million), consumption ($43.5 million) and sale ($26 million) of cannabis. Despite being 22% more than during the first three months of the year (when $4.5 million was raised), it's still well below Governor Jerry Brown's predictions stating the cannabis would bring in $175 million within the first 6 months by taxing only the growth and use of weed (two new taxes that came into force on 1st January). Under these terms, though, cannabis has only reported $82 million during the first half. Over $100 million less than anticipated.
This discouraging result hasn't really come as a surprise to the Californian cannabis industry, however, for the problems faced by those involved in the process of turning a solid medical market into an overregulated recreational market are varied and many. One of the original objectives that may, unfortunately, take more time than expected to achieve is the destruction of the black market and the creation of lawful cannabis businesses that would generate millions of dollars in taxes.
However, the difficult access to legal marijuana in some places of California with contradictory local laws, the licensing delays, the huge investment required to comply with the new rules (lower net revenues), the strict quality control requirements that slow down the testing procedures and limit the availability of products, the impossibility of many businesses to access banking services, and the high tax rates that make the black market still attractive for too many consumers, have made California's legal pot market far less profitable than expected. So many rocks on the path... Expect a bumpy ride.
Pricy legal pot benefits the black market
Many cities don't even have dispensaries and those who do struggle to offer attractive prices, due to the heightened tax rates and the overall costs they've had to bear to comply with the new regulation (labor rights, licensing, quality controls…). Consequently, a shocking number of consumers still turn to the black market.
According to a recent research study, 17% of Californian citizens bought cannabis at least once from a non-authorized seller between April and June and 84% admit to being quite likely to end up doing the same because illicit products are cheaper as well as tax-free. The same report reveals that a 5% reduction would be enough for 23% of those consumers to start purchasing weed legally. In fact, most of them are fully aware of the numerous advantages of buying legal pot: consistency in the quality, safety, customer care, reliable labelling, brand recognition… "
The illicit market outnumbers us", said Kenny Morrison, president of the California Cannabis Manufacturers Association. "You can go to a random city and find four legal stores and 20 illegal stores. What's worse, those four legal stores are charging two and three times the price of the illegal stores."
Struggling to get legal pot
According to data from BDS Analytics, the number of legal dispensaries has plunged from 1100 to 410 as of the legalization of recreational weed in California. Licensed delivery services have also dropped from 2000 to 116 with the enactment of the new regulation. Growers are no exception. Around half of the 50,000 or 60,000 cannabis farms were forced to choose between closing down or shifting to the black market, particularly the smallest ones.
Before the use of recreational marijuana became legal earlier this year, California had for decades been running the largest and oldest medical cannabis industry in the country. During all those years, growers, distributors, and retailers had built relationships that gave way to quality products. Now, the infrastructure has been smashed to bits by a slow-moving and restrictive licensing system (legal dispensaries can only work with licensed businesses), as well as by a dizzying array of local laws that, despite being federally supported, still limit or ban the sale of weed in the most conservative parts of the region. The California Growers Association has revealed that those 'pot deserts' encompass 70% of the territory and 75% of the population.
A legislative (and pretty soon a legal) battle for the legalization of marijuana is being fought in all these places. One of those laws seeks to make the delivery service possible. However, many opponents believe that this will solely serve to undermine the authority. Whatever happens, the situation is unlikely to be resolved anytime soon.
Backlogs in the labs
Before being placed on the market, cannabis products must go through very restrictive testing procedures that comply with the requirements specified by California laws, respecting, for instance, the long list of pesticides and other limited or banned substances that was extended on 1st July and will be further extended on 31st December.
"The testing costs have increased fourfold or fivefold as a result of such strict rules", says Bryce Berryessa, board member of both the California Cannabis Manufacturing Association and the California Cannabis Industry Association. To cover the extra costs, cannabis companies will have to either reduce net revenues or raise the prices that are already too high to compete with those of the black market. What's more, many of the products that don't pass the rigorous quality control tests end up being sold through illegal means.
But the problem's bigger than that. Besides slow and costly, the absence of clear guidelines on how to carry out those tests is giving way to different results for the same product. Depending on the test and the lab, a product could be suitable for the market or not.
For all those reasons, and for the typical obstacles faced by most cannabis-friendly states (such as the inability to provide easy access to banking services) and the problems specific to each region (draughts, wildfires…), cannabis seems unable to take the big leap in California. What is called upon to turn into the largest cannabis market, the green hope, is definitely struggling to overcome the obstacles that keep expanding the black market and reducing the incomes generated by the plant.