Could ‘Big Cannabis’ overrun California? :: Cannabis Industry

Could ‘Big Cannabis’ overrun California?

The state’s cannabis industry is growing and consolidating

cannabis industry

Dispensaries such as Hugs, Metro and River City Phoenix have joined a new medical-only dispensary in Marysville to form a chain of four stores under the Perfect Union brand.

PHOTO COURTESY OF PERFECT UNION

 

There’s no doubt that California’s legal cannabis industry is growing. Last year, it raked in $2.51 billion, making it No. 1 in cannabis sales in the nation and surpassing Colorado, according to BDS Analytics.

Despite regulatory complications and lower-than-expected tax revenues, more than 64,000 Californians now work in the industry, a number projected to grow by 20% by the end of 2019, according to data collected by Leafly and Whitney Economics.

The real question: Is “Big Cannabis” overrunning our state and pushing out small businesses that were supposed to be protected by Proposition 64, which legalized recreational use?

While the answer depends on who is being asked, and how they define “Big Cannabis,” there is clear evidence that international cannabis corporations are maneuvering to enter the California market, the world’s largest.

One sign is the rush of North American cannabis companies seeking corporate partners.

In April, Canada’s largest cannabis company, Canopy Growth Corp., acquired Acreage Holdings, a Madison Avenue company that cultivates and distributes cannabis in the United States, in a deal worth $3.4 billion. Betting that federal legalization will come soon, Canopy Growth wants to expand into the lucrative American market.

In May, the Canadian cannabis producer Sunniva acquired 80% ownership of two California cannabis companies, 420 Distribution and Coachella Distillation. The purchase strengthens Sunniva’s 2019 strategy to aggressively enter the Golden State.

“The availability of capital in public markets, especially Canada, has accelerated things,” said Josh Wurzer, president of SC Laboratories Inc. in Santa Cruz. “Some of those companies are new and looking to use their cash reserves to scale quickly.”

“Others are longtime operators that now have the jet fuel to make business moves that some might see as a sign of Big Cannabis taking over,” he added.

In a big, bigger, biggest scenario, another Canadian cannabis company, Origin House, recently purchased Continuum, a California cannabis distribution firm that owns warehouse property in West Sacramento. But Origin House was itself acquired in April by Chicago cannabis retailer Cresco Labs for $1.1 billion, according to Seeking Alpha, a financial analysis firm.

Vertical integration is behind these big acquisitions. Businesses that hold multiple licenses—for growing, manufacturing, distribution and for retail sales—say they can operate more efficiently while controlling the entire cannabis production cycle from beginning to end.

“Big Cannabis is here, but California’s labyrinth of dual licensure will stymie unfamiliar operators entering the state,” said Jacqueline McGowan, director of licensing and business development at Sacramento’s K Street Consultanting. “Any transaction has four key decision makers: the seller, the buyer, the state regulators and the local government. … and the failure to consider all of those factors could result in serious buyers’ remorse.”

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Jacqueline McGowan, director of licensing and business development at K Street Consulting

PHOTO BY KEN MAGRI

Local consolidation

Consolidation is at work on the local level as well. California has become the latest of 21 states to implement “seed-to-sale” tracking. As cannabis businesses get relicensed this year, they must enact a computer tracking system that follows every phase of a plant’s life, from seed to sale.

By banding together, dispensaries can save money on overhead, including the cost of tracking software. Sacramento’s Hugs, Metro and River City Phoenix dispensaries have joined forces with a new medical-only dispensary in Marysville to form a chain of four stores under the Perfect Union brand.

Midtown’s NUG dispensary, which opened in March, is the first of five stores that the vertically integrated Oakland corporation will open in 2019. NUG CEO and founder John Oram told SN&R that, “despite over-taxation and regulation, the fact that the adult-use cannabis market is being recognized with these state taxes and regulations is a game changer for those of us that have been working for normalization for years.”

The Arden-area Kolas dispensary will soon have seven affiliate stores, all rebranded under the Kolas name, making it the largest legal cannabis chain in the Sacramento region.

“I think that the trend of consolidation and rebranding is part of a larger story in the cannabis industry,” said Paul Clemons, who advises the Kolas chain as deputy director of licensing and compliance at Sacramento’s Capitol Compliance Management.

Clemons said that Kolas, like many other companies, saw that “compliance would require a proactive and sustained effort involving resources beyond what individual smaller entities were generally capable of.”

From the perspective of smaller businesses trying to establish themselves in a booming industry, this is what Big Cannabis looks like.

The lingering gray market

Proposition 64’s authors also wanted to protect small growers who supply medical cannabis patients. They designated that the largest cultivation licenses should not be issued “until 2023,” according to the ballot measure’s original text, which also calls for a five-year moratorium on “vertically integrated businesses.”

When recreational use began in 2018, cannabis medical collectives continued their legal operations. Protected by the earlier Proposition 215 and Senate Bill 420 medical marijuana laws, these cooperatives held “sesh” events that brought patients in contact with small cannabis growers and manufacturers. The symbiotic relationship allowed vendors to earn operating cash, while patients saved significantly over dispensary prices.

But the state Bureau of Cannabis Control made cannabis collectives illegal on Jan. 9, 2019, after the implementation of Phase 4 test requirements. Medical patients were offered no alternative but to buy tested products from retail dispensaries.

Sesh vendors were advised by the bureau to get new licenses and have their products tested like everyone else, or face arrest if they continued operating. The BCC offered assistance to collectives going through the compliance process, and some businesses began making the transition, according to spokesman Alex Traverso.

But five months later, sesh events are still operating. On any given night, as many as 1,000 patients will stream in and out of a vacant strip mall, hiding in plain sight along one of Sacramento’s retail boulevards.

In keeping with the provisions of Prop. 215 and SB 420, sesh vendors insist on seeing a doctor’s recommendation. “It’s in case of arrest,” said one local grower, who spoke only if he was unnamed. He hopes that the District Attorney may go easy on vendors still following regulations that were only recently changed.

For most of these small-batch producers, legal compliance isn’t affordable. A March report on social equity programs for the Sacramento City Council set the cost for a simple outdoor growing operation at $5,000 to $10,000, with annual electricity costs of $5,000. Indoor start-ups can cost as much as $400,000.

“Without traditional methods of raising capital, entrepreneurs may need to rely on personal wealth, which individual equity applicants are less likely to have,” the report states.

One seller of a popular brand of premium concentrates at local seshes is seeking an adult-use license, but said “it’s too much paperwork, too expensive and I don’t have the money this year.”

Small businesses like his choose to operate in the gray market in hopes of eventually affording license fees that will make them legal.

“Underground sesh events are an undeniable resource for small-batch producers seeking legalization, allowing them to gain the capital necessary to become permitted distributors of cannabis goods in California,” said Thomas Shaffer, an Oakland sesh promoter and graphic artist who operates as Thomasleatherboi. Shaffer told SN&R that currently legal “brands like NUG and Cookie started at sesh events.”

cannabis industry

Maisha Bahati, co-owner of Crystal Nugs

PHOTO BY ASHLEY HAYES-STONE

Seeking social equity

Social equity programs are another way to fulfill Prop. 64’s promise to “reduce barriers to entry into the legal, regulated market.” These local programs offer assistance to individuals with previous cannabis convictions who are trying to start a cannabis business. License fees and some overhead costs are temporarily waived, giving the new business time to establish a foothold.

“This is one of the fastest growing money-making industries in our country,” Sen. Kamala Harris of California, who is seeking the 2020 Democratic presidential nomination, said at She the People 2019 Presidential Forum. “And the very young men who were trying to make money doing the same thing, but got criminalized and are now branded felons for life, are excluded from the economic opportunities that are now available because of this new industry.”

Late last year, state Sen. Steven Bradford’s SB 1294 passed, authorizing $10 million for cannabis social equity programs. California cities that qualify can fund business opportunities in neighborhoods affected by the disproportionate enforcement of cannabis crimes, dating to the 1990s.

Sacramento, Los Angeles, San Francisco, Oakland and Long Beach have already created social equity programs. Sacramento’s is called CORE (Cannabis Opportunity Reinvestment and Equity), and is administered by the Greater Sacramento Urban League and the Sacramento Asian-Pacific Chamber of Commerce.

According to Brenda Davis, who manages Sacramento Green Equity, the Urban League’s CORE program, there are some good prospects in the applicant pool. Applicants and others interested are invited to a June 20 orientation at the league’s offices. “CORE puts applicants at the front of the line,” Davis said. “But it’s still up to the city to decide who gets licensed.”

That city oversight could undergo changes, while a replacement is chosen for Sacramento’s first cannabis czar, Joe Devlin, who resigned last week, after two years in the position.

“Over the next few months, we will be organizing the outreach efforts to specific communities and developing the training and technical assistance programs,” said Brandon Lewis, the program’s manager at the chamber.

Working with the Sacramento Hispanic Chamber of Commerce, the Asian-Pacific Chamber has come up with the “Grow Green” slogan to coordinate assistance over the next two years.

“We are currently processing several participants,” Lewis said.

Sacramento’s Crystal Nugs delivery service is one of them. After making an initial inquiry, the business was invited to apply for a storefront dispensary license. Co-owners Melina Brown and Maisha Bahati said the opportunity came to them at the end of a two-year long application process for their delivery business, which opened in March.

“It’s a great program that they’re putting out there, because there are not very many minority-owned dispensaries,” Brown said.

“And we would like to be the first black-owned dispensary in Sacramento,” Bahati added.

Asked what advice she would give to prospective applicants, Brown said “long gone are your weekends, but if you have the time and patience, and look at the big picture, it will pay off.”

To be eligible for Sacramento’s CORE program, applicants must have a past cannabis conviction and lived in certain zip codes between 1980 and 2011.

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John Oram, founder and CEO of NUG

PHOTO COURTESY OF NUG

A robust black market

Even with rising legal sales, California’s black market remains bigger than the state’s legal market. An estimate by New Frontier Data, a Washington, D.C., cannabis analytics firm, said black market sales could represent as much as 80% of the entire cannabis market.

Eaze, a San Francisco online cannabis delivery service, commissioned a study in July 2018 that found 20% of Californians who bought cannabis in the previous three months bought it on the black market. Among those buyers, 84% said they would do it again, for the lower prices.

“Due to excessive regulations and high demand for California cannabis in other states, it’s no surprise we have such a thriving black market,” said Forrest Heise, director at Sacramento’s Green Solutions dispensary. “Did everybody really think that it was just going to suddenly disappear in a puff of smoke?”

California’s black market began a half-century before legal recreational cannabis, smuggled in from Mexico, Panama, Columbia and Thailand. There was little organized domestic production so pot smokers got accustomed to buying on the black market, using friends and “connections.” Foreign marijuana was eventually replaced by superior domestic sinsemilla (seedless) strains and more sophisticated growing techniques.

For many old stoners, it still works that way. A Siskiyou County microgrower whose annual crop of 20 pounds has guaranteed buyers told SN&R that 80% of his crop “goes to friends in California, some from high school years.” Over the last decade, some of his previous harvests have been smuggled into Arizona and Mexico.

As such tiny enterprises quietly go about their business throughout the state, all of this valuable data goes uncollected by cannabis analytics companies.

“While estimating the size and composition of sales within the illicit market remains challenging,” said Greg Shoenfeld, vice president of operations at BDS Analytics, “one can be certain that as long as pricing in regulated dispensaries remains high, an illicit market will continue to challenge licensed operators and the state.”

The Siskiyou grower agrees that black market prices can undercut dispensary prices. He said current black-market flower in his county sells for around $700 per pound “for fresh,” but added, “there is a tremendous supply of old stuff, especially from Oregon and not stored properly, that is cheaper.”

“If there is money to be made in the black market, it will continue to thrive, and compliant operators will continue to miss out on some of that revenue,” said Green Solution’s Heise.

Could lower cannabis taxes be a solution? Eaze’s study found that “a 5% decrease in the overall tax rate in California could drive 23% of illicit market supporters into the legal market.”

Is Big Cannabis here or not?

Those in the industry say Big Cannabis is not here quite yet, but it may be soon.

“When you say Big Cannabis, I’m guessing we’re talking along the lines of Coca-Cola, Walmart, Philip Morris,” Heise said. “Give it a few more years. We have some big players with big funding, but the billion-dollar companies haven’t really made their move yet.”

SC Labs’ Wurzer agrees.

“Regardless of what people think, the industry is still relatively nascent. Those that fear Big Cannabis has already taken over, are in for some bad news when things really start to scale,” he said. “We have to grow and scale our businesses so that when big business really comes to town, we are ready to compete with them.”

Robert Baca, executive director of the Sacramento Cannabis Industry Association, sees both sides.

“On one hand the industry has moved away from a mom-and-pop economy into a highly regulated and taxed environment in which the well capitalized and experienced are able to navigate, while smaller companies are having a difficult time surviving, and aspiring entrepreneurs are facing substantial barriers to entry,” Baca said.

On the other hand, Bacca listed barriers including “hyper regulation, lack of banking and institutional financing, and prohibitively high local, state and federal taxes” that “have impeded an era of truly ’Big Cannabis.’”

Whenever Big Cannabis does come to California, will small businesses survive?

Ryan Stoa, a professor at Concordia University School of Law in Portland, says yes. In his 2017 study published by the Harvard Law Review, Stoa wrote that his research “suggests that a local, sustainable and artisanal model of marijuana production can coexist with Big Marijuana—much as craft beer has thrived in recent years alongside the traditional macro breweries.”

Perhaps NUG’s Oram had it right: “Big Cannabis” hasn’t come to California as much as “big normalization.”

The social acceptance of cannabis as a normal part of Californians’ daily life, is the biggest development so far. Oram, for one, is optimistic.

“The sky is the limit for the future of the California cannabis market,” he said. “We can continue to become an important and essential part of the state’s economy.”

 

Source: https://www.newsreview.comBy  / Published on .

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