To say that California’s cannabis industry has not met the mark would be a monumental understatement. And unfortunately, any regulatory missteps in the golden state can be very costly, as is evidenced by the new $100 million government bailout that was recently approved to help struggling canna-businesses.
California’s cannabis bailout: Not only is California the dominant economy in the US and one of the wealthiest states in the nation, it’s also home to the largest and most boisterous cannabis market in the entire world. When it comes to cannabis trends, or any trends for that matter, look west to see where the rest of the country will end up. However, just because California is pulling in big money from nearly all directions, that doesn’t necessarily mean that everything is running as smoothly as it appears to the outside eye.
This is especially true in regard to the cannabis industry. Sure, it’s the largest market in the world and all the newest products and pot-related fads start there, but it’s certainly not always an easy ride, and it never has been. California’s cannabis industry growing pains serve as a warning to other states that have just legalized or plan on doing so and are still trying to navigate the complicated landscape of marijuana regulations, tax rates, social-equity issues, and black-market competition.
The cannabis industry can be complicated, and this California Cannabis bailout is just the beginning. It may seem like a goldmine, and it definitely has the potential to be, but it takes a lot of work, dedication, and jumping through hoops. If you’d like to learn more about the industry, make sure to subscribe to The Medical Cannabis Weekly Newsletter. If you’re looking for exclusive deals on flowers and other products, check out our CBD Flowers Weekly Newsletter. For deals on the exotic cannabinoids, such as Delta 8, Delta 10 THC, THCV & THC-O, subscribe to the Delta 8 Weekly newsletter.
More On California’s Cannabis Issues
California’s Cannabis bailout didn’t arrived out of the blue. Much of California’s pot problems are blamed on competition from the state’s expansive illicit market, which according to New Frontier Data is valued at roughly $66 million. But what exactly constitutes an ‘illegal market’ and what factors are driving consumers to shop outside of licensed dispensaries?
Let’s start with what is considered illicit in the world of cannabis. There are the obvious – illegal growers, street dealers, gangs/cartels, etc. – but a large portion of black-market sales come from unlicensed dispensaries. Customers who shop there may or may not know that the store is not above board, but regardless, these stores take a massive amount of traffic and business from legal shops.
That said, the reasons for why a store would remain unlicensed are not always clear cut. Legalization in California, made official in 2016, has been messy from the very beginning. From insanely high licensing and operating costs, to incredibly confusing tax structures, and varying rules by city and county, it’s enough to make any business owner’s head spin.
According to Steve Allan, chief executive officer of the Parent Company, which has acquired several cannabis firms in California, only an estimated 700 dispensaries out of the state’s exiting 10,000 are fully legal. “That’s left a swathe of companies in a gray area. Others have tried to make the transition but are still struggling with the process. This money tries to make up for what has been a slow, heavy red-tape process of getting these dispensaries up and going.”
Taxes, something that California is known for, impact both consumers and businesses and continue pushing everyone further into the grey/black market area. Consumers are hit by higher prices and will go searching for the best deals while business owners are stuck paying so much for absolutely anything pertaining to running their companies that, for many, the profits are negligible and even non-existent in some cases.
Additionally, the cost to even get a foot in the door in the first place is so high that it has prevented many small businesses, the mom-and-pop shops if you will, from transitioning into the legal market. Only the bigger dispensaries or people coming in with a large cash fund were able to fast-track the process and get their businesses up and running in a reasonable time frame. Everyone else was left to scramble.
“Too big of a hurdle for many smaller operators,” Allan added. “Cities and counties also didn’t roll out programs quickly enough to encourage legacy sellers to get licensed because they worried the public wouldn’t like the government helping the once illegal industry.” Ironic considering where we are now.
One thing California does better than most states is establishing safety and quality-control standards in general but this trickles down to the cannabis industry of course. California cannabis products are some of the cleanest you can find, and this is all thanks to very strict testing guidelines that prevent contaminated, low-quality products from being sold to consumers.
Unfortunately, the extensive safety regulations have also contributed to the higher sticker prices. Soaring demand for third-party laboratory testing has artificially increased the cost of the already expensive lab testing and has enticed unqualified, and even unscrupulous, players into this sector of the industry.
In this aspect, California’s legal cannabis industry fell short and is still struggling to catch up. Cannabis regulators are woefully understaffed. This has created an uneven playing field where quality labs are being undercut by inferior operations. An obvious losing situation for pretty much everyone involved except the shady labs.
California Cannabis Industry Bailout
I’m sure no one would have imagined we would get to this point. Not only because it’s so farfetched for the government to throwing $100 million at an industry that is still federally illegal, but because who could have predicted that it would ever be difficult to sell pot on the West Coast? The bailout, which was approved last month, would be dispersed in the form of grants given to local agencies who will help cannabis businesses throughout California that are stuck in the process of converting their provisional licenses to permanent ones.
As it turns out, the process was so difficult and expensive in California that roughly 82% of currently operating dispensaries still hold provisional permits, stating they are unable to afford the cost or put forth the time required to make everything official. This has led to Governor Gavin Newsome proposing a six-month extension on the deadline to finalize licensing issues.
“Gov. Newsom is dedicated to the success of the legal cannabis industry in California,” Nicole Elliott, the governor’s senior advisor on cannabis, said. “The purpose of this one-time $100 million in grant funding is to aid locals and provisional licensees, many of which are small businesses, legacy operators, and equity applicants, in more expeditiously migrating to annual licensure.”
Again, the money won’t go directly to the business owners, but will instead be provided to local agencies that hold the largest number of provisional licenses. The funds will then be dispersed at the city level and who exactly gets help from that point has yet to be determined. Regionally, the money will be split between Los Angeles, Long Beach, San Francisco, Oakland, Commerce, Adelanto, and Desert Hot Springs.
What Other Legal Markets Can Learn From California
Despite California’s status as a cannabis market leader, their road to legalization has been a cautionary tale for states that are trying to establish successful weed programs and avoid problems experienced by industry trailblazers. One of the most important lessons to be learned here is that licensing and operating costs need to be reasonable. Demand for pot will never dwindle, and if no one can afford to legally own a cannabis business they’ll find a way to sell it illegal – which means the state doesn’t get any income from these transactions.
Among these costs include taxes that are insanely high and levied at numerous different points in the seed-to-sale process. If you have ever shopped online at Weedmaps.com or similar sites, you’ve likely noticed how much extra the taxes add to your out-the-door price. Accounting for sales and excise taxes, you’re looking at up to a 40 percent markup at some stores.
California’s black market is massive and well-established, so it will be hard to compete with even if everything goes according to plan. Making it easier for legal businesses to function is definitely the first and most important step in this equation. Until the legal market can compete with the low costs and conveniences of buying from an unlicensed seller, the illicit market will continue to thrive. Although, I will say this, if you ever go to a state where cannabis is still illegal and you’re forced to buy in the black market (like me currently) you’ll realize that prices in California’s legal industry are much lower comparatively. For example, I was getting ounces for $140, tax included, at a legal shop in California, here in Indiana I’m paying an average of $200 per ounce on the street.
Regardless, a solution needs to be reached and this is why the bailout was proposed. It’s only a temporary resolution, but it’s all part of a larger plan to bring more stability to the state. Titled the “California Comeback” plan, Newsom intends to use $630 million in future tax funds from legal cannabis sales to put towards healthcare, environmental protection, and public safety.
Final Thoughts on The California Cannabis Bailout
California’s cannabis industry is not a failure, even with this new bailout, and the state is still at the forefront of progressive cannabis legalization as well as new product innovation. That said, there are many unique challenges to operating a marijuana business (or any business, really) in the golden state. From high costs to ridiculous tax codes to combating a thriving black market, it’s safe to say there are still a few threads out of place in California’s pot industry. If the state can find a way to mediate these issues, and actually enforce the new laws once they are voted on, California can come out on top once again.
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