Interesting story out of California last week where the marijuana industry is sending an SOS letter to the state government saying their legal industry is on the verge of collapse. The gist of the story is that higher taxes, not enough locations, too many fees, and too many consumers going to the illicit market are causing a financial firestorm for legal marijuana businesses.
The most striking line of the article out there is that 73% of cannabis transactions occur on the illicit market in California, and not the licensed, legal one.
This is bad for legal businesses. No taxes are paid on illegal sales, no revenue is created to pay for those state marijuana licenses, no 280E tax code relief, and a whole lot of fees for software, banking, and technology. The state has pledged $100 million to help figure out the legal cannabis industry. But that just tells half the story of why the cannabis industry may have just hit its first maturity point as an industry as a whole.
For consumers it was never about legalization; it was about accessibility.
What, what does that mean?
As the drama playing out in California proves, consumers are not worried about the legality of their transaction, they are worried about price and accessibility. Yes, lab testing is nice, but not for the 50% markup in prices legal shops have to charge to pay for all those things like licenses, storefronts, technology, tracking, security, taxes, etc.
In a recent survey on Cannabis.net’s social network, The WeedFeed, illicit growers, when asked about how business is going as we enter 2022, answered with the following type of quips:
It is fine, but not nearly as crazy as the past few years, everyone seems to have a weed guy now.
Not as busy as before, people now have plugs that are local and I am not shipping as much.
Steady but not the crazy demand from previous years, there is just so much weed around now.
Everyone has a plug.
That is a fascinating turning point in the supply/demand curve of the cannabis industry. Yes, everyone loves cannabis from the legal and illicit market, but supply is now starting to keep up with demand in many areas. Supply as a whole, including both legal and illicit suppliers, seem to be filling the overall demand curve of local cliental. Plugs, or cannabis suppliers, are getting more local, more geo-centric as people don’t want to get illegal packages in the mail and feel more comfortable buying local.
As access continues to expand for millions of people, and they get a “weed guy”, prices will come under pressure. As consumers have more choices and offerings, competition has to heat up from suppliers in order to create sales. Price points and quality will now be the king of the jungle in the consumer’s world.
Remember, every cannabis consumer survey so far has shown consumers don’t really care, or remember, anything about branding or packaging, but they do know how much they paid for a product and if the product delivered the desired results. Consumers in highly developed markets like California and Colorado has massive access to a wide variety of products and prices, both legal and illicit, and getting some product is as simple as clicking a few buttons on an app or making a phone call.
The more mature the market, especially if it has legal recreational and medical sales, the more access there is to products for the WHOLE population of that area. Need a pre-roll? Your nephew has a card, or your son knows a guy. Want some great edibles? Swing in the dispensary on the corner, or my corner store guy sells edibles on the side. Need it fast? Plenty of delivery options from both the legal market and illicit market online so you can order off a website or app. Can wait a day or two? You can still order, and have it sent in the mail to you, but who wants to wait these days when there are so many local plugs to get you your weed in a few hours?
Does that mean everyone in America has access to affordable marijuana? No, states that do not have any type of legal marijuana program will have the LEAST accessible product. As states add medical programs and growing licenses, whether caregiver or industrial, more product leaks into mainstream society. If a state has legalized both recreational and medical marijuana, then the odds are overwhelming that market saturation will start to show within 2 years. The supply eventually catches up with demand because supplying the demand generally makes someone money.
California = the laughing stock of the cannabis world; the poster child for how not to legalize. Corporations be warned: if u don’t welcome legacy to legal, we will just stay outside the system— and outcompete you for another
80 years. https://t.co/1ExOIfRJOW
— Steve DeAngelo (@stevedeangelo) December 28, 2021
California voted on legal recreational marijuana in 2016, on the same ballot Trump/Pence was on at the time. In 2022, the legal industry is on the verge of collapsing for a variety of reasons, one of them being consumers don’t mind buying on the illicit market at all, as 73% of them do. The reason they can do it is that so much product is accessible, albeit not legal, per se. If people have access to quality products at 33% off the legal price, they will look to save their wallet over the benefits of having lab-tested bud. Ten-percent off? Maybe people still pay more for that lab test, but 35 to 45% off the legal prices, load up the hookah pipe and lab testing be damned.
As California’s letter and the Cannabis.net survey shows, accessibility is starting to reach its first tipping point in America. States like Illinois and Oklahoma have vibrant illegal markets that can supply the Midwest. No longer to people have to risk years in jail driving from the Emerald Triangle to New York City. The trip is a lot shorter from illegal grows in upstate New York and Ohio vs. from San Francisco.
The scariest part going forward for the legal weed industry is that accessibility will increase forever, or until it is no longer economically viable to be an illegal cannabis grower and seller. When we get to the point where illegal growers are throwing in the towel, what happens to the legal version of those businesses that have to pay taxes, overhead, fees, licenses, etc.? They will be gone before the illicit guys as margin compression will force only the lean businesses models to survive.
It is just too dang expensive to sell weed legally in America when everyone has a plug.