Lessons from California’s Pot Industry Bailout

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Getting cannabis regulations wrong comes at a high cost, as California’s $100 million fund to help floundering marijuana businesses has made clear.

The largest U.S. state earmarked money last week to aid companies that are struggling financially in large part because of bureaucratic delays and missteps in transitioning them from temporary licenses into more stringent permanent ones. It’s a cautionary tale for other states that are figuring out how to balance social-equity provisions, tax rates and competing with an illicit market valued at $66 billion last year, according to New Frontier Data.

While California’s 15% tax on legal marijuana has been blamed for pushing consumers to the illicit market, it’s clear that much more has gone wrong. Legalization, which began in 2016, has been messy with rules varying by city and county. The process has also been slow and expensive. That weighed most on small operators, thus many haven’t transitioned to the regulated recreational market, which has more potential than medical.

Steve Allan, chief executive officer of the Parent Company, which has acquired several cannabis firms in California, estimated that only about 700 of the state’s roughly 10,000 dispensaries have become fully legal and regulated. 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, he said.

“This money tries to make up for what has been a slow, heavy red-tape process of getting these dispensaries up and going,” Allan told me in a phone interview last week.

The biggest issues are that in California it can take as long as two years to get a license and initial costs to open a regulated dispensary start at about $250,000, according to Allan. That’s too big of a hurdle for many smaller operators. 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, Allan said.

Lawsuits also gummed up the transition. After California gave out its first 100 licenses, it planned to allocate others to “social equity applicants” -- minorities and others harmed by the war on drugs. That effort got mired in the courts over who qualified.

Allan doubts the $100 million will bring much relief, calling it a “drop in the bucket” that won’t be enough to save all the struggling dispensaries. Still, his firm plans to keep consolidating what remains of a crowded market that’s still promising.

The state also sees opportunity ahead. Governor Gavin Newsom’s $100 billion “California Comeback” plan calls for $630 million in future tax funds from legalized cannabis to be spent on health care, environmental protection, and public safety.

The state’s move is also a much-needed first step reducing competition from the illegal market, Allan said. “Until you get the legal operators operating, you can’t go after the illicit market.”

NUMBER OF THE WEEK

  • $58.9 billion: The annual value of illicit cannabis sales expected in the U.S. by 2025, according to a report from New Frontier Data. This level would represent an 11% decline from 2019.

QUOTE OF THE WEEK

“The tidal wave of change regarding cannabis in America is happening,” Ben Kovler, CEO of Green Thumb Industries, a cannabis product maker, said of Connecticut lawmakers voting to legalize recreational marijuana last week. “The momentum is undeniable.”

WHAT YOU NEED TO KNOW

  • Connecticut lawmakers voted to legalize recreational marijuana, creating an expected tax revenue boost of $97 million a year. Meanwhile, Florida’s Supreme Court blocked a recreational cannabis initiative.
  • The medical marijuana program in Texas will be expanded in September to cover people who have all forms of cancer and post-traumatic stress disorders.
  • Cantourage, a medical cannabis company based in Berlin, launched a platform to connect with pharmacies and eyes an initial public offering next year.
  • Columbia Care, a multistate U.S. operator, agreed to buy Medicine Man Denver to strengthen its business in Colorado.
  • Canada’s struggles to control Covid-19 have created difficulties for marijuana companies. That includes Tilray, one of the world’s largest cannabis firms. Its stock declined after an analyst lowered estimates on pandemic “headwinds.”

©2021 Bloomberg L.P.

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