22 March 2022 |

The Problems Plaguing The Cannabis Industry In California

By Matthew O'Brien

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Breaking down the problems plaguing the cannabis industry in California… 

Cannabis companies in California are struggling.

California might be the largest cannabis market in both the United States, and the world, however, the market is by no means without its problems.

Warnings…

More than two dozen cannabis industry executives co-signed a letter to Gov. Gavin Newsome at the end of December last year, warning him California’s legal cannabis industry is on the verge of collapse if changes don’t come soon.

California’s highly-taxed, and highly-regulated legal industry is being crushed by the illicit market and many business owners are finding it impossible to compete.

The costs associated with bringing legal cannabis products to market in California are so high, that certain cultivators are choosing to destroy their cannabis crops, or simply sell it on the illicit market instead. 

Why is the illicit market winning?

This is a billion-dollar question, of which the answer is hidden in clear sight.

When California voters approved Proposition 64 in 2016 to legalize cannabis, officials initially expected to license as many as 6,000 cannabis stores in the first few years, however, in 2021 as little as 1,086 stores had so far received licenses.

To make matters worse, in 2019, industry officials estimated there were nearly 3x the number of unlicensed cannabis businesses in California vs legal operators.

Adding insult to injury, three-quarters of cities in California don’t allow cannabis retail stores to operate in their jurisdictions, giving consumers little to no choice but to purchase cannabis products from the illicit market.

Lastly, in certain regions of California where cannabis stores can operate, consumers are being asked to pay between 20-40% extra in taxes, whereas those purchasing cannabis from the illicit market pays ZERO dollars in state taxes.

The glass half full

California’s legal cannabis market is by no means unsuccessful, generating $4.4 billion USD in retail sales in 2020. 

This is an incredible accomplishment, considering the majority of California counties currently don’t allow cannabis stores to operate in their area.

Per the latest data in December 2021, the world’s largest cannabis market prohibits cannabis stores from operating in 321 out of 482 counties.

Which brands are winning?

Certain brands have seemingly been able to succeed in California. From a 2021 BDSA report the following cannabis brands are leading the way in the Golden State.

California’s top flower brands:

  1. Cannabiotix.
  2. Pacific Stone.
  3. Glass House Farms.

California’s top edible brands:

  1. Kiva.
  2. WYLD.
  3. Sunderstorm (Kahna)

California’s top vape brands:

  1. Stiiizy.
  2. Raw Garden.
  3. Select Oil.

What consumers want…

The primary reason consumers purchase cannabis products in California is to relieve pain, to relax, and to gain a better night’s sleep.

This is consistent with national metrics, too. Pain is often cited as the #1 reason why people consume cannabis, across the board, no matter where you turn. 

When it comes to which brands consumers like the most, BDSA found 22% of California cannabis consumers purchase based on brand familiarity.

Brand influence hasn’t played a major part in the cannabis space as of yet, at least not on the same level as traditional retail brands like clothing or cosmetics, however, this statistic suggests that progress is being made to build brand loyalty.

As per the previous edition of The Green Paper, THC is still one of the primary factors influencing the products consumers purchase (24%), however, cannabis products flavors top the charts at (31%).

Looking Forward

Many of the issues outlined in today’s edition of The Green Paper aren’t easily solved, however, that’s not to suggest solutions aren’t available.

Currently, the high state taxes are incentivizing consumers to purchase products from the illicit market which results in the state collecting ZERO dollars in taxes from these products which begs the question:

Would the state of California generate more taxes if they lowered the current taxation rate to entice consumers to purchase products from the legal market?

Personally, I think the answer to this question is yes.

Additionally, the state of California could invest resources to educate counties on the benefits of allowing retail stores to operate in their regions, so that consumers could finally obtain easy access to legal cannabis products across California.

Our Take

California’s cannabis industry continues to succeed in a limited capacity, despite the crushing regulations damaging countless cannabis businesses in the state. 

Long term, we remain optimistic that California will resolve all of the issues we have outlined, however, it remains unclear today which politician will champion this cause to allow California cannabis companies to truly succeed.