.Green Is in the Red

California’s cannabis industry is still struggling to make a profit

Advocates of the legal-cannabis business, including those in California, applaud whenever another state decides to legalize. In the long run, state-level legalization will help the industry as a whole. It means more customers for legal pot, which helps California companies operating in other states, and it further encourages Congress and the president to legalize pot nationally (though how encouraged they really are remains frustratingly unclear).

In the short term, though, every new legal state represents, in a way, a new competitor for the beleaguered California cannabis industry. Sans federal legalization, every state is a separate market, and nationally focused businesses (called multi-state operators or MSOs) pick and choose which markets they want to operate in, depending on market conditions.

Market conditions in California are abysmal, and they seem likely to stay that way in 2023. As a result, MSOs are starting to pull out of the state. The highly regarded, Colorado-based edibles producer Wana Brands quietly left the state early last year after two years of trying and failing to gain a foothold here. 

California is “a losing market for us in terms of overall profitability,” Wana’s chief marketing officer, Joe Hodas, recently told the Green Market Report, a cannabis trade publisher. “And where we looked at where we could put our resources and our time, there were just significant swaths of the country that we’re growing in that felt like the better place to put our dollars and our resources.”

Wana now operates in a dozen states across the country, including medical-only ones like Oklahoma, with more on the way. The fact that it has abandoned California, the largest cannabis market in the country, speaks volumes about how challenging it is for cannabis companies to do business here.

Another big operator, Florida-based Trulieve, has closed some of the handful of dispensaries it still operates in the state. It’s hard to tell what the company has planned for California because the company didn’t respond to a request for comment and because news of store closures came via a conference call with investors in which CEO Kim Rivers spoke in a near-indecipherable form of corporatese. 

“[W]e have made the decision to close select California retail locations,” she said on the August call. “Jettisoning non-core assets and activities allows our teams to concentrate on more impactful areas of our business. Across our retail platform, we are focusing on performance within our high conviction markets, adding dispensaries in our core states, increasing the sale of branded products through branded retail and utilizing data to meet evolving customer preferences.”

Or, in English: California is a bitch of a state to operate in. Truelieve’s “core states” include its home state of Florida and nine others. In some of those, it operates dozens of dispensaries. It even has 10 in West Virginia. In California, there are just three Trulieve outlets remaining, in Chula Vista, Grover Beach and Napa. That California isn’t one of the large operator’s “core states” says nothing good about the market here.

Meanwhile, both out-of-state MSOs and California-based companies laid off employees in droves in 2022. Last month, Sonoma Lab Works, a testing facility in Santa Rosa, shut down and laid off all of its two dozen or so employees. Irvine-based Weedmaps, the San Francisco-based Eaze and the Bend, OR-based Dutchie all announced layoffs in California last year. And Curaleaf, the Massachusetts-headquartered producer and retailer, closed a facility in Sacramento and fired about 50 employees.

The reasons for all this are not news: Revenues for legal pot businesses in California are held down by the underground market, which continues to thrive, thanks to the massive difference in price (on average, weed on the illicit market in California is more than a third cheaper than the pot one can buy at a dispensary). 

Taxes and often heavy-handed regulations, and the fact that most local governments continue to refuse to license pot companies, make doing business in the state an immense challenge for cannabis companies, and especially for dispensaries. Most other states don’t have these problems (at least not to the same degree). So these companies would rather do business there.

For some locally based businesses, the withdrawal of big, corporate, out-of-state operators might be good news, at least in the short term. It means less competition for them. But the long list of reasons for their withdrawal isn’t good news for anybody.

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