.High Hopes

Cannabis industries are being hit hard, but there’s no need to despair

Thanks to the continued federal illegality of weed, there really is no “American cannabis market.” There are a bunch of independent, largely isolated state markets. At the same time, though, there are interconnections. Several big weed companies have operations in multiple states. A pot company based in Colorado can slap its brand on products for sale in California as long as those products are made from California-grown pot. A bunch of companies operate dispensaries in multiple states.

But that doesn’t really make for a single market. The restrictions that come with federal illegality make doing business much harder for multistate operators (MSOs) than it otherwise would be. But the interconnections, friction-filled as they might be, do have effects that ripple across the country (and to some degree, into foreign markets as well). The bleak conditions in California, for example, can hit an MSO pretty hard, even if that MSO is headquartered across the country.

The latest example of this is Trulieve’s decision, announced last week, to close another dispensary in California: the third one so far. The Florida-based Trulieve is the biggest dispensary operator in the country, with 187 shops. Trulieve is also exiting the Massachusetts market entirely: It will shut down its cultivation and processing facility there and close all three of the pot shops it runs.

In California, the announced closing of Trulieve’s Grover Beach store follows the company’s shutdowns of dispensaries in Palm Springs and Venice. The problem in both states: exceedingly thin profit margins as prices drop while costs either stay the same or increase. In both cases, at least some of the blame can be directed at state and local laws and regulations. 

The problems in California stem largely from high taxes (the state excise tax on cannabis sales is 15%) and from the fact that local governments have the power to ban cannabis companies from setting up shop. And most of them do: Vast swaths of the state are “pot deserts,” which obviously hurts cannabis companies that want to sell to as many people as they can.

Trulieve said the moves—which come on top of its recent closure of its wholesaling operations in Nevada—are part of its strategy of “going deep in our core markets and jettisoning non-contributive assets.” Tellingly, retail sales in both California and Massachusetts fell by 7% last year after huge gains in the previous two years. 

Somewhat amusingly (but not inaccurately), Cannabis Business Times referred to California and Massachusetts as “legacy markets.” Legal sales began in California in January 2018, and in Massachusetts a year later. Trulieve seems to be doing quite well in other states, especially ones that have only medical pot, like Georgia and Florida.

But the contagion of weak state markets has spread across the industry. The best evidence for this might be found in the news last week that the National Cannabis Industry Association, the most prominent industry lobbyist, is cutting staff, including three senior employees and two support staffers.

NCIA CEO Aaron Smith told Green Market Report that the cuts are due to “the general downturn in the industry.” Pot companies across the country, some of them longtime members of the NCIA, are cutting costs, he said, and that includes dues to membership organizations. “We’ve had members who have been members for years who aren’t renewing because they’re doing layoffs, and how can they renew a membership if they just laid off their staff?”

The dilemma, of course, is that the NCIA is working to get legalization passed, and in the meantime is trying to get Congress to approve measures like the SAFE banking bill, which would allow financial institutions to do business with pot companies without fear of liability. Until such reforms are passed, the industry’s ills will continue. But those ills are causing companies to stop supporting efforts to pass reforms.

A longer-term national outlook, though, remains good, especially if Congress finally legalizes weed. Grand View Research says legal cannabis sales in the U.S. were $13.2 billion in 2022 and estimates that they will grow by more than 14% over the next seven years.That’s impressive until one considers how much more growth there would be if cannabis companies were allowed to do business from coast to coast.

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