XPost: alt.politics.marijuana, alt.atheism, sac.politics
XPost: alt.society.liberalism

Vince Ning has a singular perspective on California's weed industry.
He's the CEO and co-founder of Nabis, the state's largest pot
distribution company, which interacts with every single pot retailer in
the state. When Ning looks out across California's legal weed industry,
he sees a market in long, drawn-out freefall.

"It's like a wave crashing in slow motion," Ning recently told SFGATE.
"People thought the big crash was going to happen in 2022, and there was certainly a crash, but things continued to get worse in 2023. And we are
still in 2024, and things aren't looking that much better."

The latest data confirms Ning's point of view, with signs of economic
trouble nearly everywhere you look: Overall sales have been falling for
the past two years. The number of legal cannabis growers and brands has decreased by more than 70% since legalization first went into effect,
according to the Mercury News. A recent report found that pot companies
owe the state more than $730 million in back taxes, money that
California likely will never see as most of those companies have already folded.

Furthermore, very few new farms are opening, even in places like
Humboldt County, the original capital of cannabis cultivation in
California. Overall employment in the legal industry is also falling.
Even the sacred mantra of California's cannabis market - that it's the
largest legal market for weed in the world - is at risk, as Michigan now
sells more cannabis products per month than California.

Most analysts say that there's no end in sight to the industry's
contraction. Or as Ning puts it, "We're still not fully bottomed out."

This is hardly the outcome Californians predicted in 2016, when voters legalized pot. There were already warning signs back then that making
money in legal weed was nearly impossible in the four states that had
legalized pot before California, but economists still issued sky-high predictions for the market's size. More than 10,000 businesses were
launched as entrepreneurs jumped into the so-called Green Rush.

Yet today, six years after legal sales started, the first wave of
California's legal cannabis industry is crashing.

California's Green Rush
California, with its population of more than 39 million people in 2016,
was irresistible to cannabis entrepreneurs. The Golden State's massive population meant that voters had suddenly doubled the scale of America's
market for legal weed by approving legalization of recreational
cannabis. It would take two years for legal sales to launch, but
capitalists wasted no time investing billions into California's pot
market.

Companies like the retail chain MedMen and distributor Herbl raised
massive sums of money under the promise that they would be virtually
printing cash. The bet was that folks who may not have been comfortable purchasing illegally, but were hesitant to get into the medical
marijuana system, would spend money in recreational pot stores, opening
up a whole new subset of customers. Thousands of farmers applied to grow cannabis to feed the state's massive new cannabis market.

Nicole Skibola can still remember the runaway optimism among
entrepreneurs at the time. She joined thousands of folks in opening a
new pot business, launching Cosmic View, a Sonoma County pot
manufacturer specializing in edibles, topicals and medical-focused
products, with her mother in 2017. Skibola and her mother are both
cancer survivors who found relief using cannabis during their fights
with the disease. They put every ounce of effort into their business,
sourcing ingredients like local Sonoma County olive oil for use in
cannabis tinctures and using only the best small-batch cannabis they
could find.

"Looking back I'm like, man, we were naive," Skibola told SFGATE in an
April interview. "We all thought California was different. California is
a huge market. California is sophisticated. California is the cannabis
capital of the world. I think there was a hope that California was going
to break the mold of other states that had stagnated [and other]
companies [that] were already starting to falter."

But with the birth of a new legal industry also came a new maze of
bureaucracy. California's many layers of government also wanted a share
of the newly flowing cash. The 2016 legalization initiative gave local governments nearly total control over regulations, which allowed
politicians at both the city and county level to restrict how many
licenses were allowed in their communities. They could also require
hundreds of thousands of dollars in licensing fees, a trend that one
industry blog called "extortionate" in 2019. In some cases, California's
local pot laws allowed politicians to engage in outright criminal
corruption, as Politico reported in detail in 2020.

In short, lawmakers across the state saw the new industry as a "cash cow
that needed to be milked," according to Dennis Bozanich, who worked as a cannabis regulator in Santa Barbara (he was once deemed the "cannabis
czar" by a local paper) during the first years of legalization. He now
runs his own consulting practice for government affairs.

"I think everybody got greedy," Bozanich told SFGATE, referring to both
private companies that expanded too fast and government officials who
created expensive regulations.

When sales first opened in 2018, things looked strong. A multibillion
dollar pot market grew from nothing in a matter of months. The COVID-19 pandemic gave the market an additional boost in 2020 and 2021, when
consumers across the West Coast spent more money on pot as they were
stuck at home during pandemic lockdowns.

But the growth didn't last long. California's pot sales peaked in early
2021 and have since been coasting at a lethargic and slightly downward trajectory, with overall sales much lower than the estimates from pre-legalization had predicted. For the thousands of new pot business
owners who invested heavily on the assumption their businesses would
grow quickly - and keep growing for years - that spelled disaster. By
the end of 2021, California was offering not a money-printing machine,
but an overinvested market with nowhere near enough people buying pot.

Now, midway through 2024, thousands of pot companies have gone out of
business, from the state's biggest players like MedMen and Herbl to
small family-run companies like Skibola's Cosmic View. She decided to
shut down her business this past April.

"This is a conscious choice for us to no longer participate in what is a
broken regulatory system. It's not like we ran out of money and had no
choice; we decided that it was simply too painful to continue," Skibola
said. "I hear all the time, 'Next year! Next year will be better!' But
next year is never better. ... I personally think that it's only going to
get worse."

Weak cannabis sales
California has the largest legal market for weed in the world by total
retail sales - a fact Gov. Gavin Newsom likes to point out - but that's
not because California's pot stores are particularly busy or profitable. California ranks 14th on annual retail sales per resident, behind every
other West Coast state, with only $129 in legal pot sold per resident.
That's less than half of the $271 sold per resident in Colorado,
according to an April report by LeafLink, a cannabis data company.

These meek retail sales numbers have resulted in California no longer
having the largest market in the world by individual products sold.
Michigan now sells more overall cannabis products than California,
despite having only a quarter of the population.

They've also created a devastating cascade of market failures.

First, cannabis farms started going out of business, as weak retail
sales and plummeting wholesale prices turned historic farms
unprofitable. Then, the cash crunch came for distributors, which are the legally required middlemen between producers and retailers. With
retailers running out of money, they stopped paying their bills to distributors. Producers and distributors kept sending legal pot to
stores in the hopes they'd get paid eventually, but that only created a
massive debt bubble. Now it's bursting, bringing companies down across
the state. Most famously, Herbl, once the largest pot distributor in California, collapsed last June.

The economic crunch has now come for retailers, with hundreds of stores
across the state on the verge of failure. The bankruptcy declaration of
MedMen, a cannabis retail chain that was valued at more than a billion
dollars when California's legal market first launched, in April served
as a warning that things really are dire. The California Department of
Tax and Fee Administration said last month that 15% of retailers and distributors are in default on their taxes, which analysts say is close
to a death sentence for those businesses as they face a 50% penalty if
they miss a single tax payment.

Finally, the problem has worked its way to the government: An April
report found the state was owed approximately $732 million in overdue
cannabis taxes, money that the government will likely never see because
72% of those companies have gone out of business. Turns out the
regulatory maze that led to sky-high licensing fees and tax burdens may
not have actually been the way for communities to make money. Local
governments from Sonoma County to Monterey County are finding that
cannabis tax revenue cannot cover the costs of regulating the industry.

Perhaps that is the most powerful sign that California's legal weed
economy is in trouble: Even the taxman is struggling to make money
selling legal cannabis.

Illicit market thrives
While California's legal market has struggled, a massive underground pot economy has thrived. Billions of dollars of cannabis is being grown,
packaged and sold at illegal stores that often look like fully licensed dispensaries. Estimates vary on how large the illicit market is, but the
head of enforcement for the state Department of Cannabis Control
recently told NPR that the illicit market is "definitely larger" than
the legal market.

California has created an almost perfect environment to push customers
toward the illicit market. It's extremely expensive to open a legal
business, thanks to high taxes and expensive regulations, and local bans
have meant that a majority of the state is still off-limits to legal
businesses even if an entrepreneur did want to pay to set up shop.
Meanwhile, penalties for running an illegal business were largely
reduced from criminal penalties to financial fines in an attempt to
reduce the racial harms of cannabis prohibition, which
disproportionately impacted people of color.

If a legal business does get up and running, it has to contend with a significant tax burden. California has a 15% excise tax rate on pot, but
the effective tax rate can climb to as high as 34% when factoring in
state sales tax and local taxes. That's made California's legal pot
extremely expensive compared with other West Coast states - and made the illicit products, which are sold tax free, a cheap alternative.

All together, it's created a situation where many entrepreneurs would
rather take their chances making money in the illicit market than
attempt to run a legal business. Jay Moss, a lieutenant at the Los
Angeles County Sheriff's Department, recently told the Los Angeles Times
that some illegal pot shops reopen within hours of being shut down and
look at the financial penalties as simply "the cost of doing business."

These illicit sales undercut the legal market from every corner,
depriving licensed businesses of customers they need to stay profitable
and governments of tax revenue.

Who's left in California's cannabis market?
Some of California's pot problems have little to do with the state
itself: Nearly all of the states that were first to legalize cannabis
have seen decreased sales with many legal businesses struggling. That's
because the efficiencies of capitalism have dropped the legal price of
pot precipitously, a dynamic predicted by economists, and made it harder
to turn a profit selling legal cannabis. Federal prohibition has also
been a thorn in the side of pot companies, as federal law makes it significantly more expensive to run these businesses and forces the
companies to pay incredibly high tax rates.

There's also the reality that the majority of businesses fail five years
after they are founded. With legal sales six years old in California, it
isn't completely surprising that many of the businesses that first
launched are now underwater.

Still, pessimism is the default perspective inside California's legal
industry. The mounting business debts in California's legal market have
been compared to an "extinction event" and left some academics studying California's market asking whether legal weed can ever win.

Some, however, are quietly wondering whether what's happened has been a necessary if painful winnowing.

Wesley Hein, an executive at Mammoth Distribution and board member of
the California Distributors Association, compared the present pot crash
to the dot-com crash of 2001 and 2002, when the Nasdaq lost 78% of its
value in two years as exuberance in the Internet Age ended with
widespread business failures.

"It looked like anything associated with technology was going to go out
of business. And one after another they were going down," Hein told
SFGATE. "But out of those ashes the companies that had real business ...
were growing. Google, eBay, PayPal all came when it felt like the sky
was falling."

There are reasons to think that, even with its systemic problems and
nearly constant failures, California's market could produce the future
great pot companies. It has the size that would allow a company to scale without crossing state lines, a necessity given that the federal ban on marijuana prohibits weed-legal states from trading products between each
other. There's also a theory that given how turbulent California's
market has been, any company that has survived the crash of this first
cannabis wave may be more likely to thrive if the market becomes calmer
in the future.

Perhaps there's no better example of that than Nabis, which formed out
of the famed Y Combinator startup accelerator. The company grew slowly
at first - Ning, its co-founder and CEO, even delivered cannabis himself
early in the company's life - but it's now on a meteoric rise. In 2023,
it was one of the fastest growing private companies in the world,
according to Inc, and opened a new 87,000-square-foot distribution
facility in the Central Valley, which Nabis claims makes it the largest
such marijuana facility in the world. The company is now expanding to
Nevada and New York.

Ning told SFGATE that even with the industry struggling all around the
state, "cannabis isn't going anywhere." If anything, he feels individual company failures could help surviving businesses by limiting
competition. That's certainly been the case for Nabis, which has rapidly
filled the void left by Herbl's collapse and even purchased some of
Herbl's former assets earlier this year.

"More people adopt [cannabis] every day into their daily lives. Someone
has to serve them, and if there's fewer operators out there to do so and
times are getting tough, with consolidation happening there's going to
be only so many players that will last," Ning said.

https://www.sfgate.com/cannabis/article/california-cannabis-economy-crash -19492956.php

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