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7 Years After Legalization, Why Licensed Cannabis Sellers Still Face Stiff Competition From Illicit Market

Marijuana plants in small containers in a white room.
Cannabis products are displayed inside a medical marijuana dispensary on April 21, 2022, in Bloomfield, New Jersey.
(Robyn Beck
/
AFP via Getty Images)
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California’s cannabis industry is going through some tough times. The wholesale price of cannabis is down — from their peak of about $1,500 per pound in 2021 to about $600 per pound in late 2022 — and legal dispensaries, which have to fend off competition from illegal sellers, are facing dwindling profit margins.

While some see the issue as a surplus of product, others say it’s the lack of retail options, inside or outside California, that’s causing the greatest strain on the industry.

Bans of cannabis sales

Even though recreational use is legal in California, 56% of its cities and counties prohibit the sale of cannabis, according to Tony Lange, editor at the Cannabis Business Times, who was part of a panel on the topic on our newsroom's public affairs show AirTalk, which airs on 89.3 FM. California has fewer than three dispensaries per 100,000 people — compared to Oregon, for example, which has 19 per 100,000 people.

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In parts of the state that ban cannabis sales, like Bakersfield, whose metropolitan population is over 900,000, the illicit market will thrive, Lange says.

“People aren't going to drive an hour or further to buy legal cannabis when they can buy it from their neighbor next door, in these communities that ban cannabis activity,” Lange says.

Consumers can also find cheaper product in the illicit market, since legal dispensaries must charge an excise tax on the product as well as comply with a host of expensive local and state requirements for licensure.

Prohibition of interstate commerce

California, with its optimal climate for agriculture, grows far more marijuana than its 40 million residents can consume. But because marijuana is illegal at the federal level, California cannot legally transport product out of its borders, even to other states where cannabis is legal, according to Virgil Grant, the owner of the company California Cannabis. Grant not only operates retail locations in the City of L.A., but also owns and operates over 100 acres of cannabis cultivation land in Humboldt County.

Kyle Kazan, the chairman and CEO of Glass House Brands, also joined AirTalk and says other states cannot grow marijuana as readily as California can. Massachusetts, for example, is using 10% of the state’s electrical grid to grow it inside warehouses, he says — while California’s bounty, grown by generations of experienced farmers, can’t leave its borders.

“California produces 90% of strawberries for the for the country. Imagine if you could only sell strawberries in California,” Kazan says. So now there’s a “death battle” between sellers to distribute a country’s worth of product in one state, he says.

Legalizing this transport would legitimize the out-of-state transport that has been occurring for years, Grant says. He says the biggest threat to legal dispensaries is being “hammered” by these illicit operations — he says he’s currently having to bring down his prices to compete with the many illicit sellers, despite also having much higher overhead costs.

A 30-year veteran of the cannabis industry, Grant admits he took a big pay cut moving from the illegal to legal cannabis market. Kazan says a lot of people are feeling the same way: Prices are starting to rebound as fewer people renew their licenses, so fewer acres are being legally tilled for marijuana.

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Kazan says his own son, despite having easy access to his dad’s cannabis company (one of the largest in the U.S.), still goes through the illicit market.

“He says, ‘Look, Dad, it's too expensive,’” Kazan says. “And I said, ‘Yeah, but [illicit products are] not tested.”

Increasing retail opportunities

Rasha Salama, the acting director of the California Department of Cannabis Control, was also on the panel — she says the department is trying to provide a boost to legal operations, which can also prove beneficial for consumer access to regulated and tested marijuana. The department has asked Rob Bonta, California's attorney general, to formally issue an opinion in favor of legalizing commerce among states where cannabis is legal.

Additionally, they are opening up grants of up to $20 million to help California cities and counties develop and implement legal cannabis retail programs — reducing the number of jurisdictions where cannabis sales are prohibited would help decrease demand in the illicit market and improve consumer protection, Salama says.

Marijuana is still a Schedule 1 controlled substance at the federal level, which means it’s said to have no medicinal value — a claim Kazan strongly contests.

“The biggest barrier here to me is the federal government,” Kazan says. “If the federal government would get out of the way, I think you'd find the markets would would open up.”

Listen to the conversation

28:37
Cannibus Surplus 04.26.2023
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