Industry After a rough 2019, California’s cannabis industry will bloom in 2020 David Downs February 11, 2020 Share Twitter Facebook Share Print (Leafly)

Data from Leafly’s 2020 Cannabis Jobs Count indicates that legal cannabis sales in California contracted 18% year-over-year to $2.03 billion in 2019.

On a bureaucratic and social timescale, California is still at hour one of day one of legalization.

That took a toll on cannabis employment in the Golden State. From Jan. 2019 to Jan. 2020, about 8,600 previously legal cannabis jobs in California became illegal cannabis jobs or disappeared entirely.

That was due in large part to the sunsetting of medical marijuana-era collectives. Industry veterans and Canadian newcomers alike lost their shirts last year. California remains the nation’s largest cannabis employer, with an estimated 39,804 full-time jobs, but the industry remains tightly constrained by a tough licensing and regulatory environment.

The dire headlines are easy to find:

After two years of massive expansion, the California-based retail chain MedMen suffered financial difficulties that led to the resignation of CEO Adam Bierman on Jan. 31. Crunched for cash, the company has sold assets and slowed payments to vendors.

Caliva of San Jose announced 200 job cuts on Feb. 4., related to splitting with the delivery service Eaze.

Eaze itself cut 36 employees back in November.

Leading vape and tincture-maker CannaCraft laid off 40 employees, about 16% of their staff, in November.

But here’s the flip side: Legal excise tax revenues surged 60.5% year-over-year to an estimated $305.30 million in 2019 (up from $190 million in 2018). There are now more than 600 open stores and delivery services, with an estimated 300 new stores expected to open in 2020. There are 5,400 licensed farms, ensuring adequate legal supplies.

Here’s the kicker: More than 3.2 million Californians age 25+ used cannabis in the past month. Millions of dedicated cannabis consumers who live in municipalities that have banned licensed stores still await their first legal cannabis experience—which means there’s plenty of room for growth. For example, Airfield Supply Co., a San Jose dispensary, celebrated its 10-year anniversary Monday. It sees more than 1,500 customers per day; 300 of them new. Caliva plans to grow, not contract, creating new in-house driving jobs to replace its Eaze positions, the company said.

On a bureaucratic and social timescale, California is still at hour one of day one of legalization.

‘California is fucking fantastic’

Just ask Graham Farrar, CEO of Glass House—a grower/retailer based in Santa Barbara.

“I think California is fucking fantastic,” Farrar told Leafly. “There are more cannabis consumers in California than ever. It could be better, but it’s the best it’s ever been. There are more legal stores than ever, and there will be even more by the end of the year.”

Glass House operates a half-million square feet of greenhouse space for cannabis production in Santa Barbara. The company runs three retail shops and opened a fourth in Berkeley Feb. 7. Of the 120 people employed by Glass House, 40 were hired in just the past two months.

“We are hiring on a tear,” he said.

Glass House’s Santa Barbara boutique Farmacy sees 300 to 400 customers per day, with an estimated 80% of them shopping at a legal store for the first time.

Farrar is a veteran of the tech sector, and he pointed out a distinct advantage cannabis holds over hardware, software, and apps. “My last company was Sonos,” Farrar told Leafly. “When we would build a product, we didn’t know if anyone wanted it! People have been buying cannabis since doing so could send you to jail.”

Liquor stores still outnumber cannabis 21-to-1

Legal cannabis retail is a giant just beginning to stir. Compared to the state’s 600 cannabis stores, California has about 13,000 liquor stores. Illicit cannabis outlets still outnumber legal stores by an estimated ten to one.

“Someone said to me, ‘I feel like we’re late to the game.’ I said, ‘You’re late to batting practice. It’s federally illegal still. I don’t know if you can be late to something that’s not really legal.”

Even in its early stages, the legal industry is having a real impact in California. A UC Santa Barbara economist recently concluded that legal cultivation in Santa Barbara County alone has created 6,000 jobs and $458 million in economic impact.

From no rules to extreme regulation, overnight

Maximum regulation is most certainly squeezing all but the most savvy, diverse, and lucky operators out. Before Prop. 64, a medical cannabis grower could operate with near-zero regulatory oversight.

Today, licensed California cannabis growers are regulated by at least 10 state agencies including: California Fish & Wildlife, California Water Quality Control Board, California Department of Food and Ag., Bureau of Cannabis Control, California Department of Public Health, Cal OSHA, the CA Dept of Labor, EDD, Dept of Weights and Measures, Dept of Pesticide Regulation, and the CDTFA.

At the local level, they also face the local tax assessor, planning department, agriculture department, air district, sheriff, public health, fire department, city council or supervisors, and potentially local tribes.

In the game since 2010, Farrar said he’s gone from no regulations, to all the regulations. He’s seen that transition kill companies who didn’t have the compliance chops. “A lot of people went to Humboldt to be left alone.” Today, he said, “cannabis is not a left-alone market. It’s the definition of a not-left-alone-market.”

California’s overall high-tax and regulation climate doubly applies to newly legal cannabis. Farrar makes an analogy to opening an ice cream shop on State Street, Santa Barbara’s outdoor shopping district. “You don’t just go in and start selling,” he said. “You’ve got to get zoning, building, fire, and the tax man, and public health.”

Santa Barbara is an example of a local city’s regulatory journey as well. Where 14 unlicensed medical marijuana dispensaries once operated, the city now permits only three stores—out of 56 applicants ready to open up shop.

A similar radical reboot has happened in cities and counties all across the state.

Taxes do take a bite

Similarly, cannabis went from relatively untaxed to heavily taxed—an average of 29%.

The biggest pain point can be local cannabis business taxes, which can run from 0% to 15% of gross receipts. For example, Oakland’s 10% cannabis business tax continues to threaten licensees on the knife-edge of failure.

C.R.A.F.T., a longtime medical grower and licensed delivery service based in Oakland, has been battered by thinning profit margins and rising costs despite the popularity and demand for its award-winning flower. The company aims to become the Russian River Brewing of cannabis, but to do that they’ll need to find an investor for the capital to add an additional grow facility. In most other industries, C.R.A.F.T. could apply for a bank loan to expand its operation. But in cannabis, of course, there are no bank loans because of federal prohibition. Federal tax law also punishes cannabis sellers with effective business tax rates of 75% (versus the normal corporate tax rate of 21%).

Profit margins have, um, narrowed

In pre-legalization days, growing and selling cannabis carried with it a risk premium. There were no regulations or taxes, but one slipup could land you years in prison. The upside: full-on prohibition retail profits could reach 1,000% of grow costs. In today’s legal era, the prison-risk premium is near zero, but long-term legal retail cannabis profit margins will be around 15%, which is more in line with liquor stores.

“Sometimes even 10%,” said C.R.A.F.T. founder Alan Sorrentino.

To compete with other delivery services and the illicit market, C.R.A.F.T. texts customers with special offers like Skywalker OG ounces for $120. Sorrentino said he’s gained customers since the passage of Prop. 64, and now delivers in the Bay Area from San Francisco to Antioch in as little as an hour. But it’s tough.

“There’s certainly a lot more delivery services in the area and a lot more options,” he said. Customers can shop for bargains, “which is great for the consumer,” but hard on profit margins.

C.R.A.F.T. is thinking of leaving Oakland to avoid the 10% business tax since “it’s pretty much our profit after salaries.”

The city’s high taxes are now acting as a business repellent. “When investors hear ‘Oakland,’ said Sorrentino, “they don’t want to listen anymore.”

While Oakland has succeeded in raising taxes on legal companies, the city has failed to dent the illicit market. There are illicit pop-up markets in C.R.A.F.T’s own neighborhood.

“I’m from that world, so it’s hard for me to hate on it,” Sorrentino said. “But it’s certainly made it difficult to be a smaller operator. It’s amazing we’ve been able to stick it out this long.”

But city bans are softening

One of the biggest constraints on California’s legal industry has been the widespread prohibition of cannabis businesses in local municipalities. Marijuana is legal statewide, but 67% of the state’s local jurisdictions do not allow retail stores.

That’s starting to change. Cities and counties are now beginning to compete to attract cannabis dollars.

Berkeley, Oakland, Adelanto, Palm Springs, Coalinga, and Cathedral City have already lowered taxes or are doing so. Hamlets like Crescent City, Colfax, Yountville, Hemet, Suisun City, and Pacific Grove are coming online.

'I think we’re going to see a lot of tax lowering across the board, and a lot of these little communities open up just one or two dispensaries.' Amanda Ostrowitz, founder, CannaRegs.com

“I think we’re going to see a lot of tax lowering across the board, and a lot of these little communities open up just one or two dispensaries,” said Amanda Ostrowitz, regulatory attorney and founder of CannaRegs, a regulatory tracking service. “But it could have substantial impacts on communities of that size.”

For example, the rural central coast town of Lompoc has offered 0% cannabis business taxes. Glass House jumped on the deal. The company is building out a $5 million manufacturing facility there. “We’re seeing it and we’re taking advantage of it,” Farrar said.

The city of Lompoc still gets property tax revenue, as well as spending from new construction and middle-class cannabis salaries.

Similarly, the city of Eureka, up in the cannabis-growing heartland of the Emerald Triangle, is advertising easy permitting and low taxes and fees. Those features have drawn 70-plus cannabis companies to the city, including Kiksanu and Papa & Barkley. A low-tax, no-red-tape approach has attracted more than 150 high-quality local jobs and millions of dollars in industry investment in formerly vacant or blighted buildings.

Eureka advertises itself as “the only plant-friendly city in the state without a Cannabis Sales Tax.”

Delivery services are expanding

Eaze is California’s most well-known cannabis delivery service, and its recent financial woes have made headlines. But other weed runners seem to be thriving. Since retail stores are banned across two-thirds of the state, the medical marijuana-era delivery service Ganja Goddess has been running wide open, delivering legal cannabis next-day to addresses in nearly any town in California.

“We’ve been doing a lot of hiring lately,” said Zachary Pitts, head of Ganja Goddess. “We’ve been lucky to able to be expanding.”

Many of Ganja Goddess’ Prop. 64 customers are medical patients who were too scared to see a doctor or wary of the old, quasi-legal clubs. They are age 35 to 55 or older, evenly split between men and women. They’re averse to smoking, or vaping, or even edibles, after hearing about bad trips. Their modality of choice: low-dose sublinguals. Sales of those dissolving strips surged 400% as a category in 2019, said Pitts.

Ganja Goddess is looking to expand its delivery hub in Los Angeles. Pitts said the tough post-Prop. 64 business climate punished the big dogs and the little OGs. But companies in the middle have a shot at long-term survival.

“The people who just spent tons of money and went too far too fast are going to fall off,” Pitts predicted. “Some of those small shops or growers may fall off as well. But there’s a good section in that middle ground who remained flexible and adaptable to the regulatory and tax environment. If they can hold out six months to a year, they will start to see more success.”

New cannabis niches emerging

At Friday’s ribbon-cutting for iCANN Farmacy in Berkeley, Sue Taylor became the city’s first black, senior citizen cannabis store owner. Before equity programs even existed, Taylor’s team won a permit in 2016, besting all comers in a points-based application system. The city council voted unanimously to license the store, and Taylor still lost four years to kafkaesque local permitting delays. One issue alone caused a year-long delay—her building had two addresses. “The city agencies don’t talk to each other,” she said.

In the interregnum, iCANN lost one financial backer and had to find another. Nevertheless, Taylor persisted.

On Feb. 7, it was all smiles, and tears of joy in a beautiful, clean store eons beyond the ratty old shops of yore. It was a good look for legal cannabis. “We all cried,” said Taylor. “It was unbelievable, I’m still not over it.”

The Farmacy Santa Barbara has a new sister! We’re proud to present @farmacyberkeley — serving the Bay Area as of Friday, February 7 #farmacyfamily pic.twitter.com/6xb5cNay6r — The Farmacy Santa Barbara (@TheFarmacySB) February 9, 2020

iCANN is focused on serving seniors and promises private, custom consultations. Customers are coming in from ban towns like Fresno (179 miles to the east) and Redwood City (40 miles west). “They’re coming from everywhere. They say, ‘I saw you on TV.’”

On cannabis pessimism in 2020, Taylor says, “I’m not buying any of that. We gonna thrive and we gonna thrive well,” Taylor tells Leafly.

“Regardless of what the media says—It’s all what you put out. That’s what comes back to you. We have this gorgeous store. We have the top products in it, and we have caring people that work for us. Our vision is clear and our mission is strong. You got to find your niche.”

“It’s amazing,” said Glass House’s Farrar, iCANN’s new backer. “It’s such a great market to be in. And we are in such the perfect place to be. It’s not easy. But nobody promised it would be easy. But we are going to look back five years from now and it’s going to blow our minds with how far we’ve come.”

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David Downs David Downs directs news and lifestyle coverage as the California Bureau Chief for Leafly.com. He's written for WIRED, Rolling Stone and Billboard, and is the former cannabis editor of the San Francisco Chronicle, as well as the author of several cannabis books including 'Marijuana Harvest' by Ed Rosenthal and David Downs. He co-hosts The Hash podcast. TW: @davidrdowns | IG @daviddowns View David Downs's articles