Lack of Product and Black Market Affecting California Cannabis Businesses

Lack of Product and Black Market Affecting California Cannabis Businesses

The first year of legal recreational cannabis is California is off to a somewhat rocky start. That’s expected in any new industry, but most industries don’t have to compete with a long established black market in their products. Along with those who continue to distribute and sell marijuana illegally, the industry also suffers from product shortage and licensing issues.

Another challenge: NIMBY (not in my backyard) ordinances preventing the sale of cannabis in many jurisdictions. A spokesman for the state’s Bureau of Cannabis Control (BCC) says that up to 70 percent of cities have banned the sale of recreational marijuana.

Wholesaler and Retailer Woes

Prior to legalization on January 1, wholesalers sold their products in approximately 1,000 establishments dedicated to medical marijuana. However, at the dawn of recreational legalization, only a few hundred wholesalers had their business licenses ready.

Companies that did $50 to $60 million in sales prior to recreational legalization have seen sales drop by 75 percent in the interim while awaiting licensing, a process the BCC admits has been far too slow.

Of course, the lack of licensing on the part of wholesalers gushes, not trickles, down to the retail sector. Los Angeles, in particular, is experiencing a shortage of legal weed. Cannabis is hard to come by, as the black and gray market dealers of old are still in force, selling their unregulated and untested products to willing customers and not paying a cent in taxes. These aren’t people selling cannabis on the corner, out of their homes or via courier services.

The black and gray market product is available in dispensaries, but the dispensaries aren’t legal. Customers seeking out legal marijuana may not realize they are still purchasing contraband cannabis.

In September alone, Los Angeles prosecutors charged over 500 people with misdemeanors involving illegal cannabis operations, ranging from retailers to growers. Sheriff deputies raided thirteen shops in East LA. It’s part of a crackdown by the BBC on illegal operations. Major staff hiring to continue the crackdown is planned.

In fact, illegal weed is doing better than ever. Although industry analysts point out that California growers produce much more cannabis than state residents – and tourists – could ever use, it's clear that California is producing pot for the majority of users in states where marijuana is still illegal. Because of shortages at the legal retail level, it makes sense that those who want to purchase cannabis will have to turn to the black market.

There’s tremendous irony in the fact that the state is awash with cannabis, yet those trying to follow regulations cannot receive sufficient amounts to supply customers.

Testing Issues

The state’s daily estimates on compliance testing haven’t corresponded with the lab’s reality. Labs are handling an average of 265 compliance tests daily, about 10 percent less than the BCC anticipated. State law requires that cannabis products are tested for pesticides, certain chemicals, and various molds and bacteria. However, a six-month enforcement grace period granted by the state meant that many cannabis companies simply didn’t test at all. That forced the labs to lower prices on testing, and many of these facilities are losing money.

Looking Forward

Are these just growing pains, no pun intended? Sales are slated to grow exponentially for the next seven years. However, after 2021, when an estimated $6.3 billion in sales is projected, sales are expected to level off, reaching just $6.59 billion by 2025.

That’s about double this year’s projections, so if the BCC can get its act together, cannabis sales will continue their upward trajectory. These statistics focus on legal weed. If this first year of legal recreational cannabis has shown anything, it’s that the black market remains healthy. That’s not a good prognosis for cannabis’ overall fortunes.

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David Kani

David Kani is a Newport Beach, California based business lawyer with a focus on cannabis companies, their investors, employees and cannabis-related litigation.
To connect with David: [hidden email] or 714-907-0697.

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