A Cautionary Tale on the Legal Cannabis Market – Twin Cities Business Magazine

The Disjointed States of America started down a road toward legalizing cannabis when Cali opened up medical marijuana in 1996. If you look at it from a distance, perhaps you see a bunch of greedy entrepreneurs making a metric ton of money. Maybe you see a bunch of stoners walking away from local sources and dead drop locations for a legal dispensary. Or, you see sticky-fingered politicians swapping a heavy tax cash grab for votes.

Examine the industry a little more deeply and you’ll find none of these is entirely accurate.

After a few years working with Curaleaf, one of the largest multi-state operators, we have been able to see inside an industry facing greater challenges than any other. And, there are three big reasons for these challenges.

One: The legalization and regulation of cannabis has followed decriminalization. Which seems utopian and intuitively right, in order to invite new consumers into the category. But those who had an illegal source now have a somewhat less illegal source, and this segment of the consuming population are referred to as “legacy cannabis” users. Even in states where the drug is legal, these folks still comprise a significant chunk of the market. In California, for instance, it’s estimated that as much as 80-90% of cannabis sales “fall in a legal gray area.” The remaining 10-20% is the legal marketplace, sometimes broadly referred to as the “cannabis curious” market, or new consumers who are interested in the drug for medical or other reasons. That means that in some cases, we have an industry that is almost 90% black market.

Two: The licensing and taxation of the legal industry is “high as a kite”, starting with the federal tax on gross income, often referred to as the 280E tax. State taxes vary between 20-40% on cannabis sales, but the largest challenge is often the technical requirements to actually grow. In Colorado, each plant must have an RFID, and any time a plant is trimmed, harvested, or changed, it has to be registered in a database. Meanwhile, in an attempt to right previous wrongs, New York is giving its first round of cannabis business licenses to individuals convicted of cannabis crimes and their family members. The push for social equity is admirable, but it necessarily narrows the market.

Three: Some states mandate full vertical integration from growing to brand building to retail. This pushes a business model proven to be very challenging in every other industry. Where do you see agriculture (growers), brands (innovators) and retailing (distributors) under one organization? If the only example you can name is Apple, then maybe we should consider how capital intensive and culturally challenging it is. Other states have made it illegal to be fully integrated, which adds an entirely new layer of complexity.

Any one of these three challenges would make it enormously hard to turn an industry profitable. It is easy to see how large Canadian cannabis brands like Aurora and Canopy Growth have both lost hundreds of millions of dollars. So, now we Minnesotans have arrived late to the party with our bong, some hemp rope, and a homemade tie dye t-shirt. Great.

When I visited MJ Unpacked, one of the best industry trade shows serving the cannabis market, the typical reaction I garnered upon introducing myself was, “Wow, Minnesota, you guys are in a weird place.” Yeah, that’s great, the state only recently starting to sell alcohol on Sundays is now opening up cannabis in one of the most awkward and legally tenuous ways imaginable. The door opened with hemp-derived THC, also known as Delta-9-THC, because of a loophole in the 2018 federal farm bill. Then, a Minnesota law that went into effect in July essentially stating that permitted the sale of THC edibles in small amounts.

While this route to legalization is being called a new path, it isn’t yet apparent how clear this path will be.

Here are a few things to consider when we do open the doors properly.

1. Take an experienced cadre to these three trade shows (MJ Unpacked, Hall of Flowers, MJBizCon) and talk to anyone who will listen and provide advice on the best examples of states opening up. Then, visit the top three states and talk to multi-state operators and small business owners to get their perspective.
2. Journey map the process of decriminalization, legalization, and re-regulation. Do the hard work of mapping it to protect citizens, create business opportunities and earn tax revenue otherwise heading to surrounding states. If a vast majority of the market is not legal, you’ve failed; see California as an example.
3. Try to put aside your New York-style social justice virtue signaling if you’re going to incentivize a thriving, legal entrepreneurial community. Once the decriminalization takes hold and the black market shows back up it will be hard to attract consumers to a legal and more expensive option.
4. Last, take a trip to Humboldt County California and get a tour of the most experienced growing area for cannabis. You’ll be able to connect with the history of this industry and see how an area is building a “craft” cannabis industry.

On a final note, if you’re going to be late to the party, learn from those who have been there already. This is perhaps the only benefit of this state-by-state legalization, and regulation of an industry. As a region of highly educated, adaptable individuals rooted in farming history, we can and should set an example for the next state.