Big business sets its sights on California
Big business has turned its attention to California, the fifth-largest economy in the world.
Dispensaries officially opened their doors to the public on Jan. 1, 2018, kicking off what could become an industry with more than $6 billion in annual sales just from recreational weed. Of course, $6 billion is a big number, and it’s more than tempting to lure in deep-pocketed big businesses that want a taste of this rapid growth.
According to a recently published analysis from Marijuana Business Daily, licensing data in California showed that 20% of cultivation licenses (that’s 697 total licenses) in the state belonged to just 12 licensees. Put in a different context, just 0.7% of the aggregate cultivation businesses within the state controls a fifth of the production.
Is a big business takeover inevitable for the legal cannabis industry?
The legal cannabis industry is budding in North America. Yeah, it may sound cliche, but there’s really no better way to describe the rapid growth in legal weed sales. According to cannabis research firm ArcView, legal pot revenue grew by 33% in 2017 to $9.7 billion in North America, and it’s expected to near $25 billion by 2021, representing a compound annual growth rate of a scorching 28%.
Where’s this growth coming from? First of all, Canada legalized medical marijuana back in 2001 and now stands on the verge of allowing adults to purchase recreational weed, legally. Waving the proverbial green flag on adult-use marijuana is a $5 billion bump to the legal weed industry in Canada. To our south, Mexico legalized medical cannabis in June of 2017. And domestically, 29 states have passed broad-based medical pot laws since 1996, with nine states giving the OK for recreational weed use.
Of course, the U.S. is a really unique case. Unlike Canada and Mexico, marijuana firmly remains an illicit substance at the federal level. As a Schedule I drug, as defined by the Controlled Substances Act, it’s deemed as being wholly illegal, highly prone to abuse, and has no recognized medical benefits. In fact, it’s on par with LSD and heroin, based on its current classification. This makes state-level legalizations somewhat precarious, and is why most investors have chosen to put their money behind Canadian pot stocks rather than U.S.-based weed businesses.
But regardless of marijuana’s legality, one constant remains throughout North America: Big business wants its share.
Big business is leaving its mark on the legal weed industry
While most cannabis enthusiasts would probably prefer to see small businesses thrive, it’s big business that’s been making its mark on the space.
Ergo, in the beginning this is going to be a consumers’ market, and not necessarily represent the best environment for investors. Marijuana prices on a wholesale and retail basis could fall, precipitously, for a few years. Thereafter, though, the remaining big businesses should have much stronger pricing power and be able to take advantage of their economies of scale. Perhaps three to five years down the road, it’ll turn into an investor’s market but be potentially bad news for the consumer.
This has happened before
And if you think this won’t happen in California, think again, because it’s happened before.
According to FiveThirtyEight.com, the exact same scenario has played out in Washington state, where wholesale and retail cannabis prices have plunged since the summer of 2014, when sales commenced. Whereas wholesalers could get up to $8 per gram back when sales first began, TopShelfData.com shows that wholesale cannabis is going for about $2.53 per gram in the state, as of September 2017.
Besides the business challenges, America’s legal marijuana industry also has to reckon with an unavoidable moral dimension. The US has been engaged in a “war on drugs” since Richard Nixon declared it in 1971. While white Americans use marijuana and other drugs at roughly equal rates to African Americans and Latinos, in virtually every respect, racial minorities have been disproportionately incarcerated and otherwise punished for involvement with drugs, including selling marijuana.
In addition, marginalized groups – Aids patients, disabled people, veterans – who championed legalization when it was far riskier to do so now find themselves ill-equipped to compete against well-capitalized corporate refugees looking to jump on the bandwagon.
One company, Acreage Holdings, which closed on $119m in investment capital this summer, has enlisted the former Republican speaker of the House John Boehner to help it navigate the market. Boehner has never smoked pot – “he hasn’t felt the need or inclination”, according to a spokesperson – and he declared himself “unalterably opposed” to legalization when he was in office.
During a January speech pushing legal pot, Gov. Andrew Cuomo emphasized the financial and social wreckage of decades of marijuana arrests in minority communities, vowing to prioritize them for cannabis business licenses.
“We have to do it in a way that creates an economic opportunity for poor communities and people who paid the price and not for rich corporations who are going to come in to make a buck,” Cuomo said.
And while marijuana legalization has reduced the overall number of marijuana arrests in legal pot states, people of color are still being targeted by police, USA TODAY Network reported.
Even in states with largely white populations, black people using or selling marijuana still face high arrest rates.
Similar to other states with legal pot already, including California and Massachusetts, Cuomo’s plan includes criteria for promoting minority ownership of marijuana businesses.
Cuomo prioritized applicants who were convicted of an unspecified cannabis-related offense prior to legalization, as well as those who live in communities with disproportionate marijuana arrests.
But Massachusetts is finding a vast majority of its marijuana licenses are still going to white business owners.
Early findings in Massachusetts show nearly 2,500, or 72%, of the 3,400 active cannabis industry players were white, and just 160, or 5%, were black or African-American. Another 200, or 6%, identified as Hispanic, Latino or Spanish, the cannabis commission reported.