The Challenges and Resilience of California’s Cannabis Industry

Vince Ning, the CEO and co-founder of Nabis, California’s leading cannabis distribution company, has a unique vantage point on the state’s legal cannabis landscape. From his position, interacting with every cannabis retailer in California, Ning observes a market undergoing a prolonged and painful decline. He describes the current state of the industry as “a wave crashing in slow motion,” with expectations for a major downturn in 2022 only being surpassed by worsening conditions in 2023 and continuing struggles into 2024.

Declining Sales and Industry Contraction

Ning’s perspective is supported by recent data highlighting significant economic difficulties across the industry. Overall sales have been declining for the past two years, and the number of licensed cannabis growers and brands has plummeted by over 70% since legalization began, as reported by the *Mercury News*. A troubling $730 million in unpaid back taxes is owed by cannabis companies to the state, a sum California is unlikely to recover given the high rate of business closures.

The Rise and Fall of California’s Green Rush

When California voters approved the legalization of recreational cannabis in 2016, the state’s massive population of over 39 million seemed to promise unparalleled opportunities for the cannabis market. Entrepreneurs rushed into the so-called Green Rush, and significant capital flowed into the industry with high hopes for rapid and sustained growth.

Companies like MedMen and Herbl secured substantial investments, banking on the notion that legalization would open the market to new consumer demographics. Thousands of farmers eagerly applied to cultivate cannabis, anticipating a booming demand.

Nicole Skibola, who co-founded the Sonoma County cannabis manufacturer Cosmic View with her mother in 2017, recalls the initial optimism. Their business, focused on edibles and medical products, symbolized the hope that California would establish itself as a model for legal cannabis markets. However, Skibola reflects on their initial naivety, recognizing now that the challenges were greater than anticipated.

Bureaucratic Hurdles and Financial Strain

The legalization of cannabis also introduced a complex regulatory landscape. Local governments were granted significant control over the industry, leading to high licensing fees and limited business licenses in many communities. This regulatory environment, coupled with high tax burdens, strained new cannabis businesses and led to accusations of governmental greed and even corruption.

Dennis Bozanich, a former cannabis regulator in Santa Barbara and now a government affairs consultant, observed that both the private sector and government officials miscalculated, leading to rapid overexpansion and heavy-handed regulations.

The Impact of the COVID-19 Pandemic and Market Saturation

The legal cannabis market initially flourished when sales commenced in 2018, with a significant boost during the COVID-19 pandemic. However, this growth was short-lived. By early 2021, sales peaked and then began a slow decline, falling short of the high expectations set before legalization. Many new businesses, having heavily invested with the anticipation of continuous growth, found themselves facing financial ruin as the market became oversaturated and consumer spending did not meet projections.

Ongoing Business Failures and Market Decline

As of mid-2024, the collapse of cannabis businesses continues, affecting companies of all sizes. Even prominent players like MedMen and Herbl have succumbed to financial pressures, while smaller family-run operations like Cosmic View have chosen to close voluntarily rather than continue in a “broken regulatory system.”

California’s legal market remains the largest globally in terms of total sales, yet the state ranks only 14th in per capita sales, trailing behind other West Coast states. This discrepancy highlights the challenges facing the industry, including the recent surpassing of California by Michigan in monthly cannabis product sales.

The Illicit Market’s Thriving Presence

While the legal market struggles, California’s underground cannabis economy flourishes. High operational costs and stringent regulations have pushed many entrepreneurs towards the illicit market, where products are sold without the burden of taxes. This underground activity not only undermines the legal market but also deprives the state of significant tax revenue.

Broader Industry Challenges and Federal Constraints

California’s cannabis woes are not unique. Early-adopting states have similarly seen declining sales and business struggles as the market adjusts to the economic realities of legal cannabis. Federal prohibition continues to exacerbate these issues by imposing high costs and tax burdens on cannabis businesses.

The natural business cycle also plays a role, with many enterprises failing within five years of inception. As California’s legal cannabis industry enters its sixth year, it is not surprising that many of the early businesses are now struggling or have ceased operations.

Looking Ahead: Potential for Market Stabilization

Despite widespread pessimism, some see a potential silver lining in the industry’s current contraction. Wesley Hein of Mammoth Distribution likens the situation to the dot-com crash of the early 2000s, suggesting that the current downturn might weed out weaker businesses and allow stronger companies to thrive. 

Nabis, for example, has navigated the industry’s turbulent waters by growing steadily and strategically. The company, which started humbly with Ning personally delivering cannabis, has now become one of the fastest-growing private companies globally, recently expanding its operations significantly.

Conclusion: A Market in Transition

Ning remains cautiously optimistic about the future of cannabis in California. He believes the current wave of business failures could ultimately benefit the remaining players by reducing competition. For Nabis, the collapse of competitors like Herbl has provided opportunities for growth, positioning the company for continued success amidst ongoing market challenges.

In Ning’s view, “cannabis isn’t going anywhere.” As more people incorporate cannabis into their daily lives, the need for reliable suppliers persists. While the road ahead may be fraught with obstacles, the industry’s capacity for adaptation and resilience offers a glimmer of hope for those still standing.

“California’s Pot Economy Is Crashing. What Comes Next?” Www.Sfgate.Com/, 13 Jun. 2024, Accessed 13 Jun. 2024.