How is it possible that California’s burgeoning cannabis industry is suddenly foundering, resulting in massive layoffs? Voters in the state legalized recreational marijuana in 2016, although it was just in 2018 that rec sales finally started. While the intention might have been to institute a profitable, licensed and legal marketplace, the reality is that lawmakers spent the time between legalization and today trying to work out the industry’s kinks, and it’s far from a slam dunk.
BDS Analytics and ArcView Group estimate that consumers spend, per month, approximately $1 billion — yes, one billion dollars — on cannabis in California. Every month. So, with that kind of cash flow, why are companies laying off their people? The problem, according to BDS Analytics and ArcView Group, is that only a quarter of that is spent in the legal market. A recipe for relentless taxes, complex regulations, and lack of retailers due to local ordinances has resulted in a massive imbalance in the largest pot industry on the planet.
The LA Times reported that almost 80% of California’s jurisdictions banned cannabis retailers, leaving the door wide open to black market operations. The numbers don’t lie — California has the lowest ratio of legal retail marijuana licenses to recreational marijuana consumers — and boasts a single dismal retailer per whopping 34,256 adults. With that kind of gloomy market presence, in stark contrast to projections, companies are cutting costs, and that means layoffs.
Over the past few weeks, companies like Ease, Pax, CannaCraft and Weedmaps have instituted hiring freezes or reduced their workforce numbers, indicating challenges in California’s recreational cannabis industry. Flow Kana blames the state for failing legal cannabis companies. Less than a year ago — in February — the company was in the news for securing the nation’s most significant private funding round (to date) for a private cannabis company, boasting a total of $175 million raised to build and scale the state’s marijuana supply chain around small, independent and sustainable weed farms.
So what happened to Flow Kana, which sources cannabis from over 200 independent family farmers and markets itself as ‘California’s No. 1 selling cannabis flower brand’? The company announced in a recent press release that it is laying off up to a fifth of its non-core workforce but didn’t specify an exact number. The company is based in California’s infamous Emerald Triangle, comprised of Humboldt, Mendocino and Trinity Counties. In a November 14 press release, the company said:
Today, Flow Kana joins these leading brands as we announce a strategic workforce reduction. We, too, have had to make the difficult but necessary choice to better align our operations with the realities and size of the market and to protect the backbone of our mission and model, California’s independent heritage cannabis farmers.
While taxes and retail space limitations are a factor, it’s not the only thing holding up the growth of the recreational cannabis industry. Basic banking services are essential for conducting legitimate business operations and is a terrible burden for those operating in the legal cannabis arena. While most businesses are forced to work in a vulnerable ‘cash only’ status that forces companies to store vast sums of cash, states are still trying to figure out how to go about that monumental task — rationalizing the fact that a state-regulated industry is also a federally illegal one means that most FDIC- insured banking operations are leery about dipping their toe into cannabis banking.
Notwithstanding the banking fails, kudos go to California Governor Gavin Newsom for several actions on his part that implied state support for the industry as a whole. Gov. Newsom signed several laws that aspire to help the cannabis industry. One allows licensed, legal cannabis businesses to claim state tax deductions, and the other allows licensed, legitimate cannabis businesses to donate products to medical marijuana users.
Right now, it’s more of a cart before the horse situation. Sales need to increase on the right side to ease out the illegal stuff. But to do that, you need more retail space. And until municipalities allow retail space, sales are stagnant. And when legal weed is hard to come by, illegal will do just fine. Everything is dependent on the other for success and growth. And until legal, adult-use recreational weed is widely available through more significant numbers of retail storefronts, licensed companies are going to suffer while the black market rushes to meet demand.
Flow Kana CEO Michael Steinmetz, in a November 14 interview by Andrew Sheeler for the Sacramento Bee, said that while there’s a place for unlicensed cannabis law enforcement, the state should ease the way to allow those currently operating illicitly to transition into the legal market. He called on the state of California to reduce the tax burden faced by growers — by implementing a temporary tax reprieve on the state’s cultivation tax, or by turning it into a percentage-based system that adjusts for changes to the going cannabis price. Or the industry could model the craft beer industry, with a tiered tax structure based on business size and output. “Doing enforcement right now, in a broken system, to me, it’s like pouring water into a glass that has holes in it,” he said.