Nationally minded cannabis businesses face tough choices about where to operate in light of significant financial headwinds.
At least three national cannabis companies have either departed the California marijuana market this year or are planning to shutter facilities in order to save on costs – the latest signal that profits are not exactly free-flowing for the industry in every U.S. state.
Rather, many nationally-minded cannabis businesses face significant financial headwinds, and thus are being forced to make tough choices about where to focus their resources for expansion, several industry experts told Green Market Report.
California, in particular, has proven tough for many companies to survive in, let alone thrive, due to an immense underground market, high state and local taxes, and plenty of red tape for businesses to navigate.
So far in 2022:
- Colorado-based edibles maker Wana Brands pulled out of the California market entirely, a spokesman confirmed to Green Market Report.
- Florida-based Trulieve (CSE: TRUL) (OTC: TCNNF) announced on Aug. 10 that it plans to close at least some of the retail stores it owns in California and maybe all three.
- Massachusetts-based Curaleaf (CSE: CURA) (OTC: CURLF) this week confirmed to Business Insider that it had laid off staff at a Sacramento facility and plans to close it down.
“We’d been in California for about two years, and we kind of quietly made the decision to wind things down,” said Joe Hodas, chief marketing officer at Wana Brands, which exited California at the beginning of 2022.
The bottom line was that Wana Brands wasn’t turning a profit in the tough California landscape, Hodas said, and so the company pulled the plug.
“It’s a losing market for us in terms of overall profitability,” Hodas said. “And where we looked at where we could put our resources and our time, there were just significant swaths of the country that we’re growing in that felt like the better place to put our dollars and our resources.”
Hodas cited several factors that many within California have long complained about, and added that so-called “slotting fees” – additional charges tacked on by retailers in exchange for valuable shelf space at brick-and-mortar dispensaries – made growth even harder.
‘Just say no’ to some markets
Spokespeople for Trulieve did not respond to requests for comment, and a spokeswoman for Curaleaf declined to comment for this story.
But other industry experts said the moves aren’t surprising and that the decisions make solid business sense. Companies can and should take their time executing expansion plans instead of jumping in with both feet into any market they can, experts advised.
“There’s a high level of wariness around the California market for the larger companies, who are focusing their efforts on markets that are better defined,” said Rob Hunt, managing member at California-based Linnaea Holdings and also the chairman of the board at Arizona-based 4Front Ventures.
That caution is well advised, said Alex Pasternack, co-founder of Binske, a Florida-based national marijuana brand.
Pasternack pointed to industry reports that suggest legal cannabis revenues in California are down this year by 27%, and part of that is because products from licensed dealers are roughly 37% more expensive than those sold in the underground market.
“There’s just major price compression everywhere, in what’s becoming a true race to the bottom,” he said of the California cannabis landscape.
Binske, which just entered California in 2021, is still expanding, according to Pasternack, but they often have an easier time because their model is “asset-light,” meaning they don’t pursue cannabis business licenses themselves. Instead they focus on branded products made with white-label raw material sourced from permitted growers and manufacturers.
But fully licensed businesses largely still have a tough go of it in California, Pasternack said. And so many – particularly those not actually based in California – are beginning to look elsewhere around the U.S. for other opportunities.
“A lot of people, whether it’s the correct decision or not, are choosing to go focus on other markets, like new markets like Missouri or New Jersey or New York,” Pasternack said. “Getting to be first to market in some of these new markets is a higher priority … than trying to elbow for shelf space.”
Pasternack said that part of the issue in California is brand saturation, which makes it harder to persuade retailers to pick up new brands to showcase.
Newer markets, where inventory shortages are a common issue when either medical or adult-use sales launch, can be a major boon to any brand.
“In a place like California, they have to remove a brand in order to bring you on,” Pasternack said. “They’re waiting to take their lowest-selling brand off their shelves, versus new emerging markets, where … it’s literally, ‘Who has product available?’”
Part of a national trend?
Hunt said that caution is becoming a more consistent theme with cannabis businesses that have a national footprint, particularly in markets facing major turbulence, such as California and New York.
“In the C-suite and boardrooms of a lot of these companies, they’re looking at, ‘What is the market going to look like?’” Hunt said. “‘Let’s handicap it and decide, is that a market we want to play in? Or are there other places where we can better spend our time and resources?’”
This explains in part why, for example, Canadian marijuana company Ascend Wellness (CSE: AAWH.U) (OTCQX: AAWH) called off its acquisition of MedMen’s (OTC: MMNFF) New York operations this month, which Hunt said fits the pattern of growing caution among bigger players.
“Is that a state you want to move into and put a lot of new capital into? Probably not, until you see how the regs shake out,” Hunt said, referring to New York’s recreational marijuana industry rules, which have yet to be finalized.
As for California, it’s likely the single most complicated cannabis market in the country, perhaps the world, due to its population of almost 40 million and a gray market that dates back to 1996, when the state first legalized medical marijuana.
On top of that, there’s still a maze of local regulations to navigate, many of which differ greatly from jurisdiction to jurisdiction, Hunt noted.
“It’s like operating in four or five other individual states, just based on the fact that L.A. is different than San Diego, which is different than Orange County, which is different than San Jose,” Hunt said. “Each of those markets are legitimately large markets, and each has very different rules and regs attached to them.”
As a result, plenty of businesses have their hands full only focusing on that single state, instead of trying to build a national brand.
A number of companies are still trying to execute on that California-centric model, Hunt said, and pointed to businesses such as Jungle Boys, STIIZY, Pax and more.
There are also some multistate operators, such as Cresco Labs and Green Thumb Industries, that have not yet pivoted away from California the way Wana, Trulieve and Curaleaf have, Hunt noted.
Wana likely will return to California at some point down the road, Hodas said, but it’ll take some major landscape shifts before that happens.
“It’s not like we’re going to ignore California. But the conditions need to change, and that’s everything from the regulation, the enforcement, the illicit market, price compression, the overpopulation of dispensaries in some areas and no dispensaries in other areas,” Hodas said. “It just needs to settle down a bit.”
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