California, an industry bellwether for the marijuana industry, is seeing signs of contraction
For the first time since the state’s adult-use market opened five years ago, annual sales for marijuana in California fell in 2022.
While Colorado and Oregon dispensaries are now bearing the brunt of the 2022 correction, Nevada and Washington retailers are also on track to report double-digit declines in terms of percent decreases to their sales totals this year after pandemic peaks equated to record growth across much of the industry in 2021. Moreover, California, which started adult-use retail more recently on January 1, 2018, is dealing with a diminishing regulated industry. (as far as sales are concerned)
According to the most recent figures provided by the California Department of Tax and Fee Administration, retailers made little above $5.3 billion in taxable sales of recreational and medical marijuana last year, a decrease of 8.6% from about $5.8 billion in 2021.
The number of taxable sales in the fourth quarter decreased to over $1.3 billion, marking the third consecutive quarterly loss and falling by almost 12% from the same period in 2018.
According to California marijuana industry consultant Hirsh Jain, this trend has been significantly fueled by two factors: depressed wholesale pricing, which have made products more affordable for consumers, and the persistent lack of retail establishments over large portions of the state.
CALIFORNIA REGULATED CANNABIS MARKET
According to Jain, the principal of Los Angeles-based Ananda Strategies, California’s “dual-licensing” structure has made it extremely challenging for new clinics to open in the years after adult-use sales started.
For cannabis businesses to be able to submit an application for a state license in California, they must first gain municipal approval from the city and/or county where they conduct business.
As adult-use sales began in 2018, this approach has caused significant delays in the issuance of annual licenses.
All around California, including Mendocino County, those delays continue to be a problem for operators.
In a letter dated February 8 to California Governor Gavin Newsom and Director of the Department of Cannabis Control Nicole Elliott, the Mendocino Cannabis Alliance alleged that local authorities had failed to ” establish a procedure which will be able to assist sincere cannabis operators towards annual state licensure. Marijuana growers there are requesting intervention from state regulators.
The state’s legal cannabis industry has been arbitrarily constrained in size, which has led to an early peak and subsequent retreat, according to Jain.
A trend that developed during the medical cannabis era, years prior to when California voters made possession and adult-use sales legal in November 2016, has contributed to the state’s illicit market, which some industry insiders estimate to be twice the size of the regulated industry, in hindering sales at licensed stores.
Tax revenue from the cannabis industry in California was little under $1.1 billion in 2022, a downward move of 21% from just over $1.4 billion in 2021.
A combination of the aforementioned economic and regulatory difficulties as well as the state’s abolition of its cultivation tax on July 1 contributed to the fall.
THE IMPACT OF DECLINING SALES ON THE CANNABIS INDUSTRY
The cannabis sector is being significantly impacted, especially for smaller enterprises, by the fall in California’s cannabis sales. For many cannabis businesses, it has been difficult to maintain profitability due to rising market rivalry, shifting consumer preferences, and the effects of the pandemic. Some companies had to cut their employment as a result or shut their doors completely.
The high cost of adhering to state and municipal rules is one of the main issues that cannabis entrepreneurs must deal with. Smaller operations may find this to be especially onerous since they do not have the funds to invest in compliance measures. However, the illegal market continues to pose a serious threat to firms that cultivate cannabis legally, particularly in terms of pricing. This might make it difficult for legitimate firms to compete and continue to be profitable.
Despite these difficulties, a lot of cannabis businesses are figuring out how to adjust to the shifting market. Others are expanding their online sales channels to reach a larger audience, while some are concentrating on creating new product categories, such as cannabis-infused drinks or edibles. In order to promote growth and reach out to new clients, some are also looking into new partnerships and collaborations.
WHAT’S NEXT FOR THE CALIFORNIA CANNABIS MARKET
The California cannabis market is anticipated to expand in the future, albeit more slowly than in prior years. As bigger competitors continue to purchase smaller rivals in an effort to gain market share, the industry is probably going to experience more consolidation. But, there will probably still be chances for smaller, Specialized firms to prosper, especially in markets like craft production and distinctive product categories.
The industry will face many obstacles, including ongoing regulatory scrutiny. California has some of the strictest cannabis laws in the nation, and adhering to these rules may be costly and time-consuming. It is unlikely that the state will loosen its laws very soon, though, as regulatory control is also considered as being essential to developing a secure and long-lasting cannabis business.
Along with regulatory difficulties, the industry will also have to keep up with the black market. Although the legal cannabis industry has advanced significantly in recent years, there is still a sizable market for cannabis products outside of that industry. It will need continual work to inform consumers about the advantages of legal cannabis as well as ongoing investment in product quality, safety, and accessibility to reduce this demand.
Sales in the California cannabis market fell in 2022, partly as a result of low wholesale prices and a continued dearth of retail locations in many parts of the state. Further contributing to the downturn were the rigorous regulatory environment and persistent difficulties brought on by the black market. Notwithstanding these obstacles, it is anticipated that the business will continue to expand, albeit more slowly, and smaller, more niche companies may still have success. Cannabis companies must change with the market, make investments in product quality, safety, and accessibility, and continue to adhere to stringent rules if they want to stay competitive. (Full Story)