New York’s Retail Bottleneck Could Fuel a $7.2B Illicit Market

March 16, 2023 · MG Magazine

crowd of people in the shape of a hourglass, 3d illustration

Illicit operators in New York are expected to capture $7.2 billion in untaxed revenue by 2030, according to a new report prepared by MPG Consulting for Acreage Holdings. In the New York Illicit Cannabis Market Absorption Analysis, MPG’s consultants outline the potential loss of 20,600 industry jobs and more than $2.6 billion in tax revenue over the next eight years if state regulators are unable to adequately address illicit market absorption.

As the fourth-largest state by population with approximately 15 million adult residents, New York has the potential to become one of the largest legal cannabis marketplaces in the country. But the state also has a rich history of gray-market sales, with the New York Post reporting 1,400 illegal shops operating in New York City at the beginning of the year. The state’s cannabis control board approved 30 conditional adult-use retail dispensary licenses in January, bringing the total to 66 for the entire state.

According to the MPG report, New York needs to increase enforcement and quickly expand its retail and cultivation footprints to meet consumer and wholesale demand during the early years of its regulated market if it wants to curb illicit sales.

In February, New York City Mayor Eric Adams and Manhattan District Attorney Alvin L. Bragg Jr. announced a partnership between elected officials and local law enforcement to combat the unlicensed cannabis dispensaries operating across the borough of Manhattan.

“For nearly two years, we’ve seen a proliferation of storefronts across Manhattan selling unlicensed, unregulated, and untaxed cannabis products. It’s time for the operation of unlicensed cannabis dispensaries to end,” said Bragg. “Just as we don’t allow endless unlicensed bars and liquor stores to open on every corner, we cannot allow that for cannabis. It’s not safe to sell products that aren’t properly inspected and regulated for dosage, purity, and contaminants. And it certainly isn’t fair to competing businesses.”

The Manhattan D.A.’s office mailed letters to more than 400 smoke shops, warning them of the potential for eviction proceedings as a result of unlawful cannabis sales. According to City Sheriff Anthony Miranda, current laws make it difficult to shut down illicit shops that often face only a $250 fine for selling unlicensed cannabis.

In order to achieve meaningful change in addressing the slow consumer access to the regulated market, MPG recommended the following:

  • Expand access to regulated and safe cannabis products across the state.
  • Convert illicit-market cannabis sales to the legal market.
  • Create a viable, stable wholesale and retail market for conditional cultivation license holders and new dispensaries, including social equity licensees.
  • Generate tax revenue to fund statewide public priority projects.
  • Stop the entrenchment and proliferation of illegal retail stores.

As the analysis notes, creating a stable and compliant adult-use marketplace takes time, money, and experience. It takes upward of one year and $5 million to open a dispensary in the state, and as much as 18 months and $20 million to open a large cultivation facility. While the state has committed $50 million toward industry infrastructure development with an objective to raise $150 million, that’s likely enough to support only 20 new shops.

One solution proposed by the report that would greatly benefit the larger, multistate operators like Acreage Holdings, the company that funded the report, would be to leverage an existing resource: registered organizations currently operating in New York. As the report states, “New licensees will open during great supply-chain uncertainty, causing needless operating risk.” However, MPG believes New York’s registered organizations would be able to add 40 dispensaries quickly, doubling the state’s licensed retail target for 2023. These registered organizations could also add 10 production facilities, allowing all retailers to offer price-competitive products with the assumption more competition in the wholesale market will reduce prices, and provide “mentorship, compliance training, operational best practices, and other resources to New York’s new licensees.”

However, any big-business-friendly approach is likely to be seen as the antithesis of the state regulator’s goals, which are to promote diversity and inclusion in the cannabis industry. The state’s Office of Cannabis Management (OCM) is responsible for issuing licenses for businesses to participate in New York’s adult-use, medical, and cannabinoid hemp industries. According to its licensing page, “The OCM will promote social and economic equity applicants who have been harmed by the prohibition of cannabis for adult-use licenses, establishing a goal of awarding 50 percent of licenses to social and economic equity applicants.” (Full Story)

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