Navigating the Storm: The Faltering Cannabis Market in California

Written July 2023

Introduction

California, long hailed as the trailblazer in the legal cannabis industry, is currently facing significant challenges that are shaking the foundations of its once-booming market. Recent failure by businesses, such as cannabis distribution giant Herbl, coupled with over-taxation by the state and unfriendly regulations, have created a stranglehold on operations. These factors, combined with the loss of licenses for cultivators, testing facilities, and retailers and a decline in licensed cultivation capacity, have placed the California cannabis market in a precarious position. In this article, we explore the current state of affairs and shed light on a question we often hear from clients: any perspective on the future of the California cannabis industry?

Shakeouts by Businesses

The recent shakeout by Herbl, a significant player in cannabis distribution, has sent shockwaves through the industry. As a considerable link in the supply chain, Herbl's unprecedented collapse reflects the difficulties cannabis businesses face in California. This development conceivably affects Herbl's now unemployed employees and reverberates across the market, impacting cultivators, manufacturers, retailers, and distributors who engaged with or relied on Herbl's services. The ripple effect of such a high-profile shakeout raises concerns about the stability and sustainability of the cannabis market in not only California but the U.S. as a whole.

Over Taxation and Unfriendly Regulation

Another key factor contributing to the faltering cannabis market in California is the burden of over-taxation and unfriendly regulations. The state's high tax rates, including excise and sales taxes, have increased consumer prices, making legal cannabis less competitive with the illicit market. Additionally, complex and often contradictory regulations create a challenging environment for businesses to operate successfully, leading to increased compliance costs and hindering growth and innovation. These factors have created a dog-eat-dog landscape, pushing some operators to the brink of closure and dissuading potential investors from entering the market.

License Loss and Decline in Cultivation Capacity

California's cannabis market has experienced significant losses in licenses and cultivation capacity. Reports indicate that the state has lost approximately 20% of its cultivator licenses and about 46% loss of testing and retailer licenses combined (see Department of Cannabis Control’s (DCC) licensing portal and Annual Legislative Reports). Furthermore, licensed cultivation capacity has dropped from 82 million square feet to 64 million square feet. These declines can be attributed to increased competition, regulatory hurdles, and market saturation. The shrinking number of licenses and cultivation capacity raises concerns about the ability of the remaining operators to meet market demand.

Looking Ahead

Despite the challenges faced by the cannabis market in California, there is still hope for a revival. Industry stakeholders, policymakers, and regulators must come together to address the underlying issues and create a more supportive and sustainable environment. This includes implementing reasonable tax structures that balance generating revenue and fostering a competitive legal market. Streamlining regulations, reducing compliance burdens, and providing more straightforward guidelines will help attract and retain businesses in the industry.

Furthermore, investing in education and public awareness campaigns can help combat the persisting stigma surrounding cannabis, thereby expanding the consumer base and driving demand. Collaboration between industry players, government entities, and community organizations can also pave the way for creative solutions and innovative strategies to navigate the challenges.

Conclusion

The cannabis market in California is undoubtedly facing a tumultuous period. The recent shakeouts by businesses, over-taxation, and unfriendly regulation have taken their toll on cannabis operators and cast a shadow over the industry's future. However, with concerted efforts and proactive measures, there is potential for a resurgence. It has been a pleasure and blessing to serve the cannabis industry since reflecting upon the days when there were only medical cannabis clients and no recreational environment. That history gives us great hope that by collectively addressing the root causes of the market's decline and fostering an environment conducive to growth and innovation, California will regain its position as a burgeoning leader in the legal cannabis industry.

About Naulls Legal Group

Naulls Legal Group (NLG) is the premier law firm for enterprise compliance representing organizations and cannabis-based businesses based in Southern California. We are well-versed in helping clients navigate corporate compliance with intimate industry experience in the increasingly complex and heavily regulated cannabis industry. At NLG, we help businesses GROW!