The Rise And Fall Of Pioneering Weed Markets: RIP California And Colorado Cannabis Industries

This article was originally published on Cannabis.net and appears here with permission.

When Colorado and Washington made history in 2012 as the first U.S. states to legalize recreational marijuana, they kicked off a green rush that rapidly transformed the cannabis industry. Colorado in particular saw a meteoric rise, with sales soaring to $2.2 billion in 2020 and the state raking in hundreds of millions in cannabis tax revenue. Some local entrepreneurs rode this wave to stunning success, building national brands from humble beginnings.

Fast forward to 2024 and the Rocky Mountain high has worn off. Colorado dispensaries that once couldn't keep up with demand now sit shuttered. Statewide sales have plummeted over 30% from their peak. While still a sizable market, the trailblazing industry that put Colorado on the cannabis map is now a cautionary tale.

1,200 miles to the west, California - the country's largest legal weed market - is facing its own reckoning. Despite the Golden State's legendary cannabis culture and ideal growing climate, many legitimate operators are struggling to stay afloat. But while Colorado's crash stems from market saturation and competition from newly legal neighbors, California's decline has more to do with over-taxation enabling the tenacious black market to undercut legal businesses.

As more and more states jump on the legalization bandwagon, policymakers are looking to these early adopters to understand how to establish a stable and sustainable cannabis sector. In this article, we'll unpack the factors behind the slumping sales in Colorado and California, and explore what lessons emerging marijuana markets can take away to avoid the same pitfalls. The great American pot experiment is far from over.

The Colorado Conundrum

Colorado's cannabis industry, once a roaring success story, has fallen on hard times. According to a recent Politico article, statewide marijuana sales have plunged from a high of $2.2 billion in 2020 to just $1.5 billion in 2023 - a jaw-dropping decline of over 30% in just three years. This has led to widespread layoffs, business closures, and a lot of nervous industry stakeholders.

So what's behind this Rocky Mountain revenue recession? Industry insiders point to a perfect storm of factors. "It's like the wind in our cannabis sails in Colorado has just been sucked all the way out," laments Wanda James, founder of Denver dispensary Simply Pure.

A key culprit is the very success that Colorado pioneered - the spread of legalization to neighboring states like New Mexico and Arizona, which has siphoned off customers. "We're a victim of our own success," explains Jordan Wellington, a partner at Denver-based cannabis policy firm Strategies 64. "New markets drawing investment away, new markets drawing purchasing away — all of these different things combined into the soup of the challenges [facing] Colorado."

Businesses have had to adapt to this new reality in different ways. Some, like Dank Dispensary in Denver, have had to cut back on employee perks and parties. Others, like Southern Colorado retailer Maggie's Farm, have shuttered multiple locations.

Cannabis jobs in the state have plummeted 16% in the past year alone, according to a report from Vangst.

But while painful, this market contraction is a natural evolution for maturing cannabis markets, explains Beau Whitney of Whitney Economics. "Initially, supply is low and profits are high, which draws in new businesses. As supply and consumer access catch up, prices drop."

 As more states legalize, Whitney predicts this boom-and-bust pattern will ease and interstate prices will normalize.

In the meantime, Colorado businesses are adjusting to compete in a crowded and dynamic market. Denver dispensary Simply Pure saw sales spike 60% during the COVID-19 lockdowns, only to come crashing down when cultivators ramped up production.[1] "The only problem … for a long time was that there was never enough weed," recalls Jon Spadafora, CEO of wholesale cultivator Veritas Fine Cannabis. "We all overestimated the market. We all believed a little bit too much of our own PR."

Veritas has since downsized from 144 employees to just 21.

This thinning of the herd is inevitable as the industry matures and stabilizes. But those businesses that are able to adapt and ride out the turbulence could be well-positioned for the next chapter of Colorado's cannabis story.

As more states enter the legal fray, Colorado's hard-won experience and expertise could prove invaluable. The green rush may be over, but the Centennial State's influence is sure to endure.

The California Cannabis Conundrum

While Colorado's cannabis market struggles are largely due to increased competition and market saturation, California's industry woes stem from a different root cause: overtaxation. Despite high hopes that legalization would cripple the illicit market, California's hefty tax rates have instead enabled illegal operators to continue undercutting legal businesses.

California imposes some of the steepest cannabis taxes in the country, with rates up to 40% in some jurisdictions when state and local levies are combined.[1]

This has kept prices for legal products artificially inflated compared to the illicit market. "The tax rate is way too high," argues Javier Montes, owner of Wilmington dispensary Delta-9 THC. "People got used to the black market, and then they were supposed to transition to the legal market, but there's no incentive to."[2]

This over-taxation has effectively acted as "prohibition 2.0", allowing illegal grow operations and unlicensed dispensaries to thrive. Ironically, this has attracted an unexpected player: Chinese organized crime.

While Mexican cartels have largely pivoted to more profitable hard drugs like fentanyl, Chinese drug trafficking organizations have moved in to exploit the lucrative California cannabis black market.[3] Authorities have busted numerous large-scale Chinese grow operations hidden in suburban homes in recent years.[4]

But taxation is far from the only issue plaguing California's legal cannabis industry. The state's onerous and costly regulations have created immense barriers to entry for legal businesses. Lengthy licensing processes, restrictive zoning laws, and expensive compliance requirements have kept many legacy operators from transitioning to the legal market.[5] This has perpetuated the illicit industry, as many longtime growers and sellers see little benefit in going legit.

Furthermore, California's patchwork of local cannabis laws has created a confusing and inconsistent market landscape. While the state legalized recreational use in 2016, municipalities can still ban cannabis businesses outright. As of 2022, fewer than 40% of California cities and counties allowed any type of legal cannabis operation.[6] This has left large swaths of the state underserved by legal operators and ripe for illicit activity.

These factors have led to a California cannabis market that is far underperforming its potential. Despite having nearly twice the population of Colorado, California's legal sales in 2022 were only moderately higher at around $5.3 billion.[7] For the state to fully realize the promise of cannabis legalization, policymakers will need to overhaul the current tax and regulatory scheme to support licensed businesses and motivate illicit operators to transition to the legal market. Until then, California's cautionary tale will continue.

SOURCES:

[1] https://taxfoundation.org/state-cannabis-taxes-2022/

[2] https://www.latimes.com/california/story/2022-12-20/california-cannabis-industry-layoffs

[3] https://www.latimes.com/california/story/2022-07-19/california-marijuana-china-cartels

[4] https://www.justice.gov/usao-edca/pr/federal-and-local-law-enforcement-shut-down-over-50-illegal-marijuana-grows-and-seize

[5] https://mjbizdaily.com/obstacles-to-enter-california-legal-cannabis-market-remain-daunting-for-legacy-operators/

[6] https://www.northbaybusinessjournal.com/article/industry-news/majority-of-california-municipalities-ban-commercial-cannabis-how-that-aff/

[7] https://www.politico.com/news/2021/10/23/california-legal-illicit-weed-market-516868

Lessons Learned: Building A Sustainable Cannabis Market

As more states consider cannabis legalization, policymakers would be wise to study the cautionary tales of Colorado and California. These pioneering markets offer valuable lessons on what works – and what doesn't – when it comes to crafting a successful and sustainable cannabis industry.

First and foremost, states must resist the temptation to overtax the newly legal market. While cannabis may seem like a cash cow for revenue-hungry governments, excessive taxation can backfire by perpetuating the illicit market.

California's punitive tax rates, reaching up to 40% in some areas[1], have kept illegal operators in business and undercut the very legal industry the state is trying to foster. Policymakers should instead aim for a tax sweet spot – high enough to generate meaningful revenue, but low enough to motivate illicit operators to transition to the legal market.

Secondly, regulations must be designed with an eye toward fairness and equity. Overly burdensome licensing requirements, zoning restrictions, and compliance costs can shut out smaller operators and communities disproportionately impacted by the War on Drugs.

Equity must be baked into the framework of the legal market from day one, with measures like expedited licensing for legacy operators, fee waivers for social equity applicants, and reinvestment of cannabis tax revenue into hardest-hit neighborhoods.

By lowering barriers to entry and providing support, states can create an inclusive industry that benefits a broad range of stakeholders.

Finally, policymakers should embrace the free market's ability to self-correct. As Colorado's story illustrates, the invisible hand is already at work balancing supply and demand in maturing cannabis markets.

While the industry's growing pains have been undeniably painful, with layoffs and closures roiling the once-booming market, this contraction is a natural stage in the evolution of a new sector.

As Beau Whitney of Whitney Economics notes, "As more states legalize, Whitney predicts this boom-and-bust pattern will ease and interstate prices will normalize."[2] By allowing market forces to weed out inefficiencies and reward innovation, states can cultivate a leaner, more resilient cannabis industry.

Of course, the cannabis industry is still in its infancy, and there will undoubtedly be more lessons to learn as legalization spreads.

But by heeding the hard-won wisdom of trailblazers like Colorado and California – keeping taxes reasonable, prioritizing equity, and letting the market work – states can lay the foundation for a cannabis industry that is built to last. The road may be rocky, but with smart, forward-thinking policy, the future of legal cannabis is bright.

SOURCES:

[1] https://taxfoundation.org/state-cannabis-taxes-2022/

[2] https://www.politico.com/news/2023/06/09/colorado-cannabis-market-crash-cautionary-tale-00101170

This article is from an external unpaid contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.