🍂 All the leaves are brown

I got my medical marijuana recommendation in 2008, from a doctor in the University Heights neighborhood of San Diego. I was 22, wearing business casual, and I had real, legitimate, printed medical records. I’m pretty sure I found the doctor on Weedmaps, but I still took it seriously.

The doctor and I played our parts.

“And you have bouts of anxiety sometimes, some agitation?” he asked.

“Yes, Doctor. And, if you can believe it, the only thing that helps is cannabis.”

He nodded knowingly, then filled out my paperwork and charged me $100.

Although there was a considerable amount of theater involved, this transaction was actually a good thing: this was California’s medical market functioning correctly, whereby more people were seeking out and being granted the legal right to possess, grow, and use cannabis products for personal medicine.

(Btw, I suppose I could still defend the claim of anxiety, just as we all probably could. But more honestly, I went to that doctor because I found cannabis to be a healthy alternative to other recreational drugs, and it afforded me peace and presence as a normal part of routine life - and I wanted to possess cannabis, legally, and not get arrested)

Gray, not Golden

That day was a watershed moment for me, when I realized that California cannabis had nearly unlimited commercial potential. Compassion was at the forefront then, and cannabis was serving the most deserving medical patients - but, just behind the curtain, a fledgling retail industry was taking shape.

When adult-use was on the horizon (in late 2017), there was limitless optimism - we, the participants and benefactors of a legal cannabis industry, were about to witness the birth of a powerhouse - an efficient, self-sustaining retail network in the biggest cannabis market in the world.

…

It didn’t exactly play out like that.

By all metrics, in fact, California has underperformed its potential as a legal cannabis market. Licenses are hard to come by, and competition is still characterized by illicit activity. Social equity programs have been abject failures - lip service to a vocal minority, rather than an honest effort to right past wrongs.

Why?

⏰ What happened then

Bad Habits Stick

In 1996, California became the first state to legalize medical cannabis. However, the rules were murky: you could legally possess cannabis, but stores weren’t allowed to sell it - this created a “gray” market, where many store owners proudly considered themselves activists, and law enforcement was inconsistent in its regulation of illegal activities.

(I distinctly remember getting used to the language of medical collectives - all payments were considered charitable “donations,” given to a store owner as a response to their compassionate act of handing you cannabis).

Los Angeles is a prime example of the legal confusion. There are (still) about 1,000 cannabis shops operating, and less than 200 are licensed to do so. Many illegal shops look downright legitimate, too - on January 1, 2018, then, it’s no surprise that illegal shops continued to syphon business from licensed retailers.

Where are all the licenses?

There are about 700 retail licenses in Oregon to service 4 million people.

There are about 700 retail licenses in California to service 40 million people.

To be clear, I believe there are inherent problems to over-licensing (retail price wars being one), but California has drastically under-delivered on developing an inclusive and extensive framework for licensing legal cannabis retailers.

To boot, crafting a winning application requires a sophisticated business plan. Funding. Lawyers. The process inherently favors individuals and organizations with money.

Social equity is a myth

The intent behind social equity programs is a beautiful one: to afford those individuals most impacted by the racist War on Drugs the opportunity to benefit from this new industry. That means putting people of color and those with limited financial means - who were relentlessly targeted by law enforcement for decades - at the front of the line and making things easier for them to capitalize.

Los Angeles, again, provides a glaring example of what not to do: operators submitted applications, secured real estate, then…

waited.

And some went bankrupt.

There are plans to release 200 more licenses to social equity applicants, but there have been “plans” for years.

To make matters worse, there are stories of predatory behavior - e.g. well-funded partners taking advantage of social equity licensees under the auspices of helping.

⚙️ Switching Gears

Yes, there were some missteps. However, California is still poised to be a primary driver of good cannabis business for years.

Sheer Numbers

California is friggin’ huge: 40 million people, with cannabis sales of $4.4 billion in 2020. The median household income is $75k+. The magnitude of this place will keep retailers interested for years to come.

Young, deliberate chains

The multi-location operators that have survived the pain of licensing and competing with a vibrant illicit market are just plain good operators.

Sweet Flower in LA. Urbn Leaf in San Diego (and up the coast). Perfect Union in central CA. TerrAscend’s Apothecarium in the bay. Bento Delivery. Coco Farms. Glass House Group.

These mid-sized+ chains are poised for two big things: continued high-speed growth (yay) or getting acquired (also yay). Either one means enterprise operators will take a larger piece of the pie in the near-term.

This also means, for better or worse, one-off operators will become fewer and farther between. Consolidation is on the horizon, big time.

Delivery

California is the proving ground for all kinds of interesting delivery setups. You’ve got pure play delivery with in-house drivers, from a single location; you’ve got the ice cream truck model with multiple trucks out on the road; you’ve got a ‘marketplace’ model wherein a large delivery operator holds inventory at several different distribution hubs; etc.

The relatively loose delivery regulations in California allow for funky business models, which is attractive to operators keen on solving the last-mile problem.

It’s…California

There is also just undeniable credibility to making a cannabis business work in California - because it’s difficult and fragmented, yes, but also because it’s the birthplace of many important parts of cannabis culture. Humboldt. The Chronic in ‘92. Venice Beach. Afroman!

The culture - both commercial and social - is highly exportable.

📚 tl;dr

• California has massive promise but has underperformed its potential

• Gray market habits, limited licenses, and failures in social equity have contributed

• However! The state boasts big revenue numbers that will only go up, the promise of consolidation and smart chains, and a delivery playground

• It is Wednesday