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May 13, 2019 The business of marijuana

Slower than expected rollout of recreational marijuana keeping prices high

PHOTO/COURTESY The first day of recreational marijuana sales in Worcester, at the retailer Good Chemistry, was by appointment only.

Massachusetts consumers have already spent more than $112 million on recreational marijuana products since two retailers opened in November, kicking off an industry predicted to be worth billions.

That may seem like a good start for the first and only state to roll out the legal cannabis industry on the Eastern seaboard, but the state is far behind its tax revenue estimates and in some cases has failed to live up to the hype over the first six months, despite sky-high projections.

When compared to other legal marijuana states, Massachusetts is far behind.

The Massachusetts Department of Revenue's tax revenue forecast $63 million of marijuana tax revenue this fiscal year ending in June. With a tax rate of 17%, the state has seen $17.7 million collected through the start of May.

In March, state officials told lawmakers the lagging numbers are primarily due to the slow pace of the industry's rollout. A total of 94 completed applications are awaiting review by the Massachusetts Cannabis Control Commission, but only 38 retailers have received either provisional or final approval, which are the first two steps needed for approval to open. An authorization to commence operations can typically take several weeks after the final approval.

Of those 38 stores, 17 have opened.

In an interview with WBJ, CCC Chairman Steven Hoffman maintains the commission didn't set any goals for number of stores to get open for any period of time, but in December said he expected four to eight new retail stores opening each month.

Two, Cultivate in Leicester and New England Treatment Access in Northampton, opened to kick off the state's industry in November, and 15 have opened since then.

“We're in the very early stages of it, but I'm pleased with how its gone so far,” Hoffman said.

He called the state's rollout a deliberate attempt to limit the impact to public health and safety of Massachusetts residents while enacting the will of voters.

“We're committed to doing this right for the state,” he said. “It's not a competition.”

Despite the slower-than-anticipated rollout, Massachusetts is expected to be home to one of the largest cannabis markets, according to Colorado-based cannabis market research firm BDS Analytics.

Legal pot spending is forecast to reach $292 million in calendar year 2019 and $918 million in 2022, lagging behind only Canada, California, Colorado, Washington and New York, the last of which is expected to roll its program out in 2020.

Behind other legal states

In Washington state, where the industry was launched in July 2014, 25 stores opened on the same day. In a state with a similar population to Massachusetts, there weren't enough stores to meet demand.

Within six months about 40 total stores had opened.

“It wasn't enough for us,” said Brian Smith, a spokesman for Washington's Liquor and Cannabis Board.

What made it more difficult for that state, Smith said, was the lack of an established medical marijuana market. Other states like Colorado and California already had robust medical industries.

Converting those operators to the recreational market was like flipping a switch, Smith said.

According to the Colorado Department of Revenue, nearly 150 retail marijuana stores opened in early January to kick off the industry and all of those were previously medical marijuana dispensaries.

In Massachusetts, 47 medical marijuana dispensaries existed in November when recreational sales started at two stores.

In California – a state with 40 million people vs. 7 million in Massachusetts – more than 400 retailers, cultivators, distributors, microbusinesses and testing labs began operating shortly after legalization in early January 2018.

According to Hoffman, Massachusetts' slow pace of approvals isn't the fault of regulators or state officials. When companies apply for provisional licenses, the CCC asks when the company will begin operating a facility or open a store.

“We get answers that go from a month to a year-and-a-half,” he said. “It's impossible to know what that's going to look like.”

The CCC is bound by law to process applications within 90 days once regulators deem those packets complete.

Those applications are being processed thoroughly, carefully and promptly, Hoffman said.

“That's what I care more about than how many licenses we give out,” Hoffman said. “It's, 'Are we doing our job the right way?'”

High prices = black market

In the competitive marijuana industry, Massachusetts operators are taking notice of the high demand and somewhat limited access – compared to other legal states – and prices reflect that reality.

An eighth ounce of marijuana typically goes for about $60 including tax. In other legal states, weed can go for about half as much.

Jim Borghesani, who worked for the Massachusetts legalization campaign in 2016 and now advises marijuana firms, said that was expected.

The high prices are a combination of supply-and-demand dynamics and high taxes, but much more so the former, Borghesani said.

Cannabis firms often have had to set purchase limits to keep products on shelves while maintaining a state-mandated supply for medical patients as production ramps up to meet demand.

Due to that, the black market is still thriving.

According to BDS Analytics, more than 76% of Massachusetts cannabis will be purchased illegally this year. However, it appears legalization has put a dent into the black market, as nearly 90% of pot was bought illegally last year.

In other similarly-sized states with mature adult-use markets like Colorado, Oregon and Washington, illegal sales make up 34%, 41% and 35%, respectively.

According to Smith in Washington, that number continued to drop each year as the state added more stores. Within a year, prices were down to competitive levels.

“We've now totally undercut the black market,” Smith said.

The per-gram price of weed in Washington was about $30 to start. Now, it's about $6.

Big players, no diversity

In Massachusetts, the CCC made it clear it wants to set aside a part of the industry for people unfairly hurt by the War on Drugs and prohibition.

The CCC formed an application process for so-called economic empowerment applicants, and six businesses have submitted completed applications. None have been awarded a provisional or final license. Hoffman conceded that part will take time as the industry matures.

At least one economic empowerment applicant in Worcester, New Dia, is preparing its application for the CCC.

The vast majority of banks won't lend to these companies, forcing small businesses to rely on the experience and financial strength of larger multi-state operators via investment or management agreements, said New Dia owner Ross Bradshaw.

It's primarily the loads of cash and knowledge minorities looking to enter the industry are lacking. As a result, more than half of Massachusetts pot companies are backed by wealthy investors or powerful political figures.

According to the CCC, 73% of cannabis workers in the state are white, which doesn't square with arrest data.

According to a 2016 report from the ACLU, the arrest rate for marijuana possession in 2014 was 3.3 times higher for black people than it was for white people. For sales, it was 7.1 times higher.

However, Massachusetts is the pioneer of cannabis equity and is set to roll out more equity programs shortly.

“I know the CCC is trying to be thoughtful, and it's taking a while,” said Bradshaw, adding capital and industry knowledge are essential pieces small business entrepreneurs have been struggling to gain in the early stages of the industry.

“We all have to be patient and realize we'll hopefully get there,” he said.

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