Will Regulations and Taxes be the Death of Legal Dispensaries?

Will Regulations and Taxes be the Death of Legal Dispensaries?

How is it possible that one of the most successful cannabis companies is losing money in the green rush?

When the best-known marijuana retailer is experiencing financial trouble in a high demand market such as cannabis; there may be a problem. The popular cannabis retailer MedMen is at a point where they’re desperately trying to raise enough cash to make up for their losses that continue to accumulate. According to their February financial statements, they’re at risk of running out of funds unless they raise additional money.

Imagine increasing revenue from ($1.8 million) up to $21.5 million from the first quarter of 2018 to the first quarter of 2019. It sounds very impressive, until you learn that the company still suffered a whopping $66.5 million-dollar loss. The only thing optimistic about these depressing numbers is that the loss was not as high as the fourth quarter of 2018 which was a staggering $78.7 million dollars.

Issues That are Decreasing Profits

The good news is that an investment company that specializes in cannabis agreed to extend to MedMen a $100 million-dollar credit line at 6% interest, the line could be increased to $250 million if MedMen’s revenue improves. But one can’t help but ask; how is it possible that one of the most successful cannabis companies is losing money in the green rush?

  • Regulations
  • High Taxes
  • Competition from illicit Dealers who don’t follow regulations or pay high taxes
  • Unable to attract a sizable number of infrequent or new users
  • 80% of all California sales are from the black market

Expenses for MedMen totaled up to $72 million in the first fiscal quarter. This included salaries, benefits, branding, marketing, cash and non-cash stock-based compensation, tax related expenses for the federal, local and state governments, and acquisition costs.

The Unfair Advantage

What do you get when you have a business that doesn’t pay taxes, employee benefits, abide by profit cutting legislation and customers who will always demand your supply? The answer is a huge competitive edge that turns into big profits.

The black market is in some ways successful because of legal marijuana. The United States is a capitalist country and customers are used to buying goods and services for the best price possible. The exceptions are brand loyal customers that enjoy the status of buying expensive brands. The latter is a smaller demographic of the consumer population in America.

Legal but not Legal

There’s a lack of awareness as to the legalities of marijuana and its jurisdiction between cities and the state. Just because marijuana is legal in a state does not mean it’s legal in your city or local jurisdiction. California for example legalized the medical and recreational sale of cannabis, but out of the 540 cities in California, only 162 cities - which is 30% percent - allow the sale of medical cannabis. The numbers are even lower for recreational cannabis where only six counties and 89 cities (20%) allow it. This creates a division where the voters of a state have voted for legalization but are blocked by local officials who oppose it. These officials have ignorantly put more money in the pocket of drug dealers. 20% of Californians admit to purchasing marijuana from the black market in the last three months.

Then there’s the exorbitant amount of fees that the black market doesn’t to pay. One good example is Illinois which has the following outrageous fees.

Illinois Medical Dispensary Fees

  • $5000 non-refundable application fee
  • $25,000 annual renewal fee
  • $30,000 licensing fee

Illinois Growers License and Operational License

  • $25,000 non-refundable application fee
  • $200,000 to obtain a license
  • $100,000 to renew license every year

These amounts are staggering, especially when you take into consideration that Illinois doesn’t even have the highest fees out of all the states that permit the sale of cannabis. To put this into perspective, a dispensary in Illinois would have to pay $60,000 in gov fees that essentially do nothing to make their business more profitable. That’s $60,000 the black market does not have to pay.

On top of the fees, a legal dispensary must pay for state-regulated testing, renewals, storefronts and attorneys. There are parts in California where the taxes make up 45% of the cost of legal cannabis. This is just a small example of how the illicit market can severely undercut legal dispensaries when distributing to consumers. The regulations, taxes and fees are making it very difficult for Legal Dispensaries to run a profitable business. Sales can be great, but it doesn’t matter. If you make 10 billion dollars but your expenses are 11 billion, at the end of the day you’re operating at a loss.

The Concern for Public Health

It’s not just California, illegal cannabis sales in Massachusetts will account for 75% of cannabis sales in 2019. These sales will be unregulated and untaxed. States are slow to issue out licensing to dispensaries, which is also contributing to some cannabis shop owners taking up the illegal sales option, just to stay in business.

Too much regulation is a bad thing but not when it comes to consumer health. One of the most dangerous drawbacks of Legal Dispensaries losing revenue to the black market is consumer safety. A study of black-market cannabis four years ago discovered that the marijuana sold illegally was full of heavy metals, fungus and pesticides.

Helpful Legislation

There seems to be legislation moving forward that will solve these problems instead of making matters worse. The Bureau of Cannabis Control passed a vote that would allow cannabis deliveries statewide regardless of the customer’s jurisdiction. Legislators are also deciding whether they should cut excise taxes from 15% to 11% for legal marijuana. This is the direction that legislators and government officials need to head toward. Making business operations difficult and less profitable only rewards the illegal distributors lurking in the black-market.

The Outlook for Cannabis Cafes

There is a lot of interest across the nation in states where cannabis is legal, to provide their residents a safe place for the consumption of marijuana. If these states aim to no longer punish their poorer residents, when it comes to the enforcement of cannabis laws, then they would be wise to enact legislation that would give low income consumers a legal place to consume marijuana whether they own a home or not.