Cannabis catastrophe...

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Cannabis prices plummeting; some predict business shutdowns
One expert predicts as many as 25% of retail pot shops statewide could close for good.
Henry Schwan
Telegram & Gazette

Peter DeCaro, owner of Resinate Inc. in Worcester.
WORCESTER — Falling prices and steady revenue.

On the surface, that’s a positive development for customers and owners in the recreational marijuana industry in Worcester and across Massachusetts.

But beneath the surface, some experts say there are cracks in the industry’s foundation and some pot shops could go out of business or get scooped up by better-capitalized competitors. 

It could happen sooner rather than later.

“Consolidation is inevitable,” said Peter DeCaro, owner of Resinate, a recreational and medical marijuana business at 1191 Millbury St.

There are 245 adult-use recreational marijuana businesses in Massachusetts, including 12 in Worcester, a number provided by City Hall. Four of the 12 also sell medical marijuana.

A City Council vote capped the number of retail marijuana licenses at 15, or 20% of the number of package store licenses issued, according to state law.  Since then, the state awarded Worcester additional package store licenses based on 2020 data from the U.S. Census Bureau. The result is two more marijuana retail licenses, said a city spokeswoman.

DeCaro said his business is running strong, but that there are storm clouds for the industry as a whole. Specifically, too much cannabis supply is driving down prices.

"In a year, we’ve seen a 100% increase in the number of (cannabis) plants harvested in the Massachusetts market," said DeCaro. “We are certainly dealing with a lot more saturation. The competitive nature of it has driven prices down. The price a couple of years ago was $5,500 to $6,500 per pound. Today it's below $1,000 per pound. This is creating stress on organizations.”

Troubling picture
Alex Mazin, owner of Bud’s Goods & Provisions, with recreational locations in Worcester, Watertown and Abington, paints a troubling picture.

It's possible, Mazin said, that as many as 25% of pot shops statewide could shut down or get gobbled up by competitors in the next year or so because of difficult market forces.

Bud's Goods owner Alex Mazin outside of his West Boylston Street shop.
“It’s time for this story to be told," said Mazin by phone from Las Vegas, where he was attending the Marijuana Business Conference & Expo. “The outside world is jaded to think that anyone can get rich (in this business). That it’s a goldmine. That if you get a license, you will have immediate success. A lot of issues are happening and a lot of operators are not going to make it.”

Supply and demand
Like any industry, retail marijuana falls under the forces of supply and demand.

Cultivators and manufacturers are pumping out a lot of weed — a 77% increase in the average count of harvested plants in the past year, according to the state Cannabis Control Commission based in Worcester, from an average count of 1.3 million plants in October 2021 to 2.3 million last month.

Meanwhile, the price of a gram or ounce of weed fell 73% over the past year and 85% in two years.

Given those numbers, which are based on self-reporting by cannabis businesses, there appears to be a ton of supply, with prices falling fast. It’s a positive development for customers, said Mazin, because the price of retail cannabis is able to compete against the nonregulated "legacy" market. In other words, the illegal market.

Worth monitoring
The legal market, especially supply and price, are worth monitoring, said Cannabis Control Commission Executive Director Shawn Collins, during the agency’s Nov. 10 virtual monthly meeting.

“Price point is obviously something we want to monitor from the viability of businesses,” Collins said. “And we also have to admit as a state government entity the impact on tax revenue. We do collect a 20% tax at retail sales. Twenty percent of less, is less. So, I think it’s just worth bearing, it’s worth monitoring.”

Other market forces are at play beyond supply and price, said Kimberly Roy of Sutton, a CCC commissioner appointed by Gov. Charlie Baker.

Roy noted that a sweeping cannabis reform bill signed into law in August by Baker could result in public hearings in the coming months on concerns from participants in the cannabis industry. A study on cannabis production could result.

"Perhaps look at the data and see where to go from there," Roy said, adding that one year ago there were 62 cannabis cultivators in Massachusetts. Today there are 92 and 25 more are in the final licensing stage.

Revenue steady
Some retail cannabis businesses are apparently not hurting for revenue, as cash is pouring in, despite the oversupply and falling price. The Cannabis Control Commission reported a 58% overall sales increase in the past year, from $2.3 billion to $3.7 billion. That's a drop in the bucket compared to the 248% increase in the past two years, when sales were $1 billion 24 months ago.

So, with rising revenues and low prices, what is behind the concern in some circles?

Major Bloom cannabis dispensary, 76 Millbury St. in Worcester.
“There is definitely an amalgamation of issues converging that make it more difficult for smaller companies to compete in the market,” said lawyer Laury Lucien, an appointed member of the state’s Cannabis Advisory Board who teaches cannabis law at Clark University.

Lucien is also a part owner of Major Bloom, a manufacturing, delivery and recreational marijuana business at 76 Millbury St. 

One issue is vertical integration, a business model that Lucien noted gives some businesses a competitive advantage because they make the products that they sell. That gives them a cost savings by keeping production in-house.

They also produce lines of cannabis flower that are only sold in their stores or to their affiliates, Lucien said. That denies other stores from having those products, or they buy them at an inflated price.

Mazin also touched on vertical integration because he feels it forces businesses that don’t produce their own products to drop their prices in order to compete. 

There’s also a federal tax issue, specifically Section 280E of the Internal Revenue Code. It forbids businesses from deducting otherwise ordinary business expenses — like salaries, wages, rent and electricity costs — from gross income tied to “trafficking” of Schedule I or II substances, as defined by the Controlled Substances Act. 

The IRS applied Section 280E to the legal cannabis businesses, since cannabis is still a Schedule I substance.

“It’s an extreme tax burden that adds a extra layer of difficulty to the process, making it more difficult for a business to compete,” said Lucien.

She also said that recreational marijuana businesses in low-income neighborhoods of color that have been disproportionally impacted by the governments' war on drugs could be most impacted by current economic forces.

"They had to take the most risk because they don't have access to (financial) resources. They poured their life savings into the business and don't have a runway to weather the storm," said Lucien.

A silver lining, Lucien said, is the cannabis reform law Baker signed in August that establishes a loan fund to bring more equity into the market.

Rising inflation is also in the mix, creating a situation where operating expenses are rising, while the price of cannabis and revenues for some businesses are falling.

“The (cannabis) bags I buy, my electricity and heating bills, everything is going up, except my revenue is down because pricing continues to go down,” said Mazin.

Too many locations?
Could there be too many recreational pot shops, where an overabundance of supply fills up shelves, contributing to falling prices?

“We have enough, I’ll put it that way," said DeCaro when asked if the Cannabis Control Commission had issued too many licenses.

“The Baker administration’s approach was to let the market determine who is successful, let competition work it out,” DeCaro continued. “We certainly don’t need more capacity in the market right now. There’s an overabundance of it, and next year it’s going to be very challenging for many operations.”

Lucien sees it differently.

It’s not fair to place all the blame on the Cannabis Control Commission, she said, because cities and towns work hand in hand with the state when it comes to issuing licenses. To get a license from the commission, a business must first satisfy local requirements.

Besides, if there were more retail pot shops, Lucien noted, there might be a greater supply of innovative products to excite consumers.

“What we’re seeing, I think, is growing pains of a new industry trying to find its rhythm,” said Lucien. “The pendulum is swinging back and forth until we find a sweet spot.”

Solutions?
DeCaro, Mazin and Lucien introduced ideas to address the challenges facing the retail cannabis industry.

One is streamlining the state’s costly process for getting a cannabis license, which can take several years to complete.

Another is changing the federal tax code so cannabis businesses can deduct normal operating expenses. Taxes are a sensitive point for Mazin. He claimed 92 cents of every dollar he earns in cannabis revenue goes to the government to satisfy five taxes – local, state and federal sales tax; payroll tax; and a consumer tax paid by customers.

In Massachusetts, adult-use marijuana is hit with a 20% tax: state sales tax (6.25%), state excise tax (10.75%) and a local option tax for cities or towns (up to 3%).

“The government is taking way too much money from the industry. Ninety-two cents on every dollar, that’s a crazy factor," he said. "(The government) is making as much money as the industry is without paying expenses and overhead.”

There is some tax relief for marijuana businesses. A retail marijuana dispensary can reduce its gross receipts by its cost of buying or producing the marijuana that it sells, according to Internal Revenue Code 471.

Also, the state marijuana reform law that went into effect in August allows licensed marijuana businesses to deduct trade or business deductions provided by the Internal Revenue Code on state returns for tax years beginning on or after Jan. 1, 2022.

Lucien would like to see more retail locations because of the oversupply of cannabis. She’s also an advocate for more manufacturing to spur innovative products that appeal to more customers.

Mazin and DeCaro call for removing the state cap of three locations for any cannabis business.

As Mazin sees it, companies with three locations generally have the financial resources and experience to buy a struggling retail marijuana business. But if the number of businesses is capped at three, the enterprises already operating three businesses can’t buy a floundering one because of the cap.

Lucien doesn’t support changing the cap because she said it will encourage domination of the market by a few players.

Final thoughts
Mazin pointed out that he's the only three-store recreational marijuana business in Massachusetts that doesn't have vertical integration. He's making a strong go of it, but feels changing market forces are a real threat to the industry.

"The state has to consider stepping in and figure out a way to allow operators to survive or accept those that fail," said Mazin.

Despite skyrocketing supply and falling prices that some feel are a drag on the industry, DeCaro said he has got plenty of customers. 

He acknowledged that since his business sells both recreational and medical marijuana, he’s likely in a better position to tap the market versus competitors that only sell recreational weed.

But market forces, he believes, will bring consolidation that will eliminate weaker adult-use recreational businesses. 

"Any industry that doubles its supply in one year is going to put stress on the industry," he said.

Contact Henry Schwan at henry.schwan@telegram.com. Follow him on Twitter @henrytelegram