Everywhere I turn I see a headline or a comment about how licensed cannabis businesses are hemorrhaging money.
I also see headlines suggesting the legacy market isnโt going anywhere, even in states where legalization has already arrived.
Between high taxes, siloed state markets, and lack of access to capital amongst other things itโs a far-off cry compared to the reported numbers of growth for the regulated cannabis industry.
According to New Frontier Data, the industry is estimated to boom to $72 million by 2030.
But where is that profit going?
And why is the illicit cannabis market worth an estimated $60 billion in 2023 alone?
My speculation of where that money is going comes from:
Iโm a licensed hemp retailer and brand, so Iโm personally and financially invested in the cannabis industry.
I have the pleasure of talking to a myriad of licensed cannabis operators across the United States weekly for my podcast and I hear the same sentiments echoed.
Itโs going to the state โ which for the record I support when that money goes back into the community or to help bolster the stateโs cannabis program.
But the reality is not a lot of states are handling legalization all too well, and their programs arenโt helping support and scale these fledgling regulated markets.
Which is only further fueling the legacy operations to coexist.
Because what are you going to do if โdoing it rightโ costs you more than
"doing it wrongโ?
For example, we have 280E which penalizes adult-use cannabis brands by โprohibiting the deduction of โordinary and necessaryโ business expenses after reducing gross receipts by COGS (Cost Of Goods Sold), essentially resulting in your federal income tax liability being calculated based on gross income, not net income.โ
What is the motivation to play the game when the rules you have to play by are detracting from your long-term success?
And then there is the not-so-sneaky โcannabis taxโ that every bank, processor, and platform imposes as a #costofdoingbusiness in this high-risk industry.
Weโre already limited with options, and the remaining ones we do have available for us still find a way to penalize us.
Square charges CBD merchants (like myself) a 4.4% processing fee which is almost double the 2.6% processing fee for non-CBD merchants who are on their platform, just to access the same technology.
We have to get creative to navigate around traditional marketing channels to reach our target consumers and have a constant fear of censorship or worse, losing our organic community for the perceived violation of a social media companyโs TOS.
This happened to us last November when RESTART was kicked off Facebook permanently for sharing our educational content as a Federally legal and licensed hemp brand.
And itโs especially painful if youโre in adult-use cannabis because you canโt sell directly to consumers, so youโre competing against competitive channels which take a cut from profit at every turn.
I know adult use, medical, and hemp are not the same, but we bear similar burdens and feel the repercussions of the overall federal sentiment toward cannabis.
This has disrupted my idea of going after a medical or adult use license (should that opportunity open up in my state).
What is the actual gain of getting licensed?
Texas just closed licensing for its medical marijuana program, TCUP (Texas Compassionate Use Program), and between consultants and lawyers, the application itself, and other tidbits to apply cost at minimum a whopping $20,000 non-refundable just to cross your fingers and hope you charmed the state enough to convince them to award you a license.
By the way, Texas hasnโt even outlined how many licenses they will even issue during this next round.
But if youโre one of the lucky few entering into that territory, just note in addition to being required to be a fully vertically integrated operation (from cultivation to sale) it will cost you $488,520 for a two (2) year period just to maintain that TCUP license.
And the latest report from the Texas Department of Public Safety which regulates the TCUP program published the latest count of patients is about 53,000.
Right now that is split between the three active licensed TCUP operators who have already respectively invested millions into their businesses.
So it leaves me wondering, how long til theyโre profitable?
Compare that with Florida at 561,177 patients and California at 1,920,294 patients (data as of 2021).
With the recent TCUP application closed as of April 2023, and the 2023 Texas Legislative Session ending this week without much if any, movement for cannabis legislation, weโre at a standstill.
Weโre waiting and seeing.
How this 88th Texas Session ends will indicate the next few years of the TCUP program.
The state of Texas still has to deal with a lawsuit on Delta 8 in regulation.
The federal government is working on the 2023 Farm Bill which will impact the hemp program.
And so many more little things that we have to be mindful of when dealing with the licensed and legal side of the industry.
Thatโs just Texas, I know every state and even city to city has its own nuances and challenges.
So when people ask me if they should get into the licensed side of the industry Iโm like, are you sure?
Iโm not saying donโt do it, Iโm just saying that I get why you wouldnโt and I understand why the legacy is thriving.
It is very conflicting because I know the legacy side isnโt free from issues, it just all comes down to what risk are you willing to take on, and whatโs the reward.
As much as I love the plant, I still need to be conscious about profitability and the reality right now is there is a disconnect in the regulated market.
I can also say that as someone who is operating under a license, itโs extremely motivating to stand up and fight for better laws.
To try to make it a better environment for every party from operator to regulator to consumer.
But my goal is to also build longevity, and we need stability to do that.
I donโt believe there is one right path, itโs a complicated situation thatโs currently in flux.
Weโre all motivated by different things, but at the end of the day, there are some big things to consider.
Whether youโre already in the industry and youโre thinking about how to pivot.
Or youโre not in the industry yet and youโre thinking of how to enter.
It just comes down to โ
At what cost?
How long are you willing to work for that change?
Can all these sides of the industry converge and coincide?
And who will survive?