Up in Smoke

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Five experts weigh in on how the pandemic has affected the cannabis industry and why the next few months could result in corporate consolidation and a surge in the black market.
Art by Evan Solano.

Weed is the only thing getting me through 2020 — and I know I’m not the only one. According to a survey conducted by the California cannabis brand Goldenseed, more than 73 percent of U.S. adults cited stress and anxiety relief as their primary motivation for getting high. Whether you were — or weren’t — getting stoned before our reality began mirroring the Book of Revelation, smoking weed has become the standard for coping with the palpable anxiety, depression, and angst triggered by this wretched year. 

It checks out, then, that cannabis sales are booming, particularly in L.A. — one of the largest cannabis markets in the world. That’s at least according to multiple cultivators I spoke with around the city. Jay Handal, the owner of ERBA Markets dispensary in Mid-City, says that product sales have maintained an upward trajectory since Los Angeles went into lockdown in March. Chris Ball from Ball Family Farms, meanwhile, says his company can hardly keep up with the increased demand for flower. Business has done so well since the pandemic began that both companies are actually looking to hire new employees.

I would be writing a much different story if an amalgamation of unique circumstances hadn’t culminated in favor of the cannabis industry this year. The first happened on March 19, when L.A. County made a historic decision to classify legal weed businesses as “essential,” allowing the industry to fully operate throughout the pandemic. At this point, however, plenty of potheads in L.A. and all over the state (myself included) had already panic-shopped for weed thinking dispensaries were going to close indefinitely. Products flew off shelves as people purchased weed in bulk, ready to hunker down for the apocalypse. The beginning of March saw the legal industry’s first massive sales spike. April 20, the Black Friday of weed, saw a week-long sales surge, with some businesses reporting a 250 percent increase in total orders from the same period last year. 

So-called vice industries such as liquor, drugs, and tobacco, historically flourish in times of crisis and recession, so it’s no surprise that people are getting high as fuck to pass the time and experience temporary relief from chronic distress and feelings of impending doom. And it’s not just potheads who are contributing to the unprecedented surge in legal weed sales: First-time tokers are apparently turning to weed in droves, and parents on full-time childcare duty are also among the demographics who’ve increased their cannabis consumption since the pandemic began. 

Read More: How One Family Beat the Odds and Created L.A.’s Most Indispensable Dispensary

While aspects of the industry are thriving, the future is hazy. A recession combined with climbing unemployment rates will inevitably have an impact on who can afford legal cannabis — which is currently taxed upwards of 70 percent, thanks to California’s rigid regulations. Depending on where you are in L.A., an eighth of legal flower can cost around $80, while weed dealers typically charge around $40 for the same amount. The more financial hardship our city — and country — endures, the more likely it is that people will start buying unregulated pot from the underground market at a fraction of the cost.

But, if consumers stop buying from the legal industry, a lot of licensed brands operating on razor thin margins will likely go out of business, according to Jeff Welsh, an L.A.-based attorney at Vicente Sederberg, which specializes in cannabis law and policy. Social equity brands trying to secure licenses or get their legal businesses off the ground will essentially be swimming against the current, making it almost impossible to succeed. Welsh worries that brands flush with VC funding, such as Cookies or Lowell Farms or Canndescent, will dominate the marketplace, making the cannabis industry an even more corporate, gentrified space. To get a sense of the highs — and hazy lows — of the cannabis industry, I asked five different experts in the space to weigh in on how the pandemic has impacted their licensed weed business and what’s coming down the pipeline. Here’s what they told me.

Chris Ball: CEO of Ball Family Farms, one of L.A.’s only black-owned licensed cultivation businesses

This is going to sound fucked up: The thing about COVID is that in terms of business, it has been a blessing for us — it’s generally made the cannabis industry boom. Once stay-at-home orders went into effect and everyone was on lockdown, everybody wanted to get high. My business just went through the roof and we started not being able to keep up with the demand — a lot of cannabis brands are experiencing this right now. It’s crazy. We’ve even had to hire more people, which is great because we’ve been able to put jobs into the community. 

But, not everyone is experiencing this. There are other brands that were kind of getting away with having pretty packaging and selling a lot of sub-par product without people ever really noticing because they could go out and drink, go to the club, get dinner and do all sorts of things. But once COVID forced everyone inside, people have started to figure out what brands are actually good because all there is to do now is sit on the couch and smoke cannabis, dissect it and break it down.

I think brands like that are going to be the ones to face the wave of inevitable market consolidation. I believe the companies growing really high-quality flower and doing it right — and not just relying on pretty packaging — are going to continue to flourish, and here’s why: It doesn’t matter how professional your brand looks or what is happening in the world, people are always going to find a way to get their medicine and drugs. If the economy is doing well, you’re selling more cannabis or drugs or anything, really, because people have money. When the economy is in a recession or depression, people are selling more cannabis, alcohol, and drugs because people are depressed. 

People have started to figure out what brands are actually good because all there is to do now is sit on the couch and smoke cannabis, dissect it and break it down.

Chris Ball

People are always going to find the money for quality cannabis. But, even still, if brands fail in the legal space, they are just going to go to the legacy market, which has been growing, it hasn’t stopped and it won’t stop. If state legislators keep increasing taxes and the price of legal weed keeps going up, the state will be helping the traditional market continue to thrive. Why would anyone pay full price when you can get pretty much the same thing but at 50 percent off? The only difference is that legal weed lab tests for contaminants and the black market doesn’t. That’s it. 

Tiffany Devit: President of wellness for CannaCraft, a licensed manufacturer with numerous products sold in LA

The big issue that I see across the landscape of the industry is that we’re heading into a massive economic recession/depression. I don’t think we’ve seen the worst of that yet. Ultimately, that’s going to impact how much money people are willing to spend on cannabis. That becomes an issue for the legal industry because California has an incredibly robust illicit market that’s been a major source of competition for the legal industry, even before COVID. It’s three-to-four times less expensive to buy product from the illicit market. How can the legal industry possibly compete when the illegal market isn’t subjected to the same taxes, or regulatory and operational fees every step of the way? 

That was an institutional challenge before, and the recession is turning it into an existential crisis for the industry. Before the pandemic, 80 percent of people in California bought their cannabis from the illicit market. Now, we expect that number to go up. This is particularly an issue for L.A. because it’s home to so many illicit manufacturers who are a public safety disaster because, obviously, when a building blows up due to an improperly managed volatile extraction oil facility, that’s an immediate danger. But, even looking back at the vaping crisis, that was a mass poisoning event perpetuated by illicit manufacturers. 

So, when we look at the industry as a whole and the economy we’re heading into, I think we’re gonna see a major resurgence of the illicit market because patients and consumers are burdened with having to pay a 70 percent markup in taxes for legal cannabis. Traditional market product is significantly more affordable. It’s really going to devastate a lot of licensed cannabis businesses, especially the small social equity brands. 

Read More: The Secret Life of Plants

Karim Webb: 4th MVMT Social Equity Licensing Consultant

Covid has made the regulatory framework and execution from the City of Los Angeles and [its] Department of Cannabis Regulation (DCR) unbearably slow-going for social equity applicants. [L.A.’s Social Equity Program is intended to offer application priority and business support to individuals who have been disproportionately impacted by the War on Drugs.] We are completely held up right now. On September 3, 2019, social equity applicants going through the application process had to have property leases in-hand or had to own the property they plan to do business out of. So, here we are a year later… and we’ve still not received local authorization — even though these people have had to pay rent on these properties for over a year now.

There’s no doubt that Covid has played a part in the DCR’s inability to be efficient enough to help us mitigate the cost of this elongated time period. There’s no doubt in my mind that there would have been more focus on solving the issue of moving the process forward in Los Angeles. But, Covid has been the priority for the mayor and our council people, which directly impacts the DCR’s ability to make moves.

“No one is getting licensed right now, which means a lot of people are bleeding money on rent they aren’t garnering any income for”

Karim Webb

So, when I look at how Covid has impacted the industry, the social equity aspect of the L.A. cannabis [industry] is stuck — no one is getting licensed right now, which means a lot of people are bleeding money on rent they aren’t garnering any income for because you have to have a property before you can get approved by the city and then licensed by the state. Most of the time, investor money could be a potential option to help people make ends meet before getting licensed, but not in this economic climate. 

Coming across capital in this space is difficult no matter how talented your team is. But it’s really hard for social equity applicants and licensees. Unless you’ve got friends or family, it can be extremely hard to find funding — and Covid only makes it harder. Capital resources have been strained in ways that in non-pandemic times wouldn’t be the case because people have lost jobs and there’s a general contraction in the economy right now.

Jay Handal: Owner of Erba Market dispensary in Mid-City

What’s interesting is that we’re seeing a lot of new cannabis users and people coming in generally curious about using marijuana products to treat certain ailments. We’re seeing an influx of people with anxiety and other issues Covid has exacerbated and stirred up who are interested in trying cannabis for the first time because they want to get off prescription medications — and many of them are liking it. It seems like a lot of people are focusing on adopting more natural approaches to taking care of themselves, and cannabis is one of the things they’re going to. 

But L.A. county has mandated that only 10 customers maximum are allowed in a dispensary at once. So, that’s how many customers we see at a time. Not all dispensaries abide by this because some are smaller than others. But, we stay safe. Everyone has to stand on designated marked spots for social distancing and wear a mask. We also practice complete sanitizing and sterilization. Every morning before we open we have a crew that comes in and cleans down the entire store. It’s a lot of work, but when you see 700 people a day, it’s how it has to be. 

To help keep the flow moving throughout the store, we’ve installed new self-service kiosks and vending machines. We put our number one products in the vending machines, which keeps the line that wraps around the building from stagnating and getting too out of hand. These self-service machines allow people to come in, buy their products, and leave. The new self-service kiosks don’t even require a budtender’s help. So, if a customer knows exactly what they want and have a debit card, they can come into the shop, check in, purchase their product and wait outside for their stuff. The idea is to make it as simple and convenient for people to come in and out.

So far, things have been working like this. We haven’t had to let any of our 89 employees go — in fact, we’re looking to hire more people. That’s another thing cannabis has done during Covid is create jobs in an economy that’s left a lot of people unemployed. We provide health insurance and all the good benefits, too. It’s important to us, especially right now, to provide a place where our employees can have a good job and make a good living.

Jeff Welsh: Attorney at Vicente Sederberg, a law firm specializing in cannabis policy

Things have been extremely challenging in the space, which has made things difficult for us. We are experiencing the ebbs and flows as far as revenue is concerned. California, in particular, has had it really tough because of the fires, obviously the pandemic, and I think a lot of people are just hesitant to spend money, generally, because of all the uncertainty… So, ultimately, what we are experiencing is a reflection of what our clients and what the industry is experiencing as well.

The cost to be a compliant cannabis company in California has created a market of companies operating on razor-thin margins. So, we’re likely to see a market consolidation, regardless of whether brands want to — many probably won’t even really have a say in the matter. You pretty much can’t get licensed in California for under $250,000. Then there’s the cost of building out a facility to meet the state’s demands for compliance, which can cost millions. The reality is that a lot of smaller brands that aren’t as well capitalized have had to participate in the black market a little bit to basically keep paying their bills to stay afloat in the legal industry.

We represent a number of bigger brands and I’m extremely proud of them, but what we’re seeing is well-capitalized across businesses across the space being very eager to gobble up distressed assets. So, you’re just seeing the rich getting richer by acquiring groups that can’t be successful and are desperately looking to shed their assets and compliance costs. So that’s one way the consolidation is going to play out. I think we will also see the black market get bigger as these consolidations happen. A lot of the groups that don’t make it past 2020 are just going to keep doing what they’re doing just on a smaller level — that means moving product on the black market.

I think that companies selling high quality flower will continue to be successful and become more successful, but there’s a limit there. Most people don’t and won’t have the means to comfortably spend $80 on an eighth of flower when you can get similar product for $40 on the black market and save money. So, I think the flower that’s consistent in quality and price is going to win. That’s where our larger cultivation clients are setting their sights. In terms of other pivots, a lot of businesses are addressing financial issues by racking up credit lines where they can. A lot of brands are going into debt throughout the supply chain, particularly the ones who were struggling before.