Year 1 a mixed bag for busi­nesses in pot mar­ket

The Tribune (SLO) - - Local - BY MICHAEL R. BLOOD

LOS AN­GE­LES

It was sup­posed to be a great year for mar­i­juana en­tre­pre­neur Brian Blatz.

When Cal­i­for­nia broadly le­gal­ized pot on Jan. 1, the lawyer with a back­ground in bank­ing and health care had been work­ing for a year to set up a truck­ing com­pany that would whisk fra­grant mar­i­juana buds, in­fused juices and other prod­ucts from fields and pro­duc­tion plants to store shelves.

On its web­site, Long Beach-based Ver­dant Dis­tri­bu­tion said the com­pany’s goal was to be the United States’ pre-em­i­nent busi­ness for trans­port­ing cannabis.

But it’s all gone. The trucks were sold to cover debt, a ware­house va­cated, its li­cense ex­pired.

The choppy roll­out of Cal­i­for­nia’s le­gal mar­ket sad­dled the com­pany with costly de­lays, but it was un­done by an abrupt state rule change that al­lowed just about any mar­i­juana busi­ness to be­come its own dis­trib­u­tor, un­der­cut­ting the need for stand­alone com­pa­nies like Ver­dant.

In Cal­i­for­nia’s emerg­ing mar­ket, “the chal­lenges are tremen­dous,” said Blatz, who is now ad­vis­ing clients in the fledg­ling in­dus­try. “Sud­denly, the whole game changes on you.”

In a na­tion in­creas­ingly em­brac­ing le­gal cannabis, Cal­i­for­nia stands out as the coun­try’s big­gest pot shop.

Top-shelf mar­i­juana, con­cen­trates, balms and munchies are be­ing pro­duced and sold. Some com­pa­nies are do­ing well, es­pe­cially those with deep pock­ets that can han­dle the mar­ket’s twists and turns.

But many are not. And some, like Blatz’s com­pany, al­ready are ca­su­al­ties.

At year’s end, Cal­i­for­nia’s ef­fort to trans­form its long­stand­ing il­le­gal and medic­i­nal mar­i­juana mar­kets into a uni­fied, multi­bil­lion-dol­lar in­dus­try re­mains a work in progress. It’s a mix of suc­cess sto­ries, strug­gles and crashes.

The il­le­gal mar­ket con­tin­ues to flour­ish – by some es­ti­mates, up to 80 per­cent of the sales in the state still are un­der the ta­ble, snatch­ing prof­its from le­gal store­fronts.

With many com­mu­ni­ties ban­ning mar­i­juana sales, lim­it­ing the num­ber of li­censes or sim­ply not cre­at­ing rules for the le­gal mar­ket to op­er­ate, the sup­ply chain is frag­ile, leav­ing some shops with sparsely stocked shelves. A bat­tle over home de­liv­er­ies of pot in com­mu­ni­ties that have banned mar­i­juana busi­nesses could end up in court.

A promised state tax wind­fall has yet to ar­rive, while busi­nesses com­plain about hefty tax rates that can ap­proach 50 per­cent in some com­mu­ni­ties. The num­ber of test­ing labs re­mains tight. Mean­while, shift­ing rules and start-up costs are tak­ing a toll.

In Los An­ge­les, where the pace of licensing has lagged, Adam Spiker, who heads an in­dus­try group, summed up the con­di­tion of most com­pa­nies with one word, “Pain.”

He said tax rates need to be cut to en­tice buy­ers into the le­gal mar­ket, and the city needs to rapidly ex­pand the num­ber of li­censes for shops to sell cannabis.

“The en­cour­ag­ing sign, the state is open for busi­ness,” said Spiker, ex­ec­u­tive di­rec­tor of the South­ern Cal­i­for­nia Coali­tion. But “if you have lim­ited ac­cess to re­tail, that’s go­ing to force a lot of com­pa­nies to fail.”

A year into broad le­gal sales, “no one has it fig­ured out in Cal­i­for­nia,” he said. “It’s so new, so big, so tur­bu­lent.”

In gen­eral, Cal­i­for­nia treats cannabis like alcohol, al­low­ing peo­ple 21 and older to legally pos­sess up to an ounce and grow six mar­i­juana plants at home.

What’s emerged is a patch­work. Mar­i­juana farms pro­lif­er­ate in Santa Bar­bara County and le­gal pot shops are never far away in San Fran­cisco. But other places ban all com­mer­cial mar­i­juana ac­tiv­ity, or al­low cul­ti­va­tion but not sales.

The state’s top pot reg­u­la­tor, Lori Ajax, said her goal in 2019 will be to get more li­censed busi­nesses in the mar­ket­place, while in­creas­ing en­force­ment against il­le­gal op­er­a­tors.

One of the for­tu­nate ones has been Ari­zon­abased Har­vest Health & Recre­ation, which has op­er­a­tions in a dozen states and over 400 em­ploy­ees, in­clud­ing in Cal­i­for­nia, and re­cently started trad­ing on the Cana­dian stock ex­change. By the end of next year, the com­pany ex­pects to have at least 20 re­tail shops in Cal­i­for­nia, a man­u­fac­tur­ing plant and a statewide dis­tri­bu­tion sys­tem.

Com­pany pres­i­dent Steve Gut­ter­man praised the state’s ef­forts to open the le­gal mar­ket – the con­sumer is get­ting qual­ity, safe prod­ucts. But he said he’d wel­come a more ag­gres­sive push against il­le­gal op­er­a­tors, and pot com­pa­nies need ac­cess to bank­ing – most fi­nan­cial in­sti­tu­tions won’t do busi­ness with cannabis com­pa­nies be­cause it re­mains il­le­gal at the fed­eral level.

“There has been good and bad,” he said, but “Cal­i­for­nia is a great place for us.”

That’s not the case for many re­tail busi­nesses in Los An­ge­les.

Drive through Cal­i­for­nia’s largest city and there are plenty of shops and bill­boards ad­ver­tis­ing pot sales, and some busi­nesses pro­vide Ap­ple store-like set­tings to pick from buds with names like Blue Dream and Choco­late Ge­lato.

But the num­ber of shops is part of the prob­lem – hun­dreds are il­le­gal. Here, and else­where, the il­licit mar­ket that thrived for decades con­tin­ues to do ro­bust busi­ness, of­ten in plain sight.

Po­lice do pe­ri­odic crack­downs on in­di­vid­ual busi­nesses, but it barely makes a dent in the il­licit mar­ket­place.

In a let­ter to Los An­ge­les of­fi­cials in Novem­ber, the United Cannabis Busi­ness As­so­ci­a­tion said le­gal shops are strug­gling to keep their doors open while il­le­gal store­fronts flour­ish, sell­ing prod­ucts for as much as 50 per­cent be­low le­gal ri­vals.

Those il­le­gal shops “do not pay taxes, do not pay the cost of … city and state reg­u­la­tions, and do not fol­low re­quired worker pro­tec­tions,” wrote the group, which rep­re­sents le­gal re­tail­ers.

Larger com­pa­nies can weather the tran­si­tion to the le­gal mar­ket – some say gov­ern­ment rules fa­vor them – but smaller op­er­a­tors are tak­ing out sec­ond and third mort­gages, in­dus­try ex­perts say.

In L.A., “we are see­ing a reg­u­lated in­dus­try that is bleed­ing out,” said Ruben Ho­ing, the busi­ness group’s ex­ec­u­tive di­rec­tor.

MATHEW SUM­NER AP file

A cus­tomer pur­chases mar­i­juana at the Har­bor­side dis­pen­sary in Oak­land on Jan. 1, 2018. State reg­u­la­tors get credit for tak­ing on the huge job of trans­form­ing the long­stand­ing il­le­gal and medic­i­nal mar­i­juana mar­kets into a uni­fied, multi­bil­lion-dol­lar in­dus­try, but the re­sults have been mixed. Some com­pa­nies are do­ing well; many oth­ers are not.

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