If you follow cannabis industry news, you probably know that California’s legal market is in trouble. Cultivators, processors, and retailers are on the verge of collapse across the Golden State. It is not a pretty picture. More importantly, what is happening in California is a cautionary tale to the rest of us.
There are now 39 states with some form of legal cannabis, be it recreational or medical. It’s only a matter of time before the remaining 11 states join the ranks. It is only a matter of time before the federal government legalizes recreational marijuana. And when that happens, we are going to see a lot of starry-eyed, would-be entrepreneurs salivating at the idea of becoming marijuana millionaires overnight.
The Apple of Weed Has Collapsed
Have you ever heard of MedMen? They are a California-based recreational marijuana brand that markets itself as the “Apple Store of Weed”. They were the darling of California’s recreational marijuana market when they first launched in 2018. Some five years later, the company has collapsed. There are very serious doubts about its survival.
How could that happen? When California decriminalized recreational marijuana, it was believed they would be one of the leaders guiding the rest of the nation in adopting recreational pot. But as you probably know, the legal market in California is in shambles.
MedMen is more or less the poster child for all of California’s legal operators. It is drowning in debt, its public valuation is absurdly overblown, and it is having trouble turning a profit thanks to collapsing wholesale prices. MedMen may not be able to pay its bills in the coming months.
Debt, Regulations, and Taxes
So what happened? MedMen’s collapse is a combination of debt, regulations, and taxes. Heavy debt stems from the company’s original founders thinking that their business was more valuable than it really was. They managed to raise millions when they took the company public in 2018. To be precise, they raised $110 million on a $1.65 billion valuation.
There is no way the company was worth that kind of money. There was no way they would realize such a lofty valuation without going deeply into debt. But in an effort to be the Apple equivalent of legal marijuana, the company took on the debt they needed to expand rapidly.
Meanwhile, California taxes and regulations boosted the black market. A booming black market saw wholesale prices collapse based on heavy competition among legal producers. Low wholesale prices undercut margins and made it impossible for MedMen to handle its debt load.
A Free Market Correction
What is happening in California is pretty much a free market correction, with help from taxes and regulation. In Utah, things are different. Utah operates one of the most strictly regulated medical cannabis programs in the country. It is very restrictive about its licenses to the point that only 15 medical cannabis dispensaries exist in Utah. Pure Utah is one of them.
According to Pure Utah, cannabis businesses need to prove their financial means before they can get a license. Entrepreneurs must prove they have access to funding to develop their businesses. Limited license volumes reduce the threat from competition for new cannabis businesses.
Knowing all this, the question becomes one of an unregulated market versus a highly regulated one. Could California have avoided the near collapse of its legal industry by controlling things more tightly? Perhaps. But nothing is certain. What we do know is that California’s current model has been an abysmal failure. It serves as a cautionary tale to the rest of us.