Adult-use marijuana companies struggle to stay afloat amid overproduction, falling prices

Falling prices and a product glut in more established state marijuana markets are forcing companies out of business, triggering layoffs and setting off an industrywide scramble to stay afloat.

In Colorado, Oregon and Washington state, where the markets are more mature, wholesale cannabis prices have tumbled because growers produced far more flower than retailers could absorb. This has put added strain on cannabis growers and retailers.

A lot of companies that are not related to cannabis are also struggling. For example, tech companies Akerna of Colorado and Dutchie of Oregon, as well as California-based delivery operator Eaze, recently had to let some people go.

This is partly because cannabis products are often taxed at a much higher rate than other goods such as corn, milk and automobiles. In Washington state, for example, taxes can account for nearly 50% of the price of marijuana products on store shelves. This makes it harder for cannabis company owners to remain competitive – much less survive.

James Lathrop, owner of Cannabis City, a marijuana retailer in Seattle, said that his revenue has been dropping for months and years. He is barely able to keep his doors open.

In response, retailers are using various tactics to stay afloat, including:

• Offering steep discounts to consumers,
• I am getting out of the retail business to focus on growing marijuana,
• Opening new businesses is a way to bring people back to your store.

Matt Walstatter, who sold his Oregon store in 2019, said that it is going poorly for almost everyone. He said that at industry events, nobody really talks about their businesses because everyone is talking about how terrible it is and how it is a bloodbath. The following is a snapshot of market conditions in three states:

Oregon

Marijuana companies in Oregon are struggling to keep up with the competition. This is because, in 2014, voters in the state legalized recreational marijuana. As a result, many businesses have opened their doors to sell cannabis products. The state imposes a 17% tax on all cannabis products, while municipalities are allowed to add an additional tax of up to 3%. Initially, there was no limit on the number of retail licenses the state issued. However, this caused a surplus of retailers which eventually led to the state imposing a moratorium on new cannabis licenses in April 2018.

"The retail market here is very crowded," Walstatter said. "People used to drive past stores to come to our store, but now there are so many other stores that they're driving past 10 or 15 of them."

Oregon has a lot of cannabis retail stores. There are 787 stores, according to the Oregon Liquor and Cannabis Commission. Oregon's population is about 4.2 million people. Walstatter said two high-volume retailers opened on either side of his store soon after he opened, which made it harder to remain competitive. He said he has seen many businesses like his either sell their stores to multistate operators or close up shop because of the stiff competition.

A tight labor market is making it difficult for businesses to find employees. Businesses are struggling to find employees who can do the job, especially in industries like agriculture where the work is physically demanding.

Colorado

Since Colorado legalized cannabis for adult use in January 2014, the state has seen steadily rising sales. However, in the past year sales have decreased steeply, and business owners are now shutting down or looking to sell. This is likely due to the imposition of a 15% excise tax on retail cannabis products, in addition to local sales taxes of up to 2.9%.

According to the Colorado Department of Revenue, the total amount of marijuana sales in April was 153 million dollars. That's a 25% decline from April 2021. The price of wholesale cannabis flower has also gone down. It's now 43% cheaper than it was a year ago. Cannabis retailers in Colorado have also reported that there is an oversaturation of the retail space, which recently led to the closure of all seven Buddy Boy stores in Denver. The situation has been just as bad for growers. Chris Becker, head of revenue and partnerships for Denver-based cannabis brand The Honeybee Collective, said that the market price for a pound of wholesale marijuana flower has dropped from 1,600 this time last year

"It has been a tough year for cannabis cultivators," he added. "Most people built their businesses around getting at least $1,500 a pound. But with the cost of production around $800-$900 a pound, many of the smaller cultivators with 3,500- to 5,000-square-foot grows are likely to go out of business."

John Andrle, owner of Denver cannabis grower and retailer L'Eagle Services said the market indicates "some serious trouble for everyone in the industry, notably growers, but extending to stores, product manufacturers and more."

Andrle said that marijuana grows are being sold at a fraction of their original cost, and stores are not faring much better because they are being offered for sale at an alarming rate. He estimates that half the stores in Boulder are currently up for sale.

Washington 

Marijuana businesses in Washington are struggling because of the high taxes. Washington state legalized cannabis for medical use in 1998, and adult-use sales began in July 2014. The state has a strict licensing limit, with the number of retail licenses capped at 556 – well below the nearly 800 stores currently operating in neighboring Oregon. The state’s population, by comparison, is nearly double that of Oregon’s, at 7.5 million. And, at a whopping 37%, the retail excise tax on marijuana purchases is much higher than in Oregon or Colorado.

Cannabis City's Lathrop said "This is in addition to the regular state of Washington sales tax, which, in Seattle, is 10.2%." He told MJBizDaily that while he might have less storefront competition than do retailers in other states, Cannabis City struggles to bring in customers who would rather shop on the illicit market rather than pay such a high tax.

"The only people who are winning are the high-volume stores that have been around for a while in an area where they have had a monopoly," according to Lathrop. Lathrop said he will be forced to close his store if market conditions don't improve. He has even opened a cannabis-themed lounge – it serves beer, since marijuana clubs are banned in Washington state – in an attempt to drive traffic back to his dispensary. "However, all of my efforts have not been successful. I'm at the point where I'm asking myself, should I declare bankruptcy? Should I sell my store after being in the industry for 8 years and walk away with nothing? Or can I still make it happen?"

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