Northern California marijuana companies lay off workers, adjust expectations
Some industry watchers say they predicted a crash would eventually come after Californians voted to legalize cannabis three years ago. They foresaw the rush to invest in fledgling marijuana companies with unrealistic revenue targets. They warned against hefty taxes from state and local governments angling to gain from those promised returns.
The so-called green rush of investment and entrepreneurship arrived with marijuana's legalization in 2016, as did whole new categories of jobs and potential funding sources for schools and road repairs.
Then more than three-quarters of cities and counties across the state banned dispensaries and other cannabis companies.
Now, hundreds of people working in California's cannabis industry are losing their jobs, while California's decades-old black market is still thriving.
CannaCraft, Sonoma County's largest homegrown cannabis manufacturer, laid off 16% of its workforce last week. Flow Kana, a major cannabis brand for organic sun-grown marijuana from Northern California's Emerald Triangle, also laid off about 20% of its employees.
Other California cannabis juggernauts announced layoffs in October. WeedMaps CEO Chris Beals announced on Twitter last month that his company fired 25% of the cannabis retail advertiser's employees.
Eaze, a San Francisco-based tech platform that helps dispensaries manage deliveries, let go of 20% of its workforce.
“Everything was going really well. Then all of a sudden we weren't hitting our target - and everybody was retracting,” said Dennis Hunter, founder of Santa Rosa-based CannaCraft. “We had to make the responsible decision to cut our costs.”
Burdensome taxes, complex regulations and not enough legal dispensaries to get products in front of consumers in California have created a tough economic atmosphere, according to many cannabis business leaders.
Then Friday, California announced it will increase taxes for cannabis businesses starting Jan. 1.
“People were gobsmacked,” said Elizabeth Ashford, senior director of corporate communications with Eaze.
Friday's announcement from the state came six weeks after Eaze closed its San Diego office and laid off 35 of the company's 170 employees, a move Ashford described as a painful response to the many unique pressures on the legal cannabis industry in California.
“It's very hard to overstate the impact of that on top of everything else,” Ashford said of the tax hike. “You've had capital markets dry up. Banking solutions have failed to materialize. The illicit market is the vast majority of the market right now.”
The contraction in California's cannabis sector is drawing comparisons to the dot-com crash that hit the Bay Area in the early 2000s when the bottom fell out of the tech industry after years of hyper speculation. For the state's cannabis industry, the cuts are hitting all kinds of businesses, from manufacturing to delivery.
“There's always been a misperception from people outside the cannabis industry that it is a gold mine,” said attorney Joe Rogoway, who runs his cannabis-focused practice from offices in Santa Rosa and Southern California. “Companies were able to raise a lot of money, expand rapidly and delay having to deal with market realities.”
Cannabis companies still cannot access traditional banking services, such as bridge loans that offer businesses short-term cash infusions to get through a pinch. These companies also can't deduct business expenses from their taxes, which most every other kind of company in the nation can do.
The industry took a hit earlier this year when people who use vaporizers - also known as vapes or e-cigarettes - started to get serious lung illnesses. As of Thursday, the Centers for Disease Control and Prevention identified 49 related fatalities. Federal health investigators are focusing on an additive - vitamin E acetate - as a “chemical of concern” in the health crisis.
Local cannabis industry professionals have said the additive is not put in their products, which go through rigorous state-mandated testing. The health scare has taken its toll while the industry tries to convince users its products are safe.
Meanwhile, the black market is thriving.
Consumers in California are expected to spend $8.7 billion on illegal cannabis in 2019, compared to legal sales forecast to hit $3.1 billion this year, according to BDS Analytics cannabis industry research firm.
That's nearly $3 spent in the black market for every $1 spent in the legal one.
The cost to buy cannabis products at a dispensary is about 45% higher than it costs to buy unregulated products on the black market, by some estimates.