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Survey: 37% of US cannabis operators say they’re not profitable

A new study blows any assumption that the U.S. cannabis industry as an easy business to make a profit — with 37% reporting they’re operating without one.

The survey was of 396 U.S. cannabis operators by the National Cannabis Industry Association.

Conditions were among the worst in the Golden State. Only 26% of the survey respondents said their businesses are profitable. Over half said they’re not; while 17%, like North Bay grower Mike Benziger of Glentucky Farms in Glen Ellen in Sonoma County, feeling like their businesses are breaking even. Twenty percent across the nation identify with that group.

“I think we’re in the business where it’s the toughest and the profit is the hardest to get,” he told the Business Journal. “When we became an industry driven on price rather than quality, that’s when it became tough.”

Benziger, whose family name comes from an established wine label, added he’s unsure how most growers are making ends meet and predicts dire consequences for the ones who have become overextended without prior wealth propping them up.

“This business is designed to take big hits. But the only way small growers will be able to survive is if they already have money or can make sales on site,” he said. But the latter is illegal. “We need to raise the boat.”

He notes his marketing prowess has helped. Diversifying the plants he grows represents the other saving grace. Besides cannabis, he also grows savory and dandelion used for wellness products.

Benziger said things would be different for legal businesses, if there wasn’t an overabundance of product coming from illegal producers undercutting prices.

The competition with illicit growers represents 1 in 4 challenges cited in the survey. Other obstacles include over taxation, price volatility and the lack of the ability to open bank accounts.

Here are even more challenges:

  • Lack of investment capital
  • No ability to do interstate commerce to trade across state lines
  • Large corporations dominated small craft operators
  • Market oversaturation
  • Negative impacts of no federal legalization
  • Substandard cost structure
  • Unfair criminal justice concerns

“This is no surprise,” said Beau Whitney of Whitney Economics, which completed the survey. “The narrative out there is that everyone is swimming in cash because of cannabis. But for many, unless you have $2.5 (million) to $3 million, you’re not able to cover a loan or rent or health care.”

Legal cannabis business operators, facing what they view as overzealous compliance rules, have coined a new term — “prohibition through legalization.”

California businesses may operate — but with the blessing of local government, which imposes its own rules through ordinances. And when less than half the jurisdictions throughout the state throwing out the welcome mat, the lack of access to sell the plants and products is a sticking point. The lack of retail space to sell the plant is having a negative impact on sales for legal operators.

The study found the illicit and legal markets combined generate $100 billion in national sales. Looking ahead, the legal industry is forecasted to total $45 billion in revenue by 2025 — with 39 states now allowing for medicinal use and 18 opening up to adult, recreation. The industry employs more than 400,000 workers.

But when businesses leave, local economies suffer.

“Companies are going out of business,” said Matt Mayberry of Novato-based Trym, a computer services company that provides growers with programs to track the quality of their strains and quantity of their harvests.

Mayberry has seen conditions are very difficult on small growers operating on shoestring budgets.

Like many industry insiders, the technologist believes legislation needs to change to make things more profitable for cannabis businesses. For example, lower taxes and fewer rules would be a start.

Beyond cultivators, other legal cannabis businesses in the supply chain are feeling the pinch.

When asked in the survey about their confidence level over the next year, over 12% of testing facility operators said they expect to be “outta here.”

The reason lies in the business model.

Oakland cannabis industry consultant Adam Mintz, formerly of Steep Hill Labs, said the start-up costs are “enormous,” especially when factoring in the instruments.

Testing labs are vulnerable in a competitive market because customers will change companies when they don’t get the results they want.

“The way to survive is they have to do a volume of tests. It’s a lose-lose situation for an entrepreneur every time,” he said.

Because cannabis operators along the supply chain aim to get the best results from lab testing necessary to be compliant with the state, CannaCraft Chief of Government Affairs Tiffany Devitt said many resort to “lab shopping” to achieve the highest level of potency.

CannaCraft, a large producer based in Santa Rosa, endures its own type of compliance issues that makes it hard to do business in the industry. Because that industry is so scrutinized, the cannabis producer swallows up reams of paper to provide the government to prove it is operating within the guidelines. Devitt said her company figured it consumes up to 4 million pages a year printing documents to meet California government regulations.

“It’s environmentally ridiculous,” she said.

Still, there’s a resiliency and optimism behind the industry. Devitt believes things will improve as the authorities and government officials notice their struggles.

For example, the state Department of Cannabis Control just tweaked some guidelines, including a passage that now eliminates the need for growers to weigh each individual plant.

“I am guardedly optimistic. It seems like they’re listening more closely than they did in the past,” she said, citing a number of tax reform bills circulating in state government.

Susan Wood covers law, cannabis, production, tech, energy, transportation, agriculture as well as banking and finance. For 27 years, Susan has worked for a variety of publications including the North County Times, Tahoe Daily Tribune and Lake Tahoe News. Reach her at 530-545-8662 or susan.wood@busjrnl.com.

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