California Cannabis: A Golden Opportunity With Unique Challenges

If the state of California were a country, it would have the fifth largest GDP in the world.

Take this kind of spending power and combine it with the recent legalization of recreational cannabis, and it’s fair to say that the Golden State is primed to become the Holy Grail of cannabis opportunities.

But while the market is home to immense potential, this doesn’t mean that the California cannabis business isn’t without its own unique challenges and obstacles to navigate.

Navigating California Cannabis

Today’s infographic comes to us from High Hampton Holdings and it helps set the stage for the boom in California, as well as listing the regulatory hurdles that companies must be prepared to deal with in the jurisdiction.

In the next year, it’s expected that recreational cannabis sales in California will surpass the existing total from the already established medical market.

By 2025, those recreational sales could be $4 billion per year – that’s five times the size of the medical market!

Sticker Shock

The potential of the California cannabis market may be obvious, but navigating both the state’s notorious regulatory system and tax regime is a clear threat for companies aiming to succeed in the space.

Since legalization, the price of cannabis in California has become an immediate hiccup that has initially angered consumers, reducing expected demand and state revenues.

According to BDS Analytics, the effective sales tax on a gram of cannabis bought in San Jose works out to a hefty 38%. Add this to the higher cost of doing business in the state, and the sticker shock for consumers is real.

Complex Legislation

After high taxes, companies entering the California market must also navigate the state’s complex rules and regulations about growing, distributing, and selling cannabis.

To give an idea of what this looks like for the average company, here is a brief snapshot of California’s regulatory environment:

• There are three governing bodies for cannabis in the state: California Department of Food and Agriculture (CDFA), California Department of Public Health (CDPH), and the Bureau of Cannabis Control (BCC)
• There is a dual licensing requirement in the state, in which companies must be licensed both by the state as well as by local authorities
• Companies must get their local license before their state license – and this is complicated: there are 58 counties and 482 incorporated cities, each with their own specific set of rules and requirements
• Currently, many growers do not meet state or local standards
• The supply of zoned, permitted areas for cannabis cultivation are scarce and in high demand

Even further, the rules around cultivating, distributing, and retailing all involve specific and highly-specialized licenses. For example, only those with a full-service distribution license can coordinate required third-party testing, ensure packaging reviews of products, and collect and remit cultivation excise taxes.

Golden Potential

Despite the challenges that exist in the California cannabis market, it is still the undisputed jewel in the crown of the global legal cannabis space, offering access to 39 million consumers and large amounts of disposable income at play.

Only companies that can navigate this uncharted territory will be able to take advantage of this lucrative opportunity.