Trends and Hot topics: California’s Cannabis Cannibals

Legal MJ businesses in the Golden State are blowing the whistle on unlicensed operators to protect their own bottom lines

By John Schroyer

It recently emerged that California regulators were trying to force perhaps the biggest online advertiser of marijuana retailers – Weedmaps.com – to quit carrying ads for businesses that are technically illegal.

California-based Weedmaps responded with a letter to the chief of the state’s Bureau of Cannabis Control, contending the company was not really at fault. Instead, the online marijuana advertising giant blamed the way California’s marijuana market is structured.

Weedmaps asserted that most long-standing businesses have been unable to obtain legal business permits because local governments have what amounts to veto power over California’s voter-approved MJ industry. Put another way, these companies are at the mercy of local government officials who may not look kindly on the cannabis industry.

How the fight between Weedmaps and the bureau will play out remains to be seen. But the confrontation represents a deeper divide in the state’s entrenched marijuana industry: A growing number of companies already have obtained business permits or are in the process of doing so, and they now view unlicensed competitors as serious threats.

As well they should.

Fully compliant MJ retailers across California are being forced to pass on high tax rates to their customers, which in turn is driving many customers to the black market. I’ve even heard stories of some brazen unlicensed dispensaries advertising to customers that they don’t pay state or local taxes, meaning that their MJ is far cheaper than prices at law-abiding shops.

That’s also led licensed retailers to file complaints with the bureau about many of those same unlicensed competitors, plenty of whom the bureau was able to identify by finding their ads on Weedmaps.

But Weedmaps is incidental to the real conflict. The real story is a crisis of conscience that’s taking place in California. It pits former political allies – California MJ companies were largely united behind full legalization in 2016 – against each other as the economic pie gets divided into haves and have-nots.

In this case, the have-nots often are companies having trouble finding a legal home, as opposed to illicit dealers that care only about turning a profit.

“As a partner in a nonlicensed delivery weed business, we’re at our wits’ end trying to get a license,” one MJ businesswoman wrote to me in early March. “We are collecting state taxes and following all the laws, but cannot get a city to issue us a business license in the Tri-Valley of the San Francisco Bay Area.”

The woman expanded, saying that if Weedmaps stops running her company’s advertising, it would be the “death knell” for her business.

And that’s precisely what many companies in California probably want: contraction. It would mean more market share for those who can get licenses. It’s a return on investment for those operators – many of whom have sunk hundreds of thousands or even millions of dollars into their companies. And they are naturally going to fight tooth and nail to protect that investment.

That, in turn, may mean “diming out the neighbor,” in the words of one regulator I spoke with.

The situation even led Alameda County District Attorney Nancy O’Malley to try to soothe industry concerns over “snitching” on competitors when she took part in a March panel sponsored by the California Cannabis Industry Association in Sacramento.

O’Malley specifically raised the possibility of businesses being hesitant to inform on unlicensed competitors that are breaking state law. “That’s not snitching,” she said. “That’s business.”

That represents a culture shift. Tax-paying marijuana businesses are incentivized like never before to get the entire industry’s act together, which means blowing the whistle on bad actors.

Legalization, in other words, has turned plenty of former rebels and outlaws into narcs, in a strange twist of fate.
Realistically, though, that’s the price the industry will have to pay if it wants full legitimacy.

What those licensed marijuana establishment companies now have is peace of mind. They can call the police if they get robbed, and law enforcement must show up and treat them just as professionally as they would, say, a convenience store that was held up.

Licensed MJ companies, in short, have legal recourse through the judicial system. And they have allies in state government that will likely help defend them against potential interference from cannabis haters like U.S. Attorney General Jeff Sessions.

What that means for the near term, however, is unclear. It’s highly unlikely the state or its 482 municipalities and 58 counties will be able to effectively stamp out the black market. I don’t see why new approaches will make a significant difference in a fight that law enforcement has been losing for decades. The bureau, for its part, has yet to fully outline its plans for combatting the ongoing black market – aside from sending cease-and-desist letters.

The only real course forward for licensed California companies is an obvious one: Play hardball.

Compete like hell. Devour the competition. Forgive the alliteration, but many California businesses that will survive 2018 will have to become capitalistic cannabis cannibals.

That means tipping off regulators – or the cops – to unlicensed companies that are selling or advertising without having gone through the proper channels.

Any businesses, especially retailers, that don’t play hardball are probably at immediate risk of serious financial loss at the least – and, at the worst, failure.

Welcome to the establishment.

John Schroyer is senior reporter at Marijuana Business Daily. He can be reached at [email protected]