The State of California Cannabis
With more than 39 million residents, California is the most populated state. If it were a sovereign nation, it would be the world’s fifth-largest economy, just behind Germany and ahead of India. The ideal weather conditions make it number one in agriculture. California produces almost half of the fruits, nuts, and vegetables in the US. California is also a dominant force in cannabis. With $5.3 billion in legal sales in 2022, it represents about 18% of the $30 billion US legal industry. Add in the traditional market, and cannabis in California is easily a $10 billion annual market. It’s not only the leader in size, but also in quality and culture. The most recognizable brands in cannabis, including Cookies, STIIIZY, and Jungle Boys, all come from California. Despite the state’s strong roots in cannabis, the legal market has struggled since approving adult-use sales in late 2016. Proposition 64 was approved by 57% of voters and ushered in a system plagued with high licensing fees, excessive taxes, and limited access for consumers. The combination has created an almost insurmountable set of hurdles for California operators and is driving out all but the top-performing and best-capitalized companies. These hurdles have led to lower-than-expected revenue and taxes. Cannabis sales peaked in 2Q21 and have since declined 19% in dollar terms. Lower revenue is not only hurting businesses, but the state is also collecting fewer taxes. The government is learning a hard lesson in the elasticity of demand. A healthier California will benefit the entire cannabis ecosystem. Single-state operators like Glass House Brands (NEO: GLAS.AU, OTCQX: GLASF) depend solely on California and many multi-state operators (MSOs) have assets in California. Ancillary companies like WM Technology (NASDAQ: MAPS) will make more money when California has more stores and profitable businesses. In this report, we will cover how these challenges are affecting operators and consumers. As a follow-up, we will be hosting a Twitter Spaces event on the state of California cannabis with Kyle Kazan, Graham Farrar, Hirsh Jain, and Aaron Edelheit on June 15, 2023, at 1:00 pm ET. Here is a link to the event. Investors can listen live and there will also be a recording available.
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