With the uptick of cannabis retailers in a variety of Los Angeles neighborhoods, it may appear as if the cannabis industry is booming. But many industry experts seem to agree that the budding industry remains chaotic.
“It’s not pretty out there in the cannabis economy,” said Michelle Mabugat, an attorney at Century City-based law firm Greenberg Glusker. “2022 was a real shakeout year with lots of closures and acquisitions. This year will be a reckoning for retailers.”
The U.S. cannabis industry was valued at $13.2 billion in 2022 and is expected to expand at a compound annual growth rate of 14.2% through 2030, according to a Grand View Research overview of the cannabis market from 2023 to 2030. Challenges in the market noted in the report, however, include strict trade regulations, supply chain disruptions and significant price reductions, which make profit margins slim.
Mabugat has been advising companies in the cannabis and industrial hemp sector for more than a decade, covering branded consumer products, manufacturing and distribution. She forecasts that in the near future, during this year in fact, the industry will see more consolidation and an increase in the number of distressed businesses.
“Costs have risen and wholesale has plummeted,” she noted. “And struggles with enforcement keep the illicit market competitive.”
Tyler Disk, a partner at Smart Work Resources who is involved as a financial service provider for cannabis entrepreneurs, said that for these business owners, managing cash flow is more important than ever.
“Growers’ prices have dropped due to oversupply in the market,” Disk said. “And growing [cannabis] has become more corporate, so smaller farmers can’t keep up.”
On the retail side, Disk noted that taxes are very high for retailers because there are not many deductions they can take with a product illegal at the federal level. Banking is also a major issue, as many financial institutions do not want to handle the complications that come with the sector.
And for institutions that agree to handle the business, solutions are expensive. It can cost cannabis businesses upward of $1,500 a month to maintain a checking account.
“It’s creating a lot of cash,” said Disk. “Which also means a lot of robberies.”
Competition from illegal dispensaries is also a challenge for entrepreneurs who are trying to work within the regulated industry. In addition to illegal growers and sellers, California also has to contend with legacy growers who may be reluctant to move into the legal market, which cuts into their profit margins with taxes and fees.
“There has been a 20-year medical market — a ‘gray’ market since 1996,” said Mabugat. “These legacy operators know their craft, but they aren’t used to paying the regulated market fees.”
Still, for the right business model, the industry is working for some. Jay Handal has been in the cannabis industry since 2012 and is co-founder and chief operating officer of Erba Markets, which has multiple locations in the Los Angeles Market, and a co-founder at West Hollywood-based cannabis-consumption lounge The Woods.
“I say our business has to be like a baseball diamond: you have to touch the four points or you don’t score,” said Handal. “Those four points are product, service, atmosphere and value.”
Handal noted that at his businesses the volume is large, so his enterprises have buying power. The Woods also has celebrity partners in Woody Harrelson, Bill Maher and John McEnroe.
But even the high-end cannabis experience faces challenges with regulation and illegal competition.
“The [California government] needs to lower taxes and step up enforcement,” said Handal. “They need to make it affordable for people.”
Sweet Flower
Headquarters: Culver City
Founded: 2018
Business: Cannabis dispensary
CEO and Co-Founder: Tim Dodd
Notable: Sweet Flower grew revenues in excess of 50% during 2020
Sweet Flower, a Culver City-based cannabis dispensary, is known for featuring California-based cannabis brands across its multiple stores in Southern California. The company also ensures that it stocks brands owned by underrepresented communities at 10 times the state average. Sweet Flower owns and operates seven retail stores in limited license markets, with more anticipated this year.
The company has partnered with several celebrities to launch their branded cannabis products — including Seth Rogen’s House Plant and Chelsea Handler’s Evolution Kit. The company recently launched a flagship retail location in Culver City.
“The launch of Sweet Flower Culver City builds on our successes in 2021, where, despite the doom and gloom elsewhere in California cannabis, Sweet Flower organically grew revenues in excess of 50% over 2020, improved gross margins by double digits and worked with an impressive number of brands and celebrities on exclusive product launches,” Sweet Flower Chief Executive Tim Dodd said in 2022.
In March, employees at Sweet Flower ratified a union contract with United Food and Commercial Workers Local 770. The three-year agreement covers more than 100 florists, delivery drivers and inventory associates. The contract increased the wage floor for drivers, florists and inventory associates and established annual wage increases. The agreement also allows newly opened Sweet Flower locations to consider representation by UFCW.
“This agreement is a milestone in the development of best-in-class cannabis operators in California. Sweet Flower is delighted to have worked collaboratively with our valued team members and with the UFCW Local 770 to build a strong partnership for collaboration, employee engagement and equity, and to further build Sweet Flower’s reputation and presence as a leader in the California cannabis industry,” said Dodd.
Bespoke Financial
Headquarters: West Hollywood
Founded: 2018
Business: Fintech
CEO: George Mancheril
Notable: Debt capital in the industry rose to $5.62 billion in 2021, up from $1.65 billion in 2020
Bespoke is the first fintech lender in the country to provide debt financing to cannabis companies. Last year, the West Hollywood-based firm said that cannabis financing is a lucrative market that remains relatively untapped, and added that its value will only grow as cannabis inches ever closer to federal legalization.
“Bespoke’s focus is on lending, which is something that never really existed for the cannabis industry,” Chief Executive George Mancheril said last May. “These companies don’t have a ton of capital, they don’t have the finance needed to invest, and they haven’t really been able to leverage [the industry’s] growth.”
Historically, the industry has been funded “mostly by private investors, a small pool of investors, but not banks,” Michelle Mabugat, an attorney at Century City-based Greenberg Glusker, said.
Debt is increasingly becoming the go-to model for financing a cannabis entrepreneurial effort. According to Cannabis Business Times, “Debt financings [in the cannabis industry] reached their highest percentage level since we began tracking these stats, reaching 44% of total dollars raised in 2021, up from 38% in 2020.”
Debt capital in the industry rose to $5.62 billion in 2021, up from $1.65 billion in 2020, per the report.
“There’s a huge debt bubble in the industry,” said Mabugat. “There’s a five-year-long trend of cannabis companies not paying the bills and there will be a year of reckoning.”
But Mancheril noted that the lack of access to traditional financial services such as deposit accounts and lines of credit have ranked among the cannabis industry’s most significant roadblocks. Due to marijuana’s Schedule 1 drug status, operators in the cannabis industry haven’t had access to even the most basic benefits of banking.
The Woods
FOUNDED: 2022
HEADQUARTERS: West Hollywood
BUSINESS: Retail and hospitality
CO-FOUNDERS: Jay Handal, Devon Wheeler
PARTNERS: Woody Harrelson, Bill Maher, John McEnroe, Jay Handal, Devon Wheeler, Thomas Schoos, Lisa Gill, Michael Berman
NOTABLE: The 5,000-square-foot space is one of several cannabis consumption lounges planned for the city of West Hollywood.
The Woods is a West Hollywood cannabis consumption lounge and dispensary whose celebrity partners include Woody Harrelson, Bill Maher and John McEnroe. The space, which was designed by Thomas Schoos, is likened to a cigar lounge and designed for cannabis consumption, adding a social dimension to the equation. It’s a large open space with seating, a koi pond and even macaws. And because it’s Los Angeles, there’s also a private VIP area.
“Our atmosphere is different,” said Jay Handal, co-founder at The Woods, which opened its doors in May 2022. “We’re one of two consumption lounges open in Los Angeles County, and we’ll have an adjacent alcohol bar opening soon.”
The Woods sells a number of cannabis brands, but features organic, sun-grown and California-based plants. Another element that sets The Woods apart is its focus on sustainability. The company has implemented eco-friendly practices, including compostable packaging for its products.
Harrelson was arrested in 1996 for planting hemp seeds in Kentucky to protest the state’s law that equated marijuana and industrial hemp. “It’s kind of mind-blowing because, to be honest, I never thought that it would get to this stage,” Harrelson told L.A. Weekly in April 2022. “I never thought you’d even have it to where it was legal, much less that you could go get it out of the shop. So it’s pretty exciting.”
He and The Woods’ other celebrity partners aren’t the only A-listers trying their hand at consumption lounges. West Hollywood has lounges backed by both Jay-Z and Patricia Arquette in the works. And more celebrities are getting into cannabis branding — Jay-Z, Snoop Dogg, Willie Nelson and Seth Rogan all have their own brands.
According to Grand View Research, recreational cannabis is expected to register a 19% growth rate through 2030.
Herbarium
Headquarters: Inglewood
Founded: 2018
Business: Cannabis dispensary
Founder: Adie Meiri
Notable: The company has more than 100 billboards around Los Angeles County
Herbarium is a vertically integrated cannabis enterprise with a license to operate a full cultivation operation, manufacture, distribution with delivery and maintain an on-site viewing grow room. It also engages in glass-blowing performances and sells branded merchandise in its full retail store.
The business is minority owned and has more than 100 billboards around Los Angeles County that promote its “Free the Trappers” campaign, calling attention to those who have been put in prison for cannabis-related crimes.
“No one should be in prison for weed; Free the Trappers isn’t just a slogan; Herbarium actually cares about the cause and the community. We want to turn weed convictions from a negative into a positive by hiring people who have only been convicted of weed charges,” said Lior Meiri, creative director at Herbarium.
The company has partnered with the National Diversity & Inclusion Cannabis Alliance to provide employment opportunities to those who have faced jail time for cannabis-related offenses.
For its part, the California state government is also pushing for equity in the cannabis industry.
“There is a very large social-equity program granting licenses and ownership to communities impacted by the war on drugs,” Michelle Mabugat, an attorney at Century City-based Greenberg Glusker, said. “But there are delays getting lights on and doors open because of delays in the program.”
In February, the California state government awarded $15 million in grants to support local efforts to promote equity in the cannabis industry. The government will open the next grant-application process in October.
In December, the Los Angeles Department of Cannabis Regulation selected 100 social-equity applicants for an opportunity to apply for retail cannabis licenses.
MedMen Enterprises Inc.
CSE: MMNFF
HEADQUARTERS: Culver City
YEAR FOUNDED: 2010
BUSINESS: Cannabis retail and cultivation
CEO: Edward Record
MARKET CAP: $21.3 million
NOTABLE: The company sold off its Florida stores for $67 million in August 2022
Culver City-based MedMen, which was founded in 2010, operates in California, New York, Nevada and Illinois. It describes its business model as focusing on providing consumers with “a premium cannabis retail experience.” Its dispensaries are modern in design, reminiscent of an Apple retail store.
The company has 23 stores and more than 700 staffers. MedMen stocks a wide array of cannabis products — flower, edibles, concentrates, and topicals, as well as accessories such as vaporizers and pipes — including its own in-house brands like MedMen Red and LuxLyte. The company also has partnerships with several other cannabis brands.
But despite a strong presence in Los Angeles, the company has faced some difficulties as the industry matures. A February financial disclosure from the company revealed that it had more than $137 million more in debt than assets and only $15 million in cash on hand. MedMen admitted in its disclosure that there was “substantial doubt” as to whether it can make good on its bills in the next year. Cannabis industry players are facing major issues including massive debt, collapsing marijuana prices, illegal sellers and high taxes.
As part of its cost-cutting measures, MedMen has sold its stores in Florida for $67 million and will sell its New York stores for $88 million. The company is also working on renegotiating its leases for its remaining stores. MedMen reduced payroll costs by 34% in February 2022 across its retail locations, cultivation centers and corporate headquarters.
Edward Record, the company’s chief executive, joined the company in 2022 to help with its restructuring. The company went public in 2018 on the Canadian stock exchange and raised $110 million on a valuation of $1.65 billion. Its stock is currently trading for about one cent in U.S. currency.
MedMen’s splashy debut into the legal cannabis market could signal trouble for the industry. The well-funded company has struggled with high regulatory costs of operating in California in addition to plummeting wholesale prices.
