2021 bodes well for California cannabis companies, business opportunities

(Editor’s note: This story is part of a recurring series of commentaries from professionals connected to the cannabis industry. Amy Steinfeld and Jack Ucciferri are employees at Brownstein Hyatt Farber Schreck, a national law firm with a cannabis arm.)

As we approach the new year, we predict that 2021 will be another favorable year for the cannabis industry.

While we foresee continued – and possibly substantial – growth of California’s licensed cannabis market, there are also several converging trends that may make 2021 a volatile year for all but the most experienced industry players.

Amy Steinfeld

The macro trends to watch for in California’s cannabis market include:

  • Expanded license opportunities around the state.
  • Continued maturation of products and consumer preferences.
  • Pricing pressures.
  • Newly legalized banking and finance services.

Expected growth

Let’s start with the good news: California’s legal market will continue to grow substantially.

Voters around the state recently approved dozens of local initiatives to tax and/or regulate cannabis-related businesses.

While not all of these jurisdictions will issue new cannabis licenses in 2021, November’s victories will boost sales in the regulated industry over the next few years.

That said, many jurisdictions will retain prohibition conditions until decision-makers realize the myriad benefits of legalization.

On top of successes at the ballot box, cannabis consumers are increasingly able (and willing) to differentiate between licensed and unlicensed retailers and products due to health and safety concerns spurred by the vape crisis and COVID-19 pandemic.

This will result in an increased focus on quality control and product legitimacy.

As licensed products come down in price, we may also see a downward trend in the proliferation of unlicensed dispensaries and delivery services.

Jack Ucciferri

Pandemic-related disruptions are one driver accelerating cannabis consumption, and while we hope Californians’ anxiety levels drop next year, there’s no reason to believe that consumers will turn their backs on using cannabis for recreational and medical purposes.

As quarantine conditions drive consumption, so too will they drive product development, with an increased focus on products specifically tailored to addressing insomnia and anxiety.

We’ll also see a surge in offerings for women and seniors in 2021.

Increasingly sophisticated consumers will be assisted by the CalCannabis Appellations Program, which will begin in January 2021.

This program will provide cultivators and brands a credible and time-tested (think wine industry American Viticultural Areas, or AVAs) method of marketing the value of their unique regions and cultivation methods.

The expectation is that high-end consumers, trained to recognize place-based designations and quality certifications in other products, will reward products that boast these designations.

Questions remain around how many consumers will be willing to pay a premium and how long full implementation of the program will take, but the program seems likely to yield value to heritage producers and already popular regions.

Regulation woes

As a new generation of scaled cultivation projects commence operations in the second quarter, some in the industry are bracing for biomass price drops.

Inevitably, some farms will struggle to comply with the maze of state and local regulations and to deliver the quality and quantity of product they projected.

Others will face enforcement actions for failure to comply with onerous State Water Board and Metrc (track-and-trace) requirements.

Regardless, new supplies will likely render the 2020 seller’s market a fond memory by the fourth quarter.

The pricing pain is likely to be compounded by high taxes and staggering compliance costs, along with competition from illicit supplies.

Pricing pressure will cull inefficient and inexperienced cultivators from the market.

Local jurisdictions are unlikely to respond in time to save struggling operations, and cultivation will migrate to jurisdictions with friendlier tax and regulatory regimes.

This dynamic will play out in interesting ways as new counties consider welcoming cannabis cultivators to address tax-revenue losses fueled by the pandemic’s toll on other industries.

Local level

When it comes to retail, the window is closing for new entrants to credibly compete.

Since cannabis businesses were declared “essential” during the pandemic and are experiencing growth in the face of a recession, bigger money is moving into the space.

One-off orders are being replaced by strategic relationships facilitated by sophisticated supply-chain managers.

While every market has its niches, mom-and-pop retailers will be swimming against the tide by the end of 2021.

But as licensed products become more accessible and affordable, we’ll see a downward trend in the proliferation of unlicensed dispensaries and delivery services.

Licensed delivery services are a bright spot for retail and poised to benefit from continued COVID-19 concerns.

One survey indicates that 38% of consumers are “moderately” or “extremely “concerned about visiting a cannabis retailer, with roughly the same proportion stating that COVID-19 has affected how often they visit cannabis stores.

Manufacturers may be the most vulnerable license holders.

There are nearly 1,200 California Bureau of Cannabis Control (BCC)-issued manufacturing licenses – more than one manufacturer for every licensed retail storefront and delivery business.

Small manufacturers may succumb to market pressures by the end of the year.

Fierce competition to process a commodity whose prices are falling will reward those manufacturers with the capital, capacity and technology to operate at scale.

Banking, finance reform

Last, it’s possible the federal government will remove obstacles to accessing banking and traditional financing services in 2021.

Such a move would increase valuations across the board, as new debt financing would provide companies breathing room to expand and innovate.

Access to credit would boost the California market, where the costs of obtaining and retaining licenses are generally much higher than elsewhere in the country.

It seems unlikely, however, that we’ll see major federal reforms next year unless Democrats pull off at least one victory in Georgia’s Senate runoff races.

One trend we are extremely confident will continue into the new year is that the industry will remain highly dynamic, exhilarating and alluring.

Remember the fundamentals: Stay safe, nimble and surround yourself with experienced, honest people.

Amy Steinfeld is an attorney at Brownstein Hyatt Farber Schreck and serves as office managing partner for the Santa Barbara, California, office as well as co-chair of the firm’s cannabis and industrial hemp industry group. She can be reached at [email protected]

Jack Ucciferri is a law clerk in Brownstein’s Santa Barbara office and a member of the firm’s cannabis and industrial hemp industry group. He can be reached at [email protected]

The previous installment of this series is available here.

To be considered for publication as a guest columnist, please submit your request to [email protected] with the subject line “Guest Column.”

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