© Jessica Rinaldi The marijuana industry in Massachusetts is about to reach a milestone. $4 billion in revenue since premium sales began in November 2018.
The marijuana industry in Massachusetts is about to reach a surprising milestone. Since its launch in November 2018, Entertainment Sales has generated $4 billion in revenue and has also raked in tens of millions of tax dollars from state and local governments.
But when the state crosses that line, likely within the next month, the 250 marijuana stores may not have much to celebrate.
That's because the nascent legal sector, once seen by mad investors and entrepreneurs as the next gold rush, has become a regular commodity market, with wholesale and retail competition increasing exponentially over the past year while prices have fallen by a similar amount. The overall pie continues to grow, but many operators are seeing their profit margins shrink.
"Everyone was expecting it to be a high-margin boom, but now it's a race to the bottom," said Kobe Evans, co-owner of Boston-based marijuana shop Pure Oasis. “The market has changed very quickly over the past 12 months and there is little chance for investors to achieve the returns they previously expected.”
Overall, 2022 has been a progressive year for the cannabis industry in Massachusetts. Entertainment companies reported record revenue of $1.42 billion through Dec. 18, up from $1.33 billion in 2021.
Thanks to Massachusetts' effective 20% tax on marijuana sales, much of last year's cannabis sales ended up in state coffers, some $284 million, and millions more in "local impact" taxes.
State legislatures expect to increase the maximum tax on recreational purchases, a consumption tax of 10.75 percent, by $165.3 million in the 12 months ending June 30 in their fiscal 2023 budget. Most of that money, $135.83 million, goes to the office The state has substance abuse services to fund everything from housing and recreational services to college tuition for people with opioid misuse to people charged with drunk driving.
Another $19.22 million in excise tax revenue is being paid for the Hemp Control Commission's oversight of the industry, while the Agricultural Resources Department is receiving nearly $1 million to regulate hemp farms and the use of pesticides in marijuana growing facilities. The remaining money will be divided among grants to low-income and supervised communities, community colleges to support low-income students, and youth crime programs.
Recreational marijuana purchases are also subject to a 6.25% state sales tax plus a 3% local tax in most cities that host marijuana retailers, giving municipalities about $42 million in unrestricted funding in 2022.
Marijuana companies have also become major employers in the state. In December, about 22,000 workers were licensed by the state to work in licensed marijuana facilities.
“Legalization has made a difference that people will see,” said David O’Brien, president of the Massachusetts Cannabis Business Association. “You can see it in the tax receipts, the occupied sites, the empty shop windows of the pharmacies, the old warehouses that are now manufacturers.
But marijuana executives argue that the staggeringly large numbers mask tougher trading conditions for individual operators, and they expect 2023 to be mixed at best for the industry.
On the plus side, they said, lower prices at legal pharmacies in Massachusetts could help lure more consumers away from the chronically illegal market, which could partially offset lower profits as volume per transaction goes up. Industry leaders expect that these adoptions, along with a steady stream of curious cannabis users trying the drug for the first time as it becomes an increasingly social normal, will continue to fuel recreational sales and tax revenues in 2023.
"Profit margins may be low, but it's still a profitable and growing business," O'Brien said.
Operators are also awaiting implementation of a new law later this year that would end high city taxes on cannabis companies and allow the opening of so-called "social consumption rooms," which are essentially the equivalent of a cannabis bar. The same law imposes a 15 percent recreational excise tax on entrepreneurs in disadvantaged communities who struggle to open businesses despite state laws demanding fair trade after decades of inconsistent drug prohibition.
Another bright spot. Increased competition is forcing many wholesalers to reduce minimum order quantities and become less picky about which retailers they deal with, making it easier for stores to offer a larger list of different products.
“Now every farmer would love to call in and get more on the retail shelves,” said Victor Xiang, a veteran investor and CEO of Ready, which operates a recreational business in Newton and Natick.
But Chiang and other experts predict several troubling developments that they say could put some cannabis companies out of business by 2023.
Disappointing returns for investors and the failure of a weak Democratic Congress to pass marijuana banking reform before Republicans take control of the US House of Representatives this month means the marijuana business will have less capital than ever before. Especially for young operators. Meanwhile, rising recreational sales in Vermont, Rhode Island, Connecticut and New York will likely begin to stem the flow of out-of-state shoppers who previously flocked to Massachusetts pharmacies, dampening a key source of demand. At the same time, the price is also dropping.
Local businesses will meet little resistance, Chiang said, as government regulations limit businesses to three retailers and leave little room for a larger player to consolidate the market by acquiring licences. The federal cannabis ban also prevents marijuana companies from filing for bankruptcy, and local operators are more likely to pinch pennies than buy up troubled companies.
In fact, says Chiang, most multinational founders never intended to stay in business for long because they hoped federal legislation would come soon and give them a chance to make money.
"They were financiers looking at it through the lens of a spreadsheet, and they didn't want to dig too deep into the operational side of the business, where there seemed to be a lot of players already," Chiang said. "If I were an independent distributor, I don't know what the exit plan would be other than closing down."