Northern California marijuana companies lay off workers, adjust expectations
Some industry watchers say they predicted a crash would eventually come after Californians voted to legalize cannabis three years ago. They foresaw the rush to invest in fledgling marijuana companies with unrealistic revenue targets. They warned against hefty taxes from state and local governments angling to gain from those promised returns.
The so-called green rush of investment and entrepreneurship arrived with marijuana’s legalization in 2016, as did whole new categories of jobs and potential funding sources for schools and road repairs.
Then more than three-quarters of cities and counties across the state banned dispensaries and other cannabis companies.
Now, hundreds of people working in California’s cannabis industry are losing their jobs, while California’s decades-old black market is still thriving.
CannaCraft, Sonoma County’s largest homegrown cannabis manufacturer, laid off 16% of its workforce last week. Flow Kana, a major cannabis brand for organic sun-grown marijuana from Northern California’s Emerald Triangle, also laid off about 20% of its employees.
Other California cannabis juggernauts announced layoffs in October. WeedMaps CEO Chris Beals announced on Twitter last month that his company fired 25% of the cannabis retail advertiser’s employees.
Eaze, a San Francisco-based tech platform that helps dispensaries manage deliveries, let go of 20% of its workforce.
“Everything was going really well. Then all of a sudden we weren’t hitting our target — and everybody was retracting,” said Dennis Hunter, founder of Santa Rosa-based CannaCraft. “We had to make the responsible decision to cut our costs.”
Burdensome taxes, complex regulations and not enough legal dispensaries to get products in front of consumers in California have created a tough economic atmosphere, according to many cannabis business leaders.
Then Friday, California announced it will increase taxes for cannabis businesses starting Jan. 1.
“People were gobsmacked,” said Elizabeth Ashford, senior director of corporate communications with Eaze.
Friday’s announcement from the state came six weeks after Eaze closed its San Diego office and laid off 35 of the company’s 170 employees, a move Ashford described as a painful response to the many unique pressures on the legal cannabis industry in California.
“It’s very hard to overstate the impact of that on top of everything else,” Ashford said of the tax hike. “You’ve had capital markets dry up. Banking solutions have failed to materialize. The illicit market is the vast majority of the market right now.”
The contraction in California’s cannabis sector is drawing comparisons to the dot-com crash that hit the Bay Area in the early 2000s when the bottom fell out of the tech industry after years of hyper speculation. For the state’s cannabis industry, the cuts are hitting all kinds of businesses, from manufacturing to delivery.
“There’s always been a misperception from people outside the cannabis industry that it is a gold mine,” said attorney Joe Rogoway, who runs his cannabis-focused practice from offices in Santa Rosa and Southern California. “Companies were able to raise a lot of money, expand rapidly and delay having to deal with market realities.”
Cannabis companies still cannot access traditional banking services, such as bridge loans that offer businesses short-term cash infusions to get through a pinch. These companies also can’t deduct business expenses from their taxes, which most every other kind of company in the nation can do.
The industry took a hit earlier this year when people who use vaporizers — also known as vapes or e-cigarettes — started to get serious lung illnesses. As of Thursday, the Centers for Disease Control and Prevention identified 49 related fatalities. Federal health investigators are focusing on an additive — vitamin E acetate — as a “chemical of concern” in the health crisis.
Local cannabis industry professionals have said the additive is not put in their products, which go through rigorous state-mandated testing. The health scare has taken its toll while the industry tries to convince users its products are safe.
Meanwhile, the black market is thriving.
Consumers in California are expected to spend $8.7 billion on illegal cannabis in 2019, compared to legal sales forecast to hit $3.1 billion this year, according to BDS Analytics cannabis industry research firm.
That’s nearly $3 spent in the black market for every $1 spent in the legal one.
The cost to buy cannabis products at a dispensary is about 45% higher than it costs to buy unregulated products on the black market, by some estimates.
New retail stores haven’t opened up at the pace matching that of manufacturing and other producers.
California has the lowest number of marijuana stores for its population among states with legal sales, with only one licensed retailer for every 35,147 adults 21 years or older, according to research firm BDS Analytics.
Two new marijuana dispensaries have opened in Sonoma County since 2018 — Flora Terra in Santa Rosa and Red Door Remedies in Cloverdale — bringing the number of dispensaries to 12 retail stores.
As of Friday, there were 948 licensed manufacturers and 564 legal retailers across California, according to state officials.
“The main reason for this problem is there are not enough retailers and not enough shelves to support the size of the supply chain in California,” said Michael Steinmetz, Flow Kana founder.
Flow Kana buys cannabis wholesale from organic farmers operating in Mendocino, Humboldt and Trinity counties and has built a line of products promoting a sun-grown ethos and the famous marijuana culture of the Emerald Triangle region.
Steinmetz said his company overestimated the pace at which California’s legal cannabis industry would grow, given the challenging atmosphere of tight regulations and stiff taxes. The cuts — about 20% of staff, although Steinmetz declined to say how many positions or the size of the business — occurred in the marketing, policy and technology departments.
But he believes the downturn is temporary.
“We know that California is the biggest market in the nation. We know we’ll grow to great heights together,” he said. “But today we’re at rock bottom.”
At CannaCraft, Hunter said the staff cuts were painful but with a clear goal in mind to keep the company healthy going far into the future. He said the company cut jobs that were redundant and slimmed areas of the business that were focused on expansions, such as its out-of-state projects.
He said the company is still seeing continued popularity with its main product lines, such as Care By Design medicinal marijuana oils and tinctures, AbsoluteXtracts vape cartridges and the Hi-Fi Hops sparkling nonalcoholic THC-infused beverage made in collaboration with Lagunitas Brewing Co.
Next month the company will introduce a new line of pre-rolled joints called Farmer and the Felon, a nod to Hunter’s outlaw past. After years on the lam, Hunter was sentenced to federal prison for six years in 2005 for a 1998 bust of his 12,000-plant marijuana-growing operation in Humboldt County.
“We’ve taken hits in the past and had to get scrappy,” Hunter said. “We’re working hard to keep the company moving forward — let’s get back to what we’re really good at.”
The downturn in California has combined with a major market reset in Canada where publicly traded cannabis companies have suffered major losses.
The world’s largest publicly traded cannabis company, Ontario-based Canopy Growth Corp., saw the value of its shares plummet 74% — to a low of nearly $14 Tuesday compared to nearly $53 in April. The company’s executives blamed a lack of retailers in Canada and the sluggish pace of legalization elsewhere across the globe, including the United States where cannabis is still illegal federally.
Industry leaders said that when the publicly traded companies experience losses, investors in private companies also become skeptical.
“A lot of people had built businesses to grow and scale to one day compete with the global market,” Steinmetz said. “They’re now being forced to lay off people and cut costs and wait for better times.”
You can reach Staff Writer Julie Johnson at 707-521-5220 or email@example.com. On Twitter @jjpressdem.
Editor's Note: This story has been updated to correct the timeline of when Eaze closed its San Diego office and laid off some of its employees.