High prices, increased competition and a largely unchecked illegal market have taken the bloom off San Francisco’s budding cannabis business.
“It’s a mess,” said Erich Pearson, a longtime cannabis activist and CEO of SPARC, which operates three cannabis outlets in the city.
And no one knows how to fix it.
A recent report from the city controller showed total retail sales of medical and recreational cannabis rose steadily each year to $223 million in 2018 — that’s $100 million more than in 2015. Recreational cannabis became legal in late 2016, while medicinal sales have been permitted since 1996.
Total sales have more than doubled in the past five years but, on average, sales at individual stores and dispensaries are falling.
According to the controller’s report, individual outlet sales dropped 45% — from $6.3 million to $3.4 million in 2018 — in part because 44 new retailers and delivery services entered the market, creating more competition.
“You can think of it as the pie getting bigger, but the average slices getting smaller,” said Jeff Pomrenke, an analyst in the controller’s office who is one of the report’s authors.
At the same time, the average price of cannabis in San Francisco increased 41% to $19.87 per gram since adult-use recreational cannabis was legalized. The national average is $14 per gram.
By contrast, researchers found the average price for a gram in May 2019 in was $15 in San Jose, $16 in San Diego, and $12 Los Angeles. The lowest price on the West Coast was $6 a gram in Portland, Ore.
“The fixed costs are more expensive here,” Pearson said.
Pearson said the reasons behind the price disparity include the city’s “higher rents, higher taxes, higher employee costs,” plus “the red tape, the bureaucracy and the requirement that retailers provide community benefits” — all of which cost money.
And, if anything, the market is expected to get more crowded as new “social equity” applications are approved.
There were 212 cannabis businesses authorized to operate in the city as of August 2019, 59 operating with medical cannabis dispensary permits and 153 with temporary permits.
Add to that the 133 “equity” retail applications in the pipeline, submitted by people who were unfairly impacted by past marijuana laws. The intent of the program is to help minority owners get in on the cannabis gold rush.
Only three have been approved.
“The fundamental problem is that there was a general assumption that all these businesses were making money hand over fist and that it was time to start spreading out the wealth,” Pearson said. “It was well-intentioned,” when voters passed Proposition 64 to make recreational cannabis legal in 2016, “but that really hasn’t happened.”
And then there is the city’s famous bureaucracy.
“The average equity applicant currently in the queue can likely expect to wait 18 to 24 months before being permitted, due to the intensive process of a multi-departmental application review and the current backlog of applications,’ the report states.
The controller’s report suggests that the Board of Supervisors and Mayor London Breed should consider a moratorium on new storefront retail applications and offer incentives for applicants to “change pending storefront retail applications to other business activities.”
“The city could likely support 100 retailers,” Pearson said. “After that, you are setting people up for failure.”
“San Francisco’s retail cannabis industry is still in its infancy, but it’s clearly facing some growing pains,” San Francisco Supervisor Rafael Mandelman said. “Regulatory requirements are tough for small businesses generally, and the additional burdens placed on cannabis businesses are particularly challenging.
“As policymakers, we clearly need to work with equity applicants, industry stakeholders and the Office of Cannabis to shorten permit approval timelines and address market oversaturation,” Mandelman added.
Meanwhile, the illegal cannabis market, where the product costs less and the sellers pay no taxes, shows little sign of slowing down.
A 2019 audit, conducted by the United Cannabis Business Association, a state industry trade organization, found approximately 2,835 unlicensed dispensaries and delivery services operating in California, compared to 873 licensed sellers.
“You don’t see illicit operators in San Francisco so much, but the further north you go, where cannabis is grown, the illicit market is stronger,” Pearson said.
San Francisco Chronicle columnist Phil Matier appears Sundays and Wednesdays. Matier can be seen on the KGO-TV morning and evening news and can also be heard on KCBS radio Monday through Friday at 7:50 a.m. and 5:50 p.m. Got a tip? Call 415-777-8815, or email email@example.com Twitter: @philmatier