Are California's Heavy Cannabis Regulations a Recipe for Black Market Victory?

In 1983, the United States announced the Strategic Defense Initiative – known as “Star Wars” – a deviously simple economic solution to end the Cold War against the Soviet Union. The US said it was bringing the arms race into space. In true Cold War fashion, the Soviets scrambled to match the US technology. However, their economy was not robust enough to support such spending and within just a few years, the Soviet Union was bankrupt, and The Cold War that had left waves of violence and sadness in its wake was over.

After seven decades of conflict, the Cold War was won not on the battlefield but on the balance sheet. And you might be wondering what this has to do with cannabis.

Cannabis Prohibition began in 1937, with the Marihuana Tax Act. By 2017 (fully eight decades after cannabis’ Prohibition), The War on Drugs and especially cannabis' prohibition had become like the Cold War – a stalemate whose only real result was a robust global black market that left had left waves of violence and sadness in its wake.

In 2017, California (the world’s sixth largest economy, just behind the country of France) fully legalized cannabis, providing a radical economic solution to accomplish what the War on Drugs failed to do. In legalizing cannabis, California can regulate it (consumer safety), tax it (revenues projected at $1 Billion per year), and the black market can be starved out of existence. (And not a small bonus, a bounty of new medicines will become available to fight dozens of diseases.)

Efficiency in Cannabis Regulations Would Signal Success

Are we all on the same page that it’s in everyone’s interest to make California's cannabis market work? That things should go smoothly so that all that money flows through the economy and the cartels and their street dealers working the bike racks at middle schools go away, right?

We’re asking because we've had a tip-of-the-iceberg moment in reading the new cannabis packaging regulations. Believe it or not, California regulators needed more than 8 pages to contain all the regulations for packaging of cannabis products.

This is just the packaging, people!

What do Business Owners Think of Cannabis Regulations?

With this kind of massive overreach on such a narrow theme, we asked owners of four California cannabis companies about how these new packaging regulations are affecting their businesses.

Q1) California's new packaging and labeling regs come into effect on July 1 - how has/is that affecting your inventory?

Tree House (Dispensary), Santa Cruz:

Our packaging costs have increased over 5x what it what in 2017. In order to meet CRP compliance, we have also had to move away from primarily recyclable options to less environmentally friendly packaging.Wholesale costs on products have increased across the board and we anticipate they will continue to raise as more regulations and testing requirements kick in. Any continued increase in our pricing will hurt our business especially when there is an illicit market of delivery services and dispensaries openly advertising on venues like Weedmaps and undercutting our pricing by 30-40% since they are not subject to the same taxes, costs, and rules.

The Weed (Dispensary), Studio City:

We are working diligently to guarantee inventory. It is a concern for us that some companies will be delayed in testing/labeling requirements/ compliance, and we are working with them to guarantee inventory moving forward.

Palm Springs Safe Access (Dispensary), Palm Springs:

As a retailer and manufacturer of cannabis products, becoming compliant with State regulations by the July deadline has been an arduous process. Inevitably, there will be an industry-wide decrease in the variety of products that dispensaries and cannabis companies can offer to consumers while remaining compliant with State law and profitable. Unfortunately, the consumer experience will be affected as the available menu in the cannabis marketplace temporarily shrinks - it will be yet another layer of stress in an already stressful industry, but luckily we have a cure for that!

Lowell Herb Co (Cultivator/Manufacturer):

As the #1 selling pre-roll in the state, our team is hyper-focused on freshness and we carefully monitor our inventory levels. We have a new customer child-resistant pack that is what now being shipped to stores and we have almost fully run out of our non-CR packs prior to this release.

Q2) Do you feel like the new regulations are clear cut? Frustrating? Too restrictive? What consumers want? Will help legitimate businesses?

Tree House:

There has never been an industry in the history of this state that has had to undergo so many changes in such a short period of time. We are having to make monumental shifts to our business while the rules on how we are meant to operate are still evolving and in flux.

The Weed:

I feel like the new regulations are overkill for cannabis. Anyone can go buy a bottle of liquor, unscrew the top and drink it. Similar with Tobacco, but cannabis customers have to get thru a child proof lock to get their product. Seems odd considering those two products are proven to cause major health issues and even death. It is a hurdle for everyone to get through the red-tape and that will drown some manufacturers/vendors/cultivators.

Palm Springs Safe Access:

At Palms Springs Safe Access and NATIV, we believe California’s new regulations legitimize the cannabis industry and level the playing field as bad actors are weeded out. We’ve been doing full spectrum testing since 2012, well before regulations, and it’s only made our products better and our consumers happier. The California cannabis industry is fortunate to have State agencies that are focused on working with us through this process. Change is never easy but we think it's worthwhile. Companies and regulators alike are learning together as we slowly perfect one of the best State regulatory systems to date.

Lowell Herb Co.:

We think that the tight regulations in CR on edibles make sense, but we think it’s a bit strict for flower, with that said we are happy to comply with these new rules. As for all of the labeling, testing, and origin specification, we were doing this before these laws were put in place. We believe that all customers should be provided this information, so we welcomed these changes.

Q3) Do you have any special plans for production, sales, etc., to help make it through the adjustments, as regs come online?

Tree House:

The additional costs of regulations and testing are forcing us to drop many SKUS from our catalogue. This will inherently lead to fewer options for patients and consumers across the board as many manufactures are having to increase their inventory levels and batch sizes to account for the continued increase in testing costs.

The Weed:

We are a vertically integrated company and we will have products on our shelves. We are continuously working with our vendors to obtain compliant product and we assure our customers they will have safe access to products.

Palm Springs Safe Access

We are initiating sales across the board to clear inventory that is no longer compliant from those companies that can’t switch out inventory (a costly endeavor for everyone). We are implementing adjustments across the board from the sales floor, to the grow rooms, and to the production line in order to be in compliance. Keeping the whole team informed of the changes and why they are important is key, and prepping the consumer is imperative.

Lowell Herb Co:

There should be no adjustments for our customers, and all of our product is labeled according to the guidelines. We are thrilled to launch our new nationally certified child resistant packaging that we believe will delight our customers.

The Last Word

There you have it, from the trenches of the California cannabis industry:

> A complete face-palm over the complexity of packaging requirements;

> A mix of frustration over heavy financial costs and unsustainable packaging waste, all of which are providing (unintended) support of black market actors.

> At the same time, all of these legit cannabis business have their sights high for the overall success of the industry and the wellbeing of California consumers.

They may gripe a tiny bit, but at least they're on the right page.