New Mexico just hit $1.3 billion in cannabis sales, according to the state’s Regulation and Licensing Department (RLD). The total was reached after a lucrative August haul of more than $51,000,000. But that good news is being soured by reports of small cannabis businesses and even legacy operators permanently closing their doors because of market oversaturation and the unique trials faced by the industry.
Operators say oversaturation is killing small businesses and that legislators need to temporarily pause new licenses.
Last week, it was revealed that Minerva Canna and Sacred Garden — two legacy operators that have been a part of the New Mexico marijuana landscape since before adult-use legalization — are permanently closing down. The ubiquitous Ultra Health has reportedly shut down 20% of its stores across New Mexico.
There are other more modest businesses that are currently either going under or downsizing, such as Cinder.
“Cinder was relatively successful when it comes to sales in the market,” says Cinder Director of Manufacturing Mitch Anderson. “We’re ranked 216 out of 1,100, which means there’s 800 businesses behind us that are on their way out.”
Anderson says Cinder, a multi-state operator with experience in the industry, is closing all of its New Mexico locations. He says the market is oversaturated with licensees, and it’s making it hard for smaller operators to compete.
“We have to turn the license faucet off yesterday. Even when we turn that off, there will still be too many licenses out there,” Anderson says. “Businesses are going to be hit every day that we leave that faucet on.”
Anderson’s sentiment has been echoed throughout the industry since adult-use was legalized in New Mexico. According to state data, the CCD has issued more than 1,500 retail cannabis licenses since New Mexico started adult-use sales.
“There’s not a lot of room for anybody else,” Anderson says. “So big players that are well funded that can afford to bleed the rest of us out.”
Anderson says the sheer number of operators gives big businesses an advantage in navigating expenses that could tank a smaller business.
“When you’re small, you’re very fragile,” he says. “There’s a lot of complexities to some of the barriers that you can run into.”
He describes a time when Cinder voluntarily recalled some of its products after internal quality assurance testing found problems that had been missed by third-party lab tests.
“For us, that was a loss of $10,000 of product, and more than that in revenue,” he says. “Those kinds of things are hard to overcome.”
Weed businesses face unique hurdles that other industries don’t experience. Unlike other sectors, cannabis companies have limited access to business loans and are cut off from federal grants and opportunities. They also face steep taxes and high regulatory scrutiny.
But Anderson says the tax rates aren’t that bad.
“I think the tax rate is actually extremely reasonable,” he says. “But I also think that there should be a pause on tax payments. I think the tax rate is fair, but right now — where the cannabis economy is — it’s a burden.”
U.S. tax code Section 280E forbids businesses trading in Schedule I or II drugs from taking many business deductions. That means weed companies aren’t allowed to deduct normal business expenses like every other legitimate company.
Unlike those in other industries, marijuana companies also have to compete with a growing black market fed by illicit out-of-state weed. In May, The Paper. visited an open-air drug market with unregulated marijuana sold at low prices. The market was packed with customers purchasing illicit marijuana while nearby dispensaries stood empty.
Anderson says the answer is to put a cap on licenses.
“Licenses go out, put them into receivership for a year, and if no one picks it up, then it goes away and the cap lowers,” he suggests.
He’s not the only one calling for some kind of limit for licenses. Industry caps have been championed by many other operators, including Duke Rodriguez, CEO of Ultra Health.
“The only way an open licensure system works is if there is a safety valve to throttle new licenses,” says Ben Lewinger, Executive Director at the New Mexico Cannabis Chamber of Commerce. “The ability for the Cannabis Control Division to do this was stripped from the Cannabis Regulation Act when the bill shifted to a Special Legislative Session where it passed, and we’ve been trying to get that language back in there ever since.”
CCD has repeatedly said that it cannot limit licenses according to the law, meaning advocates of a cap will need to find a legislative path to fixing the problem.
“If we want a healthy industry in five years, we need to take thoughtful, decisive action immediately to help the industry find equilibrium and give the current operators a chance to thrive, especially our small and medium-sized homegrown cannabis businesses,” Lewinger says.
Anderson says the closure of Cinder won’t be the end of his cannabis career.
“I’m not going anywhere,” he says. “I’ve been doing this since 2014 in one way, shape or form.”
But he says he might not do it in New Mexico. He’s considering moving to Washington state, where his family is based.
“I’ve had so much fun in New Mexico,” he says. “I fell in love with New Mexico in my time here. But I need to take a step back and slow down for a little while and see what the future holds for me.”
H/T: abq.news
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