The Massachusetts marijuana industry is on the verge of an impressive milestone: $4 billion in revenue since recreational sales began in November 2018, a total that has also netted state and local governments hundreds of millions of dollars in taxes.
But when the state surpasses that mark — likely in the next month or so — there may not be much celebration from its roughly 250 cannabis stores.
That’s because a newly legal industry previously seen by giddy investors and entrepreneurs as the next gold rush has turned out to be more like an ordinary commodity market, with a massive increase in wholesale supply and retail competition over the past year causing an equally massive price crash. As a result, many operators are watching their slice of profits shrink even as the overall pot pie continues to grow.
“Everyone was expecting it would be a high-margin boom, but now it’s a race to the bottom,” said Kobie Evans, co-owner of the Pure Oasis marijuana store in Boston. “The market shifted very quickly within the last 12 months, and for investors, there’s a low probability they’ll get the returns they once anticipated.”
By any aggregate measure, however, 2022 was a banner year for the Massachusetts marijuana sector. Recreational sellers posted a record $1.42 billion in revenue through December 18, up from $1.33 billion in 2021.
And thanks to the 20 percent effective tax on most recreational marijuana sales in Massachusetts, a significant chunk of last year’s weed windfall ended up in public coffers: approximately $284 million, plus millions more in local “impact” fees.
State lawmakers in their budget for the 2023 fiscal year expect the largest levy on recreational purchases — a 10.75 percent excise tax — to yield $165.3 million over the 12 months ending on June 30. The majority of that money, $135.83 million, goes to the state Bureau of Substance Addiction Services to fund everything from housing and recovery services for people struggling with opioid abuse to classes for those charged with drunk driving.
A further $19.22 million in excise tax proceeds pays for the Cannabis Control Commission’s oversight of the industry, while the Department of Agricultural Resources receives just under $1 million to regulate hemp farms and pesticide use at marijuana cultivation facilities. The remainder gets split between grants for disenfranchised and over-policed communities, funding to help community colleges support low-income students, and anti-recidivism programs targeted at young adults.
Recreational marijuana purchases are additionally subject to the state’s 6.25 percent sales tax, plus a 3 percent local tax in the vast majority of cities and towns that host cannabis retailers, which in 2022 netted municipalities roughly $42 million in unrestricted funds.
Marijuana companies have also emerged as significant employers in the state — around 22,000 workers were authorized by the state to work at licensed cannabis facilities as of December.
“Legalization has brought about change people can see,” said David O’Brien, the president of the Massachusetts Cannabis Business Association. “You can see it in the tax revenue, in the jobs that have been filled, in the dispensary storefronts that used to be empty, in the old warehouses that now host manufacturing companies — it’s all growth, it’s all progress, and the sky did not fall.”
But marijuana executives contended the eye-popping, big-picture numbers bely increasingly difficult business conditions for individual operators, and predicted 2023 will be a mixed bag at best for the industry.
On the bright side, they said, falling prices at legal dispensaries in Massachusetts could help woo more consumers over from the persistent illicit market, partially making up for smaller profits on each transaction with greater volume. Industry leaders are hopeful that those buyers, combined with a steady influx of cannabis-curious consumers trying out the drug for the first time as it becomes increasingly socially normalized, will push total recreational sales and the tax revenue they generate even higher in 2023.
“The margins may be getting thinner, but it’s still a viable and growing business,” O’Brien said.
Operators are also eagerly anticipating the implementation later this year of a new law that will crack down on steep municipal fees charged to marijuana firms, and allows for the opening of so-called “social consumption” venues — essentially the marijuana equivalent of a bar. The same law further sets aside 15 percent of recreational excise tax proceeds for entrepreneurs from disenfranchised communities, who have struggled to open for business despite provisions in state law calling for an equitable industry after decades of racially disproportionate drug arrests.
Another bright spot: Increasing competition is prompting many wholesalers to drop minimum order sizes and become less picky about which retailers they do business with, making it easier for shops to offer big menus with a variety of products.
“Now, every cultivator’s just happy to get a call and have access to more retail shelves,” said Victor Chiang, a veteran investor and the chief executive of Redi, which operates recreational stores in Newton and Natick.
But Chiang and other experts also foresee a number of worrisome developments they believe will put some cannabis companies out of business in 2023.
Disappointing returns for investors and the failure of the lame-duck Democratic Congress to pass marijuana banking reforms before Republicans gained control of the US House of Representatives this month means capital will be scarcer than ever in the marijuana business, they said, especially for smaller operators. At the same time, the advent of recreational sales in Vermont, Rhode Island, Connecticut, and New York will likely start to choke off the flow of out-of-state shoppers who previously made pilgrimages to Massachusetts dispensaries, depressing an important source of demand at the same time prices are falling.
Local companies that find themselves floundering won’t have many options, Chiang said, since state rules capping companies at three retail and cultivation licenses each leave little room for a bigger player to consolidate the market through acquisitions. The federal prohibition on cannabis also prevents marijuana firms from declaring bankruptcy, and national operators are more likely to be pinching pennies than buying up distressed business.
In fact, Chiang said, many founders of multi-state operations never wanted to stay in the business this long, having expected federal legalization to come sooner and give them an opportunity to cash out.
“They were finance people looking at it through a spreadsheet lens, and they’re not excited about getting deeper into the operational end of the business, where the feeling is there’s already too many players,” Chiang said. “If you’re an independent retailer, I don’t know what the exit plan is other than to close your doors.”