Welcome to the cannabis crunch: Mass. marijuana industry braces for turbulent 2023

“Everyone expected a high-margin boom, but now it’s a race to the bottom,” said Coby Evans, co-owner of Boston’s Pure Oasis marijuana store. “The market has changed rapidly in the last 12 months. Investors are unlikely to get the returns they once expected.”

But overall, 2022 was the best year for the Massachusetts marijuana sector. The recreational distributor hit a record $1.42 billion in revenue by Dec. 18 from his $1.33 billion in 2021.

And thanks to a 20% effective tax on most recreational marijuana sales in Massachusetts, a good chunk of last year’s weed windfall went to public funds.

In the fiscal 2023 budget, state legislators expect the maximum tax on recreational purchases to be $165.3 million for the 12 months ending June 30, a sales tax of 10.75%. The Department of Substance Addiction Services funds everything from housing and recovery services for people struggling with opioid abuse to classes for people charged with DUI.

An additional $19.22 million in excise tax revenues will go to the Cannabis Control Board’s industry oversight, and the Department of Agriculture and Resources will receive just under $1 million to regulate the use of pesticides on cannabis farms and marijuana growing facilities. is divided into grants for disenfranchised and over-policing communities, funds for community colleges to help low-income students, and youth recidivism prevention programs.

Purchases of recreational marijuana are subject to a state sales tax of 6.25%, plus an additional 3% local tax in the majority of cities and towns that host cannabis retailers. This will bring about $42 million in unrestricted funding to local governments in 2022.

Marijuana companies have also emerged as important employers in the state, with about 22,000 workers allowed by the state to work in licensed cannabis facilities as of December.

David O’Brien, president of the Massachusetts Cannabis Business Association, said, “Legalization has made a difference that people are seeing.” You can see it in the old warehouses that the company lives in, etc. Everything is growth, everything is progress, the sky was so.It doesn’t fall.”

But marijuana executives argued the eye-popping big picture numbers underpinned the increasingly difficult business conditions for individual operators, predicting 2023 will be a mixed bag at best for the industry. ing.

On the bright side, lower prices at legal Massachusetts pharmacies could help lure more consumers from a deeply rooted illegal market, partially offsetting dwindling profits as transaction volumes rise. They said it could make up for the Industry leaders expect these purchasers, combined with a steady influx of cannabis-interested consumers trying cannabis for the first time as cannabis becomes more and more socially normalized, will likely see recreational growth in 2023. We expect it to further boost total sales and the tax revenue they generate.

“Profit margins may be down, but it’s still a viable and growing business,” said O’Brien.

Businesses have also cracked down on exorbitant local government fees charged to marijuana companies and introduced new laws that allow the opening of so-called “social consumption” venues, essentially places where marijuana is the equivalent of a bar. We are eagerly looking forward to the second half of this year. The law further adds that after decades of racially disproportionate drug arrests, disenfranchised individuals struggling to start businesses despite provisions in state law calling for a fair industry. Set aside 15% of entertainment excise tax revenues for entrepreneurs from committed communities.

Another bright spot: Increased competition has led many wholesalers to lower their minimum order sizes, making them less picky about which retailers they do business with. This makes it easier for stores to offer large menus with a variety of products.

Victor Chen, veteran investor and CEO of Redi, which operates entertainment stores in Newton and Natick, said:

But Chen and other experts foresee a number of worrying developments that they believe will bankrupt several cannabis companies in 2023.

Disappointing returns for investors and the failure of the lame-duck Democratic Congress to pass marijuana banking reforms before Republicans took control of the U.S. House of Representatives this month mean that the marijuana business, especially for smaller operators, will continue to thrive. capital is scarcer than ever, they said. At the same time, the emergence of recreational sales in Vermont, Rhode Island, Connecticut and New York could halt the flow of out-of-state shoppers who previously made pilgrimages to Massachusetts pharmacies, squeezing an important source of demand. there is. At the same time prices are falling.

Mr. Chen said that struggling local businesses won’t have many options. State regulations limit companies to three retail and three grow licenses each, leaving little room for larger companies to consolidate the market through acquisitions. A federal ban on cannabis also prevents marijuana companies from declaring bankruptcy, and national operators are more likely to be pinching pennies than buying out struggling businesses.

In fact, according to Chiang, many founders of multistate businesses stayed in business this long because they expected federal legalization to happen sooner and the opportunity to cash out. I didn’t want that.

“They are finance people looking at it through the lens of a spreadsheet and aren’t excited to get too deep into the operational side of the business because they feel there are already a lot of players,” Chen said. said Mr. “If you’re an independent retailer, I don’t know what your exit plans are other than closing stores.”

Dan Adams can be reached at daniel.adams@globe.com. follow him on twitter @Dan_Adams86.

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