Cannabis Sales Spike, But Future Is Far From Certain

Add alcohol and cannabis to the provisions people are stocking up on amid the pandemic. Beyond that, the market for these mood-altering substances have very little in common—for a variety of reasons that don’t look to change any time soon.

Per Nielsen, year-over-year sales of alcoholic beverages climbed 55% in the third week of March following a 28% rise the week before. Spirits led the way, followed by wine and beer, with online sales driving much of the growth.

Meanwhile, in mid-March, sales of legal cannabis spiked 159% in California, 100% in Washington State and 46% in Colorado, according to data from Headset reported by Marijuana Business Daily.

What the numbers don’t show is how much illegal cannabis was sold in places like California. Which explains why the legal marketplace there and in other states is pretty much a mess for marketers that choose to follow the law.

The Golden State legalized recreational use in January of 2018. But far too much cultivation, a mishmash of local and state regulations, onerous cultivation and sales taxes, and a lack of enforcement of illicit cannabis sales are making it very difficult to run a profitable business.  

Consider the stats. As recently as 2018, there were more than 68,000 cannabis cultivators, according to the California Growers Association. A couple of months ago, fewer than 2,000 were state-licensed.

The bottom line: It still makes more sense for people in California to buy cannabis from dealers they’ve been doing business with for eons. 

This comes as no surprise to recreational cannabis companies like Med Men Enterprises, which was founded in 2010 and derives 74% of its total retail revenue from California. In its second fiscal quarter ended Dec. 28 of 2019, the company’s retail gross margin in the state was 52%, but “we were break-even after local taxes and distribution costs,” interim CEO Ryan Lissack told analysts.

Shifting to Massachusetts, which became the first state on the East Coast to legalize recreational cannabis in the fall of 2018, there’s a lot less illicit cultivation. Nonetheless, local municipalities have made it all but impossible to start a legal cannabis business—much less profit from it.

Stellar reporting by Boston NPR’s WGBH explains why this is so. Under state law, cities and towns are limited to charging legal cannabis businesses a standard 3% fee and an optional local sales tax, under Host Community Agreement contracts. Yet, in one example, the city of New Bedford asked a would-be business owner for an additional $25,000 payment on his opening day, plus a $50,000 annual donation to local charities.

WGBH examined 314 such contracts and found all required more than the standard fee. “They looked at the law. They decided that 3% tax wasn’t enough, and just started designing absurd schemes to extract more,” Massachusetts Cannabis Control Commissioner Shaleen Title was quoted as saying.

As of this writing, U.S. Attorney for Massachusetts Andrew Lelling had issued subpoenas to dozens of cities and towns to get to the bottom of the licensing irregularities.

Does it surprise anyone, then, that the governor of Massachusetts recently declared liquor stores essential during the pandemic—and recreational cannabis stores non-essential?

It is against such complicated backdrops that companies big and small have been eying the perceived potential of legal cannabis beyond the current 11 states. Not that the federal government is expected to remove it as a Schedule 1 drug—on a par with heroin—any time soon. 

In the meantime, brands that want to trademark their cannabis wares are pretty much locked out at the federal level because their products are not “in lawful use in commerce,” says Florida attorney Jessica Shraybman.

“For example, just like you can’t trademark your brand of cocaine, you also can’t trademark your brand of recreational marijuana because it’s not federally legal.”

One way around that is for companies to apply for a federal trademark for, say, XWZ Sparkling Water—as long as such a product does not contain cannabis. In the future, that same brand name could cover a beverage containing cannabis.

According to Shraybman, it can make more sense to apply for trademark protection on a state-by-state basis where recreational cannabis use is legal.

“For some clients, the cost to do a full federal application can pretty much come out the same as doing one, two and sometimes three state-level applications. So that is definitely proving to be a good alternative for companies that can make no claim to federal lawful use,” says Shraybman.

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