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Boom times are over: 10 years after Colorado legalized recreational marijuana

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When Colorado voters legalized recreational marijuana in 2012, no other state had launched a legal adult-use market, and there was no road map.

Dave Malone, co-founder and chief creative officer for Denver-based vertically integrated cannabis company Green Dot Labs, likened it to bushwhacking through the wilderness at night.

“We’ve been in the dark with a torch in our left hand and a machete in the right,” he said.

Since then, the market has matured, with some businesses succeeding and many others either shutting down or being gobbled up by bigger fish.

Colorado’s progression as one of the nation’s first adult-use markets offers plenty of lessons to marijuana business executives across the country.

Like marijuana entrepreneurs in other states, Colorado cannabis businesses saw some of their best sales months during the COVID-19 shutdowns in 2020, when people flush with federal stimulus cash had few other places to spend their money.

New cannabis consumers also turned to the plant for stress relief.

But that boom didn’t last.

And now Colorado cannabis companies are experiencing the worst downturn the market has seen, with month-over-month sales numbers on a steady slide amid lower wholesale flower prices.

Market conditions have gotten so bad that calls are increasing among marijuana growers to stop licensing new cultivation businesses in the state.

Another factor adding to the heartburn for Colorado businesses is that, for a few years, the state was the only legal adult-use market in the region.

Those days are over, as bordering states such as Arizona and New Mexico have their own adult-use markets, and people can get legal recreational cannabis in several parts of the country.

“It’s been a very tough time in the industry this year,” Malone said. “The market is down from its highs.

“It’s a real meat grinder right now.”

Malone characterizes the aftermath of the pandemic boom as a “hangover” that includes a “sour macro economy with a massively oversupplied cannabis economy.”

A few mistakes

Joe Hodas, chief marketing officer at Boulder-based Wana Brands, has been working with cannabis companies in Colorado since the beginning of the recreational market and was part of the lobbying efforts that helped shaped the regulations.

If he could go back in time and change anything, Hodas said, he would have made the tax rules final so that regulators and lawmakers can’t continue to layer on new state taxes.

“People don’t seem to understand that if we continue to add taxes and make legal cannabis more expensive, consumers will continue to (seek out) the black market,” he said.

Another mistake, according to Hodas, was not focusing on adding social equity elements to the business-licensing structure.

“We didn’t give an opportunity to people of color or those who have suffered at the hands of the war on drugs to appropriately get involved in the industry,” he added.

At the time, Hodas explained, the main effort was simply to get marijuana legalization “over the finish line.”

Alongside Hodas, Dan Pabon was involved in Colorado’s cannabis policymaking in the early days.

Pabon was elected as a Colorado state representative in 2011 and served in the Legislature for eight years.

During that time, he was an original sponsor of the first bill that legalized recreational marijuana in Colorado.

Now he works as general counsel for Denver-based, vertically integrated cannabis company Schwazze.

To Pabon, one measure of success is how many other marijuana markets have come after Colorado’s and how similarly they operate.

“Colorado’s model has been wildly successful,” he said. “And I say that because most of the states that have adopted recreational cannabis into their system have used, if not in whole, in part Colorado’s rules and regulations.”

What Colorado could have improved upon, according to Pabon, was in providing capital and opportunities for entrepreneurs trying to get into the industry.

Early on, he saw a lot of businesses falling prey to predatory lenders and bad business deals.

“A lot of that could have been avoided if the state would have invested more in an entrepreneurial fund,” Pabon added.

Market controls

Looking ahead, as the market becomes more consolidated and glutted with product – and wholesale prices continue to fall – some cannabis companies have appealed to regulators to enact a licensing moratorium on new permits.

They argue that would help curb market saturation and protect the existing businesses.

“We were always of the mind that this would not be an unlimited-license state forever,” Pabon said.

“When you have overproduction, you have a price pressure in the market, which can cause some operators to divert product into the illicit market.”

That’s why the regulators would be granted the ability to put in the caps, he added.

The ultimate goal of the licensed market has always been to completely eradicate illicit operators.

In the meantime, cannabis companies ramped up production during the boom times of the pandemic, and when prices fell off a cliff this year, people started closing up shop, according to Pabon.

“We’ve heard of some cultivation owners who said, ‘I’ll give you the keys to this place for free, as long as you take over my lease payments,’” he said.

Brian Vicente of Denver-based cannabis law firm Vicente Sederberg praised what the market has accomplished over the past decade, including the billions of dollars in tax revenue, tens of thousands of jobs and hundreds of businesses.

One sticking point has been trying to figure out the correct amount of canopy or plants that market needs to service demand, he added.

“That’s led to some price depression, which has made it somewhat of a challenging market, particularly the last six months for, for cannabis businesses,” Vicente said.

“We have too much cultivation for the state’s demand. So a moratorium on new grows is worth considering.”

The impact of brands

Several Colorado cannabis companies, including Wana Brands, have perfected their brand in the state and subsequently taken their show on the road, expanding into other state markets.

Brittany Hallett, vice president of marketing at Denver-based Slang Worldwide, which is the parent of the O.pen vape company, said Colorado has been the perfect proving ground.

“We’ve been able to grow and build a foundation for the brand,” she said.

“It’s been like a springboard to allow us to expand into different product categories and into additional markets over the course of the last 10 years.”

For example, the company recently acquired its longtime partner in Vermont, Ceres Med, and opened a retail store there in October.

“Nationally, and as you think about cannabis, Colorado has a special place in a lot of people’s hearts,” Hallett said.

“It’s the heartland of where cannabis started, at least in the United States.”

Being from Colorado is a strong notion to lead with from a national perspective, she added, noting it’s “something that we’ve seen good reception of from both consumers and retailers alike.”

Among the companies in the state, Hallett pointed out that, at one point, more than 300 different vape brands were competing in Colorado.

Now the market is less crowded, she said, estimating there are fewer than 100 vape brands in the state.

The price compression that has occurred in the flower market over the decade has also hit the vape sector.

Hallett said a 1-gram terpene distillate cartridge used to sell at retail for $90 before tax, and now it sells for $50-$55.

As for input costs, during the peak of the pandemic buying spree, Hallett said a pound of flower would wholesale for around $1,500. Now it’s down to $400-$500 a pound.

Taking a run at craft cannabis

The downturn hasn’t stopped Malone from targeting one specific area of the cultivation sector, what he calls the “ultra-premium” flower market, also known as craft cultivation.

Despite the flower market being saturated, Green Dot has pumped resources into a high-tech, state-of-the-art indoor grow facility to produce the best flower it can.

Malone said his flower now retails for more than $400 an ounce, which is steep considering entire pounds of lower-grade flower are selling for around that price on the wholesale market.

At the onset of the market, Denver-based vertically integrated company Native Roots was growing flower for quantity to meet demand, said Beth Kotarba, the company’s chief operating officer.

“We started to realize that we’re growing plenty, but maybe our quality is not stacking up to some of the competition,” she said.

“So we took a hard look at that and all of our processes.”

Native Roots started to focus more on growing the type of flower that its budtenders would be proud to recommend.

“Now we have a smaller grow that we’ve been able to utilize to do that and produce a higher level of flower,” Kotarba added.

Another marijuana company that’s been going after the craft market is Denver-based Veritas Fine Cannabis.

Jon Spadafora, partner and head of marketing of the company, said if he could turn back the clock the company would have made improvements to its facility early.

“We should have been more open to technologies that became available and different opportunities that would lower our cost of production as we went along the way,” he said.

Similar to other companies that have focused on their own brands, Spadafora said the smartest thing Veritas did was to brand and package its flower products.

“As a result,” he said, “we were very fortunate that we were able to connect with consumers much earlier than a lot of other companies were.”

Source: https://mjbizdaily.com/10-years-of-legalized-recreational-marijuana-in-colorado/

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