Consolidation changes the face of California marijuana – Times-Standard

The inside of a thriving greenhouse at StateHouse Holdings in Salinas is shown, Monday, Jan. 15, 2024. Mergers and acquisitions are the result of the state’s “green rush,” a surge in prices that then falls. (Nhat V. Meyer/Bay Area News Group)

Facing price pressure and fierce competition, California’s vast and fragmented marijuana industry is consolidating, ushering in the Big Weed era.

Legalization was led by colorful and high-flying stoners. However, sober demands for efficiency, capitalization and strict business management are driving a wave of mergers and acquisitions.

“It’s a nascent industry that’s going through a process of adaptation,” said Wall Street analyst Pablo Zuanic of Zuanic & Associates, who specializes in the cannabis sector. “Winners scale up.”

The long-banned herbal business is now starting to follow the same “consolidation curve” as every other American industry, from airlines to telecommunications. As industries mature, companies fight for market share to outperform their rivals – or risk extinction.

“Survivors are strong and getting stronger,” said Laurie Holcomb, CEO of Gold Flora, a vertically integrated network of seed growers, producers, distributors and dispensaries in California, including San Jose, Vallejo, Oakland, Soquel and San Francisco.

Meanwhile, many small, underfinanced or poorly managed businesses fall into debt. Many disappeared.

“California is a case study in a competitive market,” Zuanic said. With no limits on the number of growers and dispensaries under state law, “it is a ‘free market’ state.”

So far, it seems unlikely that any single company will claim a monopoly in the state. California, the nation’s largest legal market with $5.1 billion in 2023 sales, has room for plenty of winners, experts say. STIIIZY, Catalyst, Gold Flora, StateHouse and Glass House Brands are among the state’s largest companies, but a few small and successful specialists, such as Alameda’s Kiva Confections, seem poised to survive as well.

Weed started on his own. In the 1960s, it was grown on forbidden farms and makeshift homesteads, and was shared, bartered, or sold to friends. During the worst of the AIDS crisis in the 1980s, San Francisco’s “Brownie Mary” Rathbun and other “merchants-healers” walked the streets selling goods from a basket for a few dollars each.

Legalization in 2016 ushered in a “green rush,” with new companies popping up like seedlings in spring.

Times were good during the early part of the Covid-19 pandemic, when many Californians received government assistance and worked remotely. Businesses chased growth, taking on debt to increase employee numbers and overhead costs.

Supplies increased, but demand stabilized and then fell. Prices have dropped. Since legalization, the average wholesale price for a pound of cannabis flower in California dropped from $1,600 to $682 in mid-May, according to Cannabis Benchmarks, a national data provider. Statewide, sales dropped 7.1%. All three Bay Area counties with the highest retail sales – Alameda, San Francisco and Santa Clara – showed declining sales.

Meanwhile, taxes are high and illegal marijuana is plentiful, undercutting the legal market. Earlier this year, officers found 41,218 illegal plants and more than 2,900 pounds of processed marijuana worth nearly $39 million on San Leandro Street in Oakland, as well as $10 million worth of plants discovered on Kevin Court, also in Oakland.

As a result, the number of legal growers dropped from 18,000 at its peak to about 4,000. California once had about 6,000 different brands; now there are 1,600. The main distributor, HERBL, went bankrupt last November, causing losses to the state in terms of unpaid taxes. Old retail empires like High Times and MedMen have collapsed.

Companies are more than $7.7 million in unpaid bills this year, according to Adam Cavanaugh, president of the Cannabiz Credit Association, a group that monitors debt and provides credit ratings. While this is on pace with debt of $22.43 million in 2023, it represents a significant increase from $15.7 million in 2022.

To survive, the strongest companies mobilize – they merge, consolidate and improve. Although they are currently operating at a loss, they expect to be cash flow positive within a few years.

This trend can be seen throughout Bay Area cannabis culture.

In downtown Vallejo, popular marijuana dispensary ReLeaf Alternative Healing, founded in 2011, was purchased in 2021 by Coastal, which holds statewide retail, delivery, manufacturing and distribution licenses. Coastal was then sold to The Parent Company, which was the result of a three-way merger of Caliva, Left Coast Ventures and SISU Extracts. Last year, the Parent Company merged with Gold Flora.

Harborside Clinic in Oakland, founded by activists in 2006, has a long and storied history as a nonprofit patient collective. Harborside currently has retail locations in Oakland, San Jose, San Leandro, San Francisco and Desert Hot Springs. Two years ago, after Harborside purchased maker Sublime, retailer Urbn Leaf and brand Loudpack, the four companies merged into one with an eye-catching name: StateHouse Holdings.

How does it help? Bigger is better during booms and busts, as long as you don’t have too much debt. Size and deep pockets mean you have enough capital to weather the storm.

And companies that operate vertically – buying every business in the chain – have more reliable supplies. And these companies can ensure control over the quality and quantity of their products, said Ed Schmults, CEO of StateHouse Holdings, former chief operating officer of Patagonia and CEO of FAO Schwarz, a Harvard Business School graduate.