CA: Santa Cruz County Pot Shops – Sales Up, Profits Down

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Photo Credit: David Downs

Pot sales spiked across the state in January as new customers flooded into the recreational marketplace, according to early retailer reports. But some local business owners say profit margins have eroded as they grapple with high taxes, testing and packaging requirements and a constrained supply chain. And with a grace period for some of the state’s strictest rules set to expire July 1, some in the industry say the worst may be yet to come.

“Sales are great, but now we’re losing money,” said Grant Palmer, co-owner of the CannaCruz dispensary on Limekiln Street. Palmer predicted the next year will see taxes fall, or many pot producers and sellers — from growers to retailers — closing their doors.

“Fees, taxes — everything has gotten more expensive all at once. We’ve been profitable since the day we opened until Jan. 1, and now we’re not,” Palmer said. Beyond the state requirements, federal tax rules designed to keep illicit drug traffickers from writing off normal business expenses apply equally to dispensaries. “By the time you get through all these taxes and add up state local and all the fees, it’s more than 100 percent,” Palmer said. “I don’t know where anybody thinks the money is going to come from.”

Sales at CannaCruz soared about 40 percent by volume since Jan. 1 as new customers flock to the retailer’s doors, Palmer said.

KindPeoples similarly sold 40 percent more pot products in January at its two dispensaries in Live Oak and Santa Cruz, according to KindPeoples spokeswoman Elise McDonough — and the shops saw a 75 percent increase in overall visits compared to December. The cost of doing business has increased “considerably,” driven by pricey packaging and testing requirements.

In Aptos, dispensary Santa Cruz Naturals saw significant spike in foot traffic throughout January, with about 90 percent of customers new to the business, according to founder and CEO Colin Disheroon.

“Now those first-time people are becoming regulars, and there’s still a constant flow of new clients,” Disheroon said. But costs of edibles and other compliant, high-end products, the availability of which is now more limited, have also doubled, according to Disheroon — and customers are noticing the difference at the register. “People are experiencing sticker shock,” he said.”

The surge of new customers came as a surprise to some in the industry. Palmer told the Sentinel in December he expected few new costumers, assuming that most people who wanted to purchase pot already could, and were through the black market and lenient medical laws — especially in a county known for its liberal attitudes toward the plant. Disheroon, too, said that while he prepared for an explosion of customers, he was doubtful it would occur.

Retailers elsewhere in California have also reported significant sales increases while declining to share sales figures, which won’t need to be reported until the end of the fiscal quarter.

NEW CUSTOMERS

The sales boost appears to be driven by a base of new customers including many in their 50s and 60s who may have smoked pot in their youth as well as a younger crowd in their 20s and 30s, according to Palmer and others in the industry.

“They’re people who just want to buy a joint once or twice a month, have a good time and relax on a Friday night — not people who are treating a medical condition or smoke every day,” Palmer said.

But in the face of higher prices, many medical patients appear to be staying home.

“The people we’re seeing are all new people,” Palmer said. “All the old people that we’ve had a relationship with for years they’re all gone. They can’t afford it.”

BDS Analytics, which tracks cannabis marketing data across California, Oregon, Washington and Colorado, conservatively projected in December that California’s pot sales would sum to $3.8 billion in 2018, a boost of 22 percent.

“Unfortunately, what we have learned since January 1 is mostly bad news,” said Tom Adams, managing director and principal analyst at cannabis market tracker BDS Analytics. “The medical patients are horrified by the cost increases and are cutting back on their flower or getting it much cheaper elsewhere.”

INTEGRATE OR ELSE?

For a small pot retailer to stay afloat in the current climate, he or she may need to cut out the middle man and grow — or at least, source directly from growers — themselves, according to Seth Smith, vice president of communications and public affairs at the Santa Cruz Veterans Alliance.

Smith speaks from experience: The Veterans Alliance grows and manufacturers about 80 percent of the products on its shelves at sites in unincorporated Santa Cruz County and Watsonville.

That integration allows the alliance to sell top-shelf flower for less than many of its nearby competitors, Smith said. Prices listed on WeedMaps support his claim, with the Veterans Alliance-grown flower listed for 10 percent less at the Live Oak dispensary.

“If you’re small, we don’t see how you can necessarily survive if you’re only operating in one aspect of the industry,” Smith said.

NO CRIME INCREASE, YET

Fears that legalization would lead to an increase in crime did not manifest — at least not yet, according to local law enforcement agencies.

California Highway Patrol spokeswoman Officer Trista Drake told the Sentinel that Santa Cruz County’s drug-related DUI arrests remained about average for January, despite a push for increased training and scrutiny.

CHP officers made nine DUI arrests in January in which drugs other than alcohol were a factor, according to Drake, and two arrests for possession of cannabis. Because blood results from the DUI arrests are pending, it is not yet unknown in how many cases cannabis was present. Those numbers, Drake said, are “about average,” but she emphasized that it was too early to draw conclusions based on the small amount of available data.

The Santa Cruz County Sheriff’s Office was unable to provide cannabis-related arrest numbers by press time, but spokesman Sgt. Brian Cleveland said he knew of “no indication” that citations or arrests had risen.

“What we do envision is that more people having marijuana and amounts of cash on them could create opportunities for crimes of opportunity and robberies,” Cleveland said.

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