Cannabis regulations take small businesses on roller coaster ride

By Lara McCaffrey

Dec. 10, 2018 6:33 PM PT

When recreational cannabis use was legalized to start 2018, the cannabis industry went on a roller coaster ride. It’s been witness to changing government regulations, increased business, and changing customer demographics. It’s not clear how the industry will continue to evolve, but some businesses say barriers to entry are greater despite the industry being dominated by small business and ripe with opportunity.

“Cannabis is one of the most regulated industries in America right now,” said Keegan Peterson, CEO and founder of Wurk, a Denver-based cannabis business technology company. “To be able to start a business, you have to really have a good understanding of what it takes to be compliant in that industry — sometimes it takes lot of money to be able to do that.”

Compliance has proven to be tricky to achieve. In September, the Bureau of Cannabis Control (BCC) said that 20% of California cannabis products failed testing requirements.

Compliance has required changing of packaging as recommended by Phase II of regulations, hiring a lawyer for guidance on changing cannabis laws, licensing fees, and more. All of which can be hard for small businesses to pay for said Ruthie Edelson and Shelby Huffaker, the marketing team at San Diego dispensary Torrey Holistics.

“It is very expensive to start a dispensary of your own or any sort of cannabis business,” said Huffaker. “That can be extremely cost prohibitive.”

Torrey Holistics purchasing manager Kalina Fernandez thinks a lot of small businesses won’t make it in 2019 because of Phase III cannabis regulations taking place at the end of the year. She judges this off of what happened when Phase II regulations passed in July 2018.

“A lot won’t make it ... I’m just kind of biding my time to see who does. It already happened July first — a lot of them rose and then they just crashed,” said Fernandez. “Same thing will happen January 1. A lot of people aren’t prepared for this next phase of testing that’s going to happen.”

But there’s still promise and opportunity in the industry. Recreational legalization spurred an industry dominated by small businesses, some who have been successful.

Rachel King, partner and culinary director of San Diego edible company, Kaneh Co., has seen her customer base widen in 2018. (Her company has been in existence for three years.)

“We’ve seen a lot of different people trying our product. Before, people were scared to try it,” said King.

As for the future of small business in cannabis, King doesn’t think the challenges for existing businesses will change much.

“I think the growth is there and is a huge possibility,” said King. “I think for a new brand starting out it’s going to be much more difficult.”

There’s little data on the potential trajectory of California cannabis, but available numbers are promising. Research companies Arcview Market Research and BDS Analytics estimate that California will see $4.7 billion in spending of recreational cannabis and $300 million in medical cannabis spending in 2019.

Although it might be harder for cannabis entrepreneurs to make their green, Peterson said recreational use created a greater cannabis demand, thus more opportunity.

“We’ve seen businesses be created to meet that demand,” said Peterson. “Cannabis is probably one of the fastest growing employee bases in the state of California right now.”