Report Shows Flaws of California Adult-use Cannabis Market

A new report from cannabis delivery company Eaze highlights the challenges the legal market in California faces due to illicit sales.

The report claims that although 84 percent of California residents are satisfied with the legal market, one in five Californians has purchased a product from the black market in the past three months.

“A significant portion of California consumers who still purchase cannabis from unlicensed sources are satisfied with those sources, and are not incentivized to change,” the report says.

The study was done via an online poll of California and Colorado residents 21 years and older who had consumed cannabis in the past 30 days. Additional data was added from Eaze users.

In May, the California Department of Tax and Fee Administration (CDTFA) revealed the state had raked in US$60.9 million in tax revenue for sales in Q1 2018. Sales tax represented US$27.3 million of the total.

California legalized recreational cannabis this year, with sales starting on January 1.

After the release of results from the CDTFA, the Legislative Analyst’s Office for the state reduced its projections on tax revenue from an initial US$175 million for the entire year.

Consumers in California, according to Eaze, still face roadblocks when purchasing recreational cannabis. The three main complaints from consumers are taxes being too high, no electronic payment options and prices being too high.

In a San Francisco Business Times editorial it is estimated that consumers are paying as much as 45 percent in taxes when they buy recreational cannabis. As a result, some are buying from illicit venues.

“Simply stated, California has done a great job of telling consumers that cannabis is legal but has a long way to go in making it easy to get safe, legal and affordable cannabis,” the Eaze report states.

The company argues that since cannabis businesses operating illegally don’t have to face safety tests and other restrictions from the legal side, it gives them “strong market advantages.”

Eaze suggests that a 5-percent reduction of the overall tax rate in California could cause 23 percent of black market consumers to move into legal venues.

Despite the challenges California is facing when it comes to directing customers to legal options for cannabis consumption, one recent report still places it as one of the largest state markets in the US.

Data from New Frontier Data predicts that by 2020 California will be among the largest state markets for legal cannabis and will become the actual largest market for recreational use by 2025.

Investor takeaway

The promise of California being the biggest cannabis market available for investors took a hit with the tax revenue reduction from state officials. However, predictions still show the state as a prime market for adult-use cannabis.

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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.