The Real Reason the Weed Market is Broken

It’s not too late to save the legal weed system in New York. Better said, it’s not too late to create a legal weed system in New York, because the state doesn’t have one yet.

Two-and-a-half years after the state Legislature passed the Marijuana Regulation and Taxation Act (MRTA) in March 2021, only a tiny fraction of the weed that’s currently being bought and consumed in the state — maybe 2% to 4% by volume — comes from state-licensed, state-regulated weed stores. The rest is unlicensed, unregulated, untaxed weed sold illegally by neighborhood stores, delivery services and street dealers.

The rollout has been widely called a failure. This can’t be anything like what the legislators or regulators hoped for.

The first reason for legal weed’s tiny market share is simple: There’s almost nowhere to buy it legally. As of the end of November 2023, there were only 20 legal recreational weed storefronts open in the entire state, or about 2 per million residents. Oregon, by comparison, has 165 licensed storefronts per million.

New York City — which, according to the Cannabis Global Price Index, consumes more cannabis than any other city in the world — has exactly eight licensed recreational weed storefronts: five in Manhattan, two in Queens and one in the Bronx. A few more may open soon.

Oklahoma City, population 687,000, has about 400 legal weed stores.

You might have heard that New York’s retail rollout has been held back by lawsuits challenging its radical social equity program, under which only “justice-involved” applicants — meaning people with past drug convictions or selected relatives — could qualify for the first batch of Conditional Adult-Use Retail Dispensary (CAURD) licenses. 

The first successful legal challenge, Variscite NY One v. New York, came from non-convicted medical weed dispensary owners who were excluded from CAURD. In November 2022, a U.S. District Court judge found in their favor and temporarily suspended retail licensing in 5 of 14 regions. Nine months later, this August, four non-convicted veterans won an even broader court order from a New York judge, in Carmine Fiore et al. v. New York Cannabis Control Board et al., that froze the issuance of any new provisional retail licenses in the state. Those two lawsuits and a third one, Coalition for Access to Regulated and Safe Cannabis v. New York State Cannabis Control Board et al., had all been settled by November 2023, with CAURD licensing finally set to restart in April 2024.

But it would be wrong to blame court orders alone for the glacially slow launch of legal weed in New York. Over the nine months before licensing was totally halted, the state had already issued 463 provisional retail licenses. To date, just 5.6% of those licensees have managed to open for business.

Even among licensees unaffected by court orders, few have opened stores. Some have been held up by local community board approval. Others are mired in a lengthy process of inspection and waiting for a final go-ahead from New York’s Office of Cannabis Management (OCM). 

But the single biggest reason so few stores have opened is that the business model doesn’t work. As in other struggling states, investors have backed out because nobody can figure out how to make money in legal weed.

This is mainly because of the extraordinarily high price of legal cannabis compared with the price that most consumers are willing to pay for the product. The combined costs of complying with all the regulations and taxes make licensed weed so expensive that it can’t compete on price.

Most of these costs emanate directly from MRTA and its implementation in state law. The bill, 128 pages thick, is openly modeled after the ones in heavy-regulation states that legalized weed in earlier years, such as California and Washington, and it replicates many of those states’ costliest, least safety-relevant innovations, beginning with steep license fees of up to $300,000 and three cannabis taxes that often compound to an effective tax rate above 40%.

Maybe the costliest of all copycat regulations is called “track-and-trace,” or “seed-to-sale.” Every business must RFID-tag every plant, harvest batch, wholesale lot or consumer package they handle, and must enter mind-numbingly detailed information about every product transfer into a clumsy, overpriced, labor-thirsty software system. There’s no other legal retail business where the government micromanages so exhaustively.

Many other high compliance costs are spread throughout the supply chain: growing, processing, testing (including for 70 pesticides), packaging, distributing, transporting and retailing. 

Some less-discussed cost impacts buried in MRTA include the requirements that stores must close at 2 a.m. (prime party time on weekends), and that all flower must be pre-packaged and pre-sealed in thick plastic containers. Outlawed, therefore, is less wasteful, more popular “deli-style” service, where buds are scooped from large jars that better preserve moisture and enable customers to smell before buying.

In the end, a consumer might pay up to twice as much for a licensed product than for a comparable unlicensed product of equal (or, often, better) quality. Some consumers are willing to pay the premium — maybe for the testing certification, or other peace of mind — but not many.

There are places where legalization is working better. The medical-only state of Oklahoma, for instance, is hardly drug-friendly, but it’s business-friendly, and at first they made getting a weed license almost as fast and easy as getting a hunting license, and imposed no special cannabis taxes. Thousands of dispensaries soon opened, including many run by working-class people, and legal weed captured a majority of the market (though a licensing moratorium now threatens this).

Maine also took a relatively light hand with regulations and taxes, and most of the state’s spread-out population has plenty of dispensary access, even in rural areas.

On October 4, 2023, Gov. Hochul announced a two-pronged plan to jump-start the state’s beleaguered legalization process. The first prong was the public offering of an unlimited number of new provisional retail licenses. This meant moving past CAURD and its limitation of licensing to criminal convicts and their families.

Also embedded in CAURD was a bizarre system where the government pre-selected retail locations and assigned them to licenses through a rank-ordered lottery, rather than letting entrepreneurs choose the locations of their own businesses. Would-be retailers had to rely on the state’s much-criticized Social Equity Investment Fund, administered by the Dormitory Authority of the State of New York (DASNY), which was supposed to provide $200 million in funding for “turnkey dispensaries to start their businesses.” Some CAURD licensees alleged that they never received their promised benefits, leaving their six-figure investments in limbo.

Eliminating these barriers was clearly a positive step toward creating a functioning marketplace. But opening and normalizing licensing is just the first needed repair to the front door. It doesn’t fix the foundation, because it doesn’t turn a New York weed license into a money-making opportunity.

For high-quality retailers to buy licenses, they must want licenses. To want licenses, they must expect to make money. People can’t make money when licensed weed is too expensive compared to the alternative.

None of the state’s proposed changes reduce or even attempt to reduce the extraordinary costs that the state’s cannabis businesses face in order to be legal. Instead, the second prong of the plan focuses on raiding unlicensed smoke shops.

“Aggressive enforcement against the illegal sale of cannabis across the state,” Hochul announced, has begun. Thus far, she and the Office of Cannabis Management have proudly proclaimed that more than 11,000 pounds of illicit cannabis, worth more than $54 million, have been seized. New York’s City Council may get on board with its own bill to help facilitate more seizures.

It is tempting for licensed stores to think that this is promising news, that cracking down on the rules-flaunting competition might solve their woes, just as struggling hoteliers might think banning Airbnb will save them.

Simple economics reveals the folly of this hope. First of all, visible as they are, all the illegal smoke shops in New York make up only one small segment of the unlicensed weed market. Weed has been sold by delivery services for decades, and they will fill the gap — and continue to undercut legal cannabis — wherever unlicensed storefronts are shut down.

Second, the value proposition of the licensed weed currently on offer, compared with the unlicensed weed, is non-competitive. The last time I went into one of Manhattan’s few licensed stores, I paid about $60, after taxes and fees, for a midrange eighth (⅛ ounce) of flower. That’s about 70% higher than the $35 or so I would have paid for an eighth at a typical smoke shop.

But that’s only part of the value problem: In spite of the huge price premium, the quality of that $60 licensed eighth was so low that I’d call it “schwag.” It was a package of mini-buds (aka “minis” or “smalls”), full of sticks and stems, similar to the stuff I used to get in high school in the ’90s. These days, a street dealer would be lucky to get $15 for weed of this quality. Smoke shops and unlicensed delivery services, meanwhile, are selling big, dank buds of high-quality weed, mostly from California, which has been supplying much of New York’s underground market for decades and will likely continue to do so for decades to come.

Raiding cheap unlicensed weed sellers will not eradicate high-quality weed from New York, nor will it substantially reduce the street price or availability of unlicensed weed. In short, it won’t fix any of the problems that licensed retailers face. Because of all the costly regulations and taxes set up by MRTA, it’s just way too expensive for the legal system to produce and sell weed that’s competitive in the marketplace.

The main effect of raids and seizures will be that an unlucky handful of scapegoats will lose their money, and maybe their small businesses and livelihoods, for doing something that until a couple of months ago was openly tolerated by authorities.

Most activists who rallied for legalization over the years, myself included, did it for social justice reasons — to free people who were wrongfully arrested and sometimes imprisoned. 

I always admired CAURD, for all its impracticality, in how it embraced this shared intention of the people who fought to legalize weed. So it is a worry to see New York pivot to a new view where righting the wrongs of the past means more weed raids, weed busts, weed seizures, weed arrests, shutdowns of small minority-run businesses, and heavy penalties for “offenders” whose only crime is failing to obtain a license.

I wonder whether the smoke shop owners who get prosecuted in the current raids, these new convicts-to-be, will soon themselves qualify as “justice-involved individuals” in the next generation of equity programs, and thus be put first in line to lose their money trying to sell expensive legal blow.