The Bureau of Cannabis Control has issued more than 6,000 cannabis licenses to cultivators and manufacturers (brands) in California since January 1, 2018. During this same time period, only 264 dispensaries have received licenses in Southern California (SoCal; Ventura County down to San Diego County). The result is that the SoCal market is fiercely competitive with thousands of licensed brands competing for limited shelf space. The natural outcome of this supply/demand imbalance is that most brands are forced to compete on price, while a handful of large brands enjoy premium pricing and a ubiquitous presence in stores.
The Los Angeles cannabis market is especially competitive. Because L.A. is the largest cannabis market in the world, it is mission-critical for brands to obtain coveted shelf space here. At the same time, the L.A. market is tougher than any other in the Golden State because of excessive taxation, illegal competition from black market dispensaries, and illegal competition from black market cultivators. The brands who thrive in L.A. will be those who can convince buyers that they’re marketing efforts will bring new customers into their stores, or those who offer exceptional value at a competitive price point. If you can make it in L.A., you can make it anywhere.
Until the authorities shut down the illegal stores, dispensary buyers are likely to remain extremely price sensitive.
As a distribution management company located in Los Angeles, Pushr is gathering hard data from the field as our sales reps show products to buyers in licensed dispensaries throughout SoCal. Everyday, Pushr’s reps gather information from dispensary buyers about which products the buyers are interested in, and which price points are actually generating purchase orders. We gather wholesale market data with the following goals in mind:
- Provide brand executives with valuable market data gathered directly from the field
- Help brands understand whether their product fits into the SoCal market, and why
- Encourage brands to develop products that are a strategic fit for the market environment
- Help brands discover the optimal price point for their products to enhance shelf space acquisition and maximize sell-through
- Provide brands executives with strategic recommendations to inform future production runs
Excessive Taxation and Illegal Dispensaries
The cannabis industry is among the most heavily taxed in the US. Cultivators pay $148 per pound. Dispensaries pay 5 to 10% city tax. And consumers pay a 9% sales tax, plus a 15% excise tax to the state of California.
This puts licensed dispensaries in a precarious position. They’re forced to charge customers high taxes which their unlicensed competitors aren’t charging. The result is that prices are significantly higher to consumers who are price sensitive.
Excessive taxation and a 10:1 ratio of illegal to legal dispensaries puts heavy downward pressure on wholesale prices as dispensaries are trying to squeeze as much margin as possible out of every sale, while keeping a lid on retail prices to avoid losing customers to illegal competitors.
Illegal Growers and Manufacturers
The black market thrives because illegal cultivators are willing and able to supply it with quality flower at prices licensed cultivators simply cannot match. While the regulators did put rules in place to prevent illegal cannabis from entering the legal market, the rules aren’t easily enforced until Metrc, California’s track and trace system, is implemented. Until that time, licensed growers have to compete with black market cultivators who don’t have to pay cultivation taxes, lab tests, or packaging costs. All of this competition keeps a lid on wholesale prices which is reflected in the latest wholesale price index by Cannabis Benchmarks. It shows the price of flower across all grow types has declined 19% year over year in California.
For top shelf indoor, the average wholesale price has fallen from $25 for a packaged ⅛ oz unit in July 2018, to $18 for a packaged ⅛ oz unit in November. This represents a 28% decline in 4 months. While licensed indoor growers are still in short supply, competition from illegal growers makes it exceedingly difficult to command more than $18/eighth in SoCal.
When measured across flower quality, wholesale buyer interest was softest in the mid-shelf tier. The mid-shelf category is the most difficult to penetrate. Most cultivators fall into this range which makes it the most competitive, by far. At this time we have insufficient data to provide an average price.
On the low end, price sensitive buyers in SoCal are showing strong demand for bottom shelf flower in the $7-$8 wholesale price range. This makes sense, given the price sensitive nature of buyers and consumers. The current climate means buyers are on the lookout for bargains that’ll enable them to make money, while also offering customers a range of products they can easily afford.
Demand for flower in the SoCal dispensary market was strongest in the top and bottom shelf tiers, and softest in the middle which suggests that consumers either want the very best flower available, or the cheapest.
We advise cultivators to pay attention to what the market is suggesting. Prices are falling, and will continue to fall as competitors come online and compete for market share. Focus on efficiency to lower costs, don’t over-invest in packaging, and price your products competitively to carve out valuable shelf space.