When California passed Prop. 64, recreational cannabis was expected to become a booming industry, eclipsing even the wildly successful medical industry it replaced. While many operators in the cannabis scene were skeptical of the bill, others dove head-long into what they anticipated would be a new green rush. Countless brands popped up to take advantage of the expanded market, and dispensaries were expected to reap some of the biggest rewards of recreational legalization. As a result, one of the most salient misconceptions about retailers is that they are rolling in money. But the reality is that many cannabis retailers are drowning in taxes, struggling to stay afloat.
This myth was confronted with a sour dose of reality when Doobie Nights was burglarized in January. The shop was closed at the time, so no one was hurt, but the details that emerged were astonishing. Security footage revealed that the thieves pulled up in a Mercedes and a Maserati, wearing designer shoes that appeared to be worth thousands of dollars.
“It’s the rich robbing the poor,” Damon Crain, co-owner and general manager of Doobie Nights, said shortly after the incident. It’s a statement that might catch readers by surprise. Poor? How could the owner of a pot dispensary in the largest legal cannabis industry in the world possibly be poor?
Turns out, there are more reasons than you’d expect. Between exorbitant taxes, a saturated retail market, and the inability to write off most business expenses, Doobie Nights, which celebrated its third anniversary last December, has still not turned a profit. It is a gobsmacking statement, but true: One of the earliest recreational dispensaries in Santa Rosa, that plays by the rules and carries top-quality product, hasn’t made a profit three years in.
“Our owners do not get paid and all the work they put in is for free to build the business,” the Doobie Nights management team said in an email. “They all had to get other jobs to survive and be able to afford to keep the doors open.”
If this strikes you as surprising, imagine how the owners must have felt when this reality set in. Crain, who was a cultivator before opening Doobie Nights, certainly didn’t expect the journey would be so tumultuous. His expectations were that “cannabis was a growing and profitable business” and that it would be “really easy to get plenty of customers in our doors because when we applied for our license there were only a handful of other dispensaries in the area.” One of the most unexpected surprises he’s faced has been how much competition has sprung up in such a short amount of time.
“We thought Santa Rosa would stop approving retail licenses once the market became saturated and we had as many as our small population could reasonably support,” he said. But that has not been the case. There are currently around 25 licensed retailers in a city with a population of around 181,000, and the Department of Cannabis Control (DCC) shows no signs of slowing down, despite how unsustainable this model is.
But excessive competition isn’t the only reason retailers are struggling. Perhaps the biggest challenge is taxes. With the cannabis industry being subjected to extremely high tax rates compared with other industries, “it’s very difficult to be profitable,” the management team said. “Our biggest fear is that we will never be profitable or able to cover our costs of doing business because we are taxed so much.” This isn’t a reference just to the onerous state and local taxes, but the fact that cannabis businesses can’t write off most business expenses.
“Our first year in business… we only made $80,000 but had to pay taxes as if we made $2 million. Every other type of business can deduct business expenses except for cannabis businesses… It’s literally crippling.”
And those expenses are many. Because regulations require that applicants have a lease before they can apply for licensure, Doobie Nights had to pay rent for over a year while they waited for approval. Factor in the fact that many landlords charge triple rent to cannabis businesses, and the costs incurred are egregious – $1.5 million just on the lease and interior alone, before they could even open their doors.
“A lot of people assume that because growers or sellers were profitable decades ago in the black market that the legal market would be profitable,” the management team said, “but it’s just not the reality anymore.”
That’s why the break-in was “an extra punch to the gut, knowing that we would never be able to afford that kind of car and that the people robbing us were clearly better off than the people they were robbing,” said Crain, who said he drives a 23-year-old truck and wears $30 shoes.
The system is clearly broken, although it’s hard to say that about something that never really worked in the first place. Is there any relief in sight?
“The DCC will definitely have to adjust the rules for the industry to stay sustainable,” the management team said, “but it may be too late to save a lot of the businesses that are struggling and failing… It’s very difficult seeing so many local and small farmers go under because they can’t compete with the big corporate growers, and that will certainly start happening with retailers as well.”
Facing an uncertain future, the Doobie Nights management team says they’ll just have to “be scrappy to survive until laws are adjusted.”
Let’s just hope the DCC makes those adjustments before the entire industry goes up in smoke.
