MJBizMag August 2020 - 40

How to Compete With the Illicit Market
T
he illicit marijuana market is
among the biggest and most
complex challenges facing legal
cannabis businesses-one that takes
revenue from licensed companies and
hampers the growth of state-legal MJ
programs nationwide.
Cannabis industry advocates continue
to argue that legalization would eliminate
the illicit market because consumers
would prefer to buy marijuana legally
instead of from underground suppliers.
But that theory hasn't panned out-even
in states with legal marijuana-thus
dealing a blow to one of the primary
arguments for legalization: that it would
knock out the illicit market.
Rather, the illicit market continues
to thrive-or at least survive-in most
states that have legalized recreational
cannabis. In California, the nation's
largest legal adult-use market, roughly
80% of cannabis sales are underground,
according to Washington DC-based
analytics company New Frontier Data.
The illicit market is even stronger in
medical-only states, and it's the only way
to procure marijuana in states with no
legal markets at all.
THE PRICE OF ADMISSION
Why does the illicit market continue
to thrive in recreational states at the
expense of legal marijuana businesses?
The overwhelming reason is cost of
product. Legal marijuana businesses
must pay thousands of dollars for
licenses-not to mention taxes, testing
and other regulatory fees. These
costs increase the price of state-legal
cannabis at least 10%-25%-and often
closer to 50%-above what is typically
charged for illegal cannabis, depending
on the state.
Illicit cannabis markets also vary
regionally, complicating the search for
solutions.
" Legal markets are losing sales to the
illicit market in some places, " said Kris
Krane, president of 4Front Ventures, a
multistate operator headquartered in
Arizona. " It seems to be more of an issue
on the West Coast than it is in some of
the East Coast markets. "
Why? Cannabis from western states is
far cheaper because so much is produced,
and the scale makes illicit products
there more competitively priced.
Illicit West Coast cannabis products also
tend to be high quality, Krane added.
By contrast, illicit cannabis in the
Midwest and on the East Coast is
more expensive, giving these products
less of a competitive edge versus legal
merchandise, Krane said.
" It's going to continue to be an
issue-especially in a place like
California, where there are so many
regulations and taxes that drive the
prices up. It's just harder to compete
with what are generally really good
products on the illicit market that are
much cheaper, " Krane said.
A LINE IN THE SAND
Beyond the cost obstacles and regional
wrinkles, economic, societal and cultural
issues also feed the illicit markets.
For starters, many illegal operators
want to become legal but can't because
of state license caps and/or local municipal
prohibitions that limit the number
of licenses to go around. Moreover, the
relatively limited number of licens38
Marijuana Business Magazine | August 2020
Kris Krane
The illicit market presents some of
the toughest competition for legal
marijuana companies. Underground
cannabis cultivators and sellers
don't pay the same hefty taxes and
licensing fees as their state-legal
counterparts, making them almost
impossible to beat on price. But
marijuana executives have several
other strategies they can leverage to
get the upper hand:
* Target consumers who are more
likely to try cannabis from a legal
source and provide them with
exemplary customer service and
education.
* Take advantage of advertising
options. Though regulations exist
regarding marijuana advertising,
legal cannabis businesses have
more options than illicit competitors.
* Legal companies can make and sell
products that are difficult for illicit
sources to replicate, such as infused
drinks, pills and capsules as well as
topicals and transdermal patches.
* Combat bogus packaging by
following the lead of cannabis
companies that are incorporating
technologies such as radio
frequency identification (RFID) tags
and tamper-proof holograms.
* Win customer loyalty by being a
socially responsible community
business.
es that are available are prohibitively
expensive for most illicit market players
who want to go legal.
" The illicit market exists because the
licenses are nearly impossible to secure.
They are ridiculously expensive. The
hoops are impossible for anybody to
jump through. And, of course, they've
seen the roll-up of cannabis industry
licenses at a wide majority of publicly
traded companies that are run by
white, male boards of directors. It's a
huge problem, " said Debby Goldsberry,
CEO of Magnolia Wellness in Oakland,
California.
" The real issue is we have to get more
licenses out there and we have to make

MJBizMag August 2020

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