We Know, Prices Got Higher in 2018

New state requirements for cannabis packaging and testing, along with additional taxes, have increased legal marijuana production costs across the board in California. Unfortunately, those increased costs inevitably trickle down to customers – and the sticker shock is real. Depending on their preferred cannabis products and brands, some consumers may have noticed a steep spike in prices on January 1.

At Caliva, we’ve tackled this issue in several ways, from direct communication with customers to continuing our commitment to compliance. General Manager Erika Henika sat down to talk about the reasons for the increases in prices, Caliva’s strategy to manage production costs, and what retailers can do to answer the question, “Why does this weed cost so much?”

Why Prices Have Increased for Cannabis Products

There are three main components to the increase in prices for cannabis products: taxes, packaging requirements and product lab testing requirements.

Additional Taxes at Every Stage of the Cannabis Industry

Local tax rates vary depending on location. In San Jose, where Caliva is headquartered, retail marijuana sales are subject to three separate taxes:

  • 15% California state excise tax (each item taxed)
  • 9.25% Santa Clara County sales tax
  • 10% San Jose marijuana business tax (MBT)

That’s a total effective tax rate of 34.25%, which adds up pretty fast for customers.

A cannabis “purchase” with applicable state and local taxes.

Taxes along the supply chain contribute to that tax placed on the customer. From cultivators being taxed by distributors to manufacturers paying tax on products, the cannabis supply chain is fraught with taxation that, ultimately, hits the consumer hard.

To help combat sticker shock, Henika suggests posting clear verbiage about taxes at every register, and including a breakdown of all taxes on store receipts. Though your POS system may not be up to total snuff with itemizing the taxes, they’ll get there. In the meantime, train your budtenders with the knowledge to explain the receipt.

Packaging Requirements Became More Stringent

If you’re a cannabis retailer or manufacturer in California, you’re probably already painfully aware of the state’s requirements for items like exit bags, multiple-serving containers, edibles, etc.

Henika notes that because the new regulations focused on edibles in particular – both the dose per serving and per package – some companies had to revamp not only their packaging, but also their entire business model. As such, products that required packaging and portioning changes were the first to see prices rise.

Though Caliva’s design team had some challenging moments, our strict compliance with previous California medical marijuana rules ultimately meant making very few modifications to our products and processes, Henika noted. Fewer changes have helped tame that aspect of production costs.

Cannabis Lab Testing Is Expensive

As of January 1, all marijuana grown for sale in California must be tested for pesticides, mold and other contaminants. Last year, California’s Bureau of Cannabis Control (BCC) estimated costs associated with the mandated testing would add an average of $407 per pound, and pulled no punches on who would pay for it:

This will affect cultivators, manufacturers, and distributors who will be paying for the required testing. This will also affect dispensaries as well as medical cannabis patients who will be paying an increased price for medical cannabis goods due to the increased cost for the required testing.

For a more detailed breakdown of what marijuana lab testing entails, check out our Guide to California Cannabis Lab Testing Regulations.

Addressing Customer Feedback and Managing Expectations

California’s regulations have hit medicinal users harder than recreational users due to the combination of price increases and new potency limits. According to Henika, the effect on purchases is noticeable.

“Customers haven’t steered away from brands or items, but they purchase a little less,” Henika says. “They’re spending the same money, but with taxes factored in they’re buying a slight bit less.”

New adult-use customers at Caliva haven’t been as surprised by the taxes or pricing. Henika points out that new customers have no prior expectation to compare their legal sales experience. If complaints do come in, Henika suggests reminding customers that the state set the guidelines for tax rates and safety standards. “Don’t shoot the messenger,” she says, smiling. “We are paying them too.”

There’s a chance the state will take that feedback to heart: assembly members have introduced a bill that would cut the 15% excise tax to 11% and suspend all cultivation taxes until 2021. Passage of the bill could hurt projected state revenue totals, but a cut to Washington’s tax rate resulted in a net income gain, due to more consumers leaving the black market behind.

Local taxes, on the other hand, appear less likely to change, though Henika considers Berkeley’s recent 50% reduction in its MBT as a sign of hope. The move, aimed to keep and attract businesses, could encourage (or force) other cities to respond similarly. Unfortunately for San Jose dispensaries and customers, Henika says, “We have not heard from the city [about reducing its MBT].”

Will Cannabis Prices Stay This High Forever?

The good news for manufacturers, retailers and customers: a price drop in the wholesale cost of marijuana is coming; the true question is: When? The answer hinges on how closely California’s wholesale cannabis market mirrors that of first three of the “Big 4” legal states. In Washington, wholesale prices began declining around three months into adult-use sales. Oregon’s market for trim and outdoor flower has been “decimated”, and wholesale cannabis prices in Colorado are currently at an all-time low.

Two factors may play a role in how fast wholesale prices drop in California. Currently, only 1% of the state’s known growers are properly licensed. As more growers obtain licenses throughout 2018, flower supply will increase as well. The second factor is also a pressing concern of small growers throughout the state: The BCC’s final regulations omitted a proposed 1-acre cap on cannabis farms and nurseries. No cap allows for well-funded big businesses to set up cannabis operations as large they please.

Caliva recognizes that a decrease in wholesale prices will hurt cultivators’ bottom lines, so we partner with licensed small farms to source the flower we carry. Making a purchase from Caliva helps support not just one, but several local and small businesses.

 

 

Categories: Cannabis News

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