The Arizona hashish market is booming, however social justice issues stay

Cannabis sales in Arizona are thriving for almost a year after the state’s adult use program launched, but some industry officials fear that smaller operators, including social equity license holders, are at risk of being swallowed by large corporations.

In the first 10 months of this year alone, combined medical device and recreational sales exceeded $ 1.1 billion, and the MJBizFactbook projects will grow adult usage to $ 3 billion by 2025.

Industry officials said the boom reflected the novelty of adult cannabis, a wider range of products, and coronavirus-related federal stimulus checks distributed in 2020 and earlier this year.

The entry of operators from several states in recent years has ushered in a new level of sophistication and additional product choice for consumers, experts agreed.

The state is preparing to issue 26 licenses for social justice to minorities and economically disadvantaged entrepreneurs.

However, some industry officials fear that these operators will find it difficult to compete or may ultimately be devoured by larger operators, including MSOs.

“Surely there is pressure on the smaller regions to grow, grow, grow,” said Arizona cannabis attorney Janet Jackim.

“This is the cycle of the new industry – get more locations, get more products out,” she added. “You have to grow through acquisitions.”

Consolidation stands for “natural evolution”

Another cannabis lawyer, Laura Bianchi, stated that “Consolidation is the natural evolution of any industry”.

In Arizona, the consolidation trend is pronounced due to the vertically integrated structure of the state with limited licenses.

The numbers break down as follows:

  • 130 medical marijuana licenses converted to double MMJ and adult permits.
  • In April, 13 rural licenses were issued to fill supply gaps.
  • 26 leisure-only social justice licenses issued by lottery around spring 2022 – unless stopped by legal challenge.

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The rural licenses have already been flipped.

Jackim said a rural license recently sold for more than $ 8 million – just a paper license with no real estate or facilities.

“They (the buyers) know that they will get their investment back quickly,” said Jackim.

She said many operators are finding they can make good money in Arizona from specialty marijuana products like concentrates and edibles that offer high profit margins.

As for the social justice licenses, the application process ends on December 14th and experts estimate that up to 2,000 applications could qualify for the lottery, depending on how many potential applicants have completed a required government training program.

The recreational-only stock licenses are so valuable – they would gross more than $ 10 million in the market – that they caused a spate of alleged backroom deals and two lawsuits.

Individuals who qualify under the state’s social justice program rules must own at least 51% of the business and meet three out of four criteria based on income, previous marijuana convictions, and residency in a disadvantaged community.

Strongly courted for social equity partners

But the combination of these requirements and the fact that these are the last licenses issued for adult use have led large operators to aggressively recruit social justice partners.

The Phoenix New Times recently reported that these recruiting efforts included mailing out flyers to people living in the areas classified as disadvantaged and offering financial incentives to partner up.

“It’s very, very disheartening to see this program going,” said Celestia Rodriguez, co-founder of Acre 41, a social justice claimant who filed a lawsuit to stop the process.

The lawsuit alleges the program does not go far enough to ensure that the licenses are controlled by social equity firms.

A hearing on the case is slated for January, but legal experts say the court is likely to give the state leeway and refuse to intervene.

Rodriguez said she saw agreements offering $ 1,000 to those with social justice just to work together on an application.

“MSOs cram the ballot,” she said. “I wouldn’t be upset if they partnered and treated them (individuals) as real partners for social justice, but that’s not the case.”

As things stand, the social justice licenses can be directly resold immediately, she said.

Several experts interviewed agreed, while Jackim said she reads the rule so that the 51% must be sold to someone else with social justice.

“I can bet my last dollar that they (the bigger operators) will definitely get control of the licenses,” said Rodriguez.

Two companies aggressively recruiting social capital partners declined to speak to the New Times, while an Elevated Arizona official told the publication that the company wants to work with people to provide capital and experience and is not trying to “buy someone out” .

Big cannabis worries anticipated

Not that these trends weren’t predicted.

Turn the clock back 18 months and MSOs were aggressively entering the Arizona medical cannabis market in anticipation of recreational marijuana. An adult industry was approved by Arizona voters in November 2020 and launched shortly afterwards in January 2021.

Experts at the time feared that the industry-backed recreational marijuana initiative – the Smart and Safe Arizona Act – would benefit existing MMJ licensees as it would give them the most permits for adult use.

Today, Florida-based MSO Trulieve Cannabis heads the state after acquiring leading operator Harvest Health & Recreation.

Trulieve has 16 stores in Arizona and 320,000 square feet of cultivation and processing space, three additional licenses and an option to purchase a 20th license.

Massachusetts-based Curaleaf Holdings has nine stores in Arizona, while Chicago-based Verano Holdings has six after a wave of acquisitions earlier this year.

There are also a number of Arizona based operators, but they have fewer licenses.

Greta Brandt, for example, is President of The Flower Shop, based in Phoenix, which has three locations in the greater Phoenix area.

She has seen the surge in merger and acquisition activity, most recently after voters approved adult use last year.

Brandt recognizes the pressure to get bigger in order to compete.

The 26 stock license holders will have some market share, she noted.

Adult sales have plateaued after a dizzying start and a glut of product is possible with all of the growing projects in the pipeline in Arizona.

She said companies that only have two, three, or four licenses “will try to get more licenses to stay competitive with the larger MSOs.”

This also includes The Flower Shop: “We’re always looking,” says Brandt.

She said The Flower Shop is working with partners to apply for a social justice license, but it is inconsistent with the practices some are in use.

Brandt predicts that 80% of social equity licenses will change hands, “which defeats the purpose of social equity licenses”.

Her company, she said, is predominantly women-run and focuses on hiring minorities and veterans. “I can give something back there,” she remarked.

Bianchi, founding partner of Bianchi & Brandt of Scottsdale, said she understood concerns that large cannabis might dominate Arizona, but cited The Flower Shop, one of the law firm’s clients, as an example of a strong, smaller operator that has grown organically .

Expansion options for local companies

For these local operators, Bianchi said, the expansion options include:

  • Expansion of modern cultivation and processing facilities.
  • Acquire one of the Rural Licenses or the Social Justice Licenses.
  • Opening up new markets in other parts of the country.

Brandt, for example, also has a medical cannabis operation in Utah.

But when it comes to mergers and acquisitions, Bianchi said, it is also important to recognize that “you are buying too much,” that prices have skyrocketed.

On social justice, she said that the state is “really trying to do the best it can,” and a lot of people out there want to be good partners and achieve the goals of the program.

Bianchi said partnerships can be beneficial in helping social justice applicants gain access to the capital, expertise, and the tools they need to succeed.

Demitri Downing, founder of the Arizona Marijuana Industry Trade Association, said the legal challenges to the social justice process in Arizona should be “getting people to look at the bigger picture.”

He believes the state’s limited licensing system is an “unnecessary obstacle to social justice” and “we should be concerned that large quantities of cannabis will develop from within”.

“I think we got it all wrong,” said Downing. “We should move away from the paradigm of restricted licensing” and towards a free market similar to the MMJ industry in Oklahoma.

He said the tax revenue could then be used to create social justice funds at the local level. “Let them (local officials) determine who deserves social justice.”

In Arizona, for example, some of those who benefit from it should be tribal members convicted of illegal marijuana operations, said Downing, a former tribal attorney.

“These are the entrepreneurs who should be recognized.”

Jeff Smith can be reached at [email protected]

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