If you fail to plan you plan to fail

Erik Williams Commentary

LEE — The Massachusetts cannabis market has started to see its first dispensary closures and cultivators shutting down operations, as part of the market constriction and ebbs and flows of supply and demand balances within a maturing local landscape.

This is just the normal course of action for almost every non-limited licensing based legal cannabis market, and we expect to see increased market contraction through 2023. The larger business community here needs to appreciate what that means for the region, because the longterm viability of the cannabis industry here as job creators and a positive force-multiplier to the local economy affects the entire region.

First, a moment of light in what others have come to see as gloomy times: the cannabis industry bubble has not popped. But, it is certainly leaking air, and if credit default swaps for new dispensaries was an option, I would be buying them against almost every new dispensary that opens in 2023.

This isn’t hyperbole or a false alarm. This is a cogent and fair perspective of legal cannabis in Massachusetts right now. But almost nothing that has come out of the market maturity in Massachusetts has been a surprise to me and my team at Canna Provisions in Lee, as we always knew that there would be more competition locally, price fluctuations, and neighboring other states coming online. We have been building and planning for long-term survival. We believe consumers will continue to shop with people who share their values (in the end, every dollar is itself a vote). Where you shop and what you shop for matters even more so when so many businesses are walking the razor’s edge between a bright future or a disaster-to-be. Think “shop local” or supporting the deli who sponsors your kids softball team.

We have seen that first hand in Sheffield where our craft cultivation is located, and in Lee, where I serve on the board of the Lee Chamber of Commerce and our flagship location is located. But this has become a truism for municipalities where legal cannabis is operational across the Bay State at large. If ancillary businesses and services which partner or contract with legal weed in Western Massachusetts, as well as the local non-profits, media platforms, charities, and organizations benefiting from cannabis want whatever good times they’ve enjoyed to continue to roll, it’s vital to understand the financial realities they face.

So let me simplify the matter with stating a number: 78 percent.

That is the effective tax rate we pay to the federal government. Legal cannabis falls under US Tax Code 280 E, stem- ming from the fact that cannabis is still federally illegal. Which means cannabis businesses are unable to deduct any of the normal business expenses local businesses benefit from, with the exception of costs of goods sold. Our rent, payroll, insurance, overhead, advertising, and so on, none of this is deductible. For any local businesses trying to imagine what the impact is, just picture that for every dollar your business generates, you essentially are left with 22 cents. That’s right. Twenty-two cents, for improvements, capital investments, paying back investors, making donations to local charities and nonprofits — all of it.

But don’t feel bad for us, because in spite of all the above, Canna Provisions is doing this better than most cannabis businesses in the commonwealth. Other stand alone dispensaries, those retail locations without cultivation or manufac- turing, often find themselves in the high end of an 80 percent tax rate. There has been much math done by almost every major accounting firm with an eye on the local industry (and me personally), which concludes it is all but impossible for a retail only storefront to remain solvent if they are generating less than $6 million in annual revenue.

The business community outside of cannabis has one simple task then, and it’s something you’ve probably been doing for years. Pick good local partners, ideally ones that are positioned well and have the clear eyes to be around long after 2023 and for years to come.

For not for-profits, civic organizations, and advertising partners, it’s important for them to realize that — contrary to popular belief — being in cannabis is not a license to print money. We do not have unlimited dollars to donate or work with. Responsible operators need to make sure that they have a return on investment for every single dollar placed in the market, ever more so now with more and more competition coming online from the glut of Massachusetts dispensaries that continue to open, Connecticut dispensaries coming online, and for the Berkshires, how the slow rollout of New York’s legal market and retailers could impact your revenue.

Those cannabis companies and investors who haven’t taken all this into account or revisited revenue projections in years, it’s time to take a hard look at your plans for the road ahead. Successful long-term cannabis companies have expected and planned for this from the start because they had the long game in mind, and knew the rules of the game unfolding and shifting all around them. I know we have. And we look forward to continuing being a good local business partner and steward of the legal cannabis business landscape in the Berkshires, and all that it stands for.

Erik Williams is the COO and co-founder of Canna Provisions in Lee.