Washington Marijuana Industry Showing Signs Of Unraveling

Submitted by Darren Smith, Weekend Contributor

Marijuana Leafwashington-flag-sealThe culmination of numerous examples of barriers of entry into the marijuana industry in Washington State along with regulatory costs, high taxation, competition from medical marijuana dispensaries, the well-established illegal market, and uncertainty is hampering implementation and legalization. From an investor perspective of market forces, the risks might be too high to attract further interest and this could halt or at least greatly slow growth.

In what could be a strong indicator, the Washington Liquor Control Board, which is charged by statute with licensing and regulating the industry, reported recently that the large majority of applications currently in the review process for acquiring a marijuana permit have stopped.

The Board issued warning letters to fifty six applicants giving the businesses sixty days to schedule an interview with a licensing inspector to move forward with the licensing process. But recently few had finished the process. The Board claims that businesses have also failed to provide suitable retail locations that would be acceptable to the board. Earlier there were several reports that the Board had made the process difficult for applicants by requiring, among other things, leases to be signed before the location approval was granted. Other, almost nonsensical actions included a Belleview applicant that was told he could not set up shop because the location was too close to a youth center. That “youth center” happened to be the administrative headquarters of a youth charity.

Further complicating the matter has been a slew of municipalities, both city and county, that passed indefinite moratoriums, outright bans, or untenable zoning ordinances putting pressure on previously approved applicants, who were assigned exclusive territories, to find effective alternative means to locate or in most cases effectively dissuading their further consideration. The courts have further added to the mess by upholding restrictions, including input from the State Attorney General’s office issuing an opinion stating Initiative 502’s language did not pre-empt banning by ordinance marijuana industries within their jurisdiction.

In the early stages the Board issued fifty seven retail marijuana licenses of which thirty two stores have actually opened for business. That was statewide. Specifically in the City of Seattle, where the Board permitted thirty two slots to be allocated by future applicants, only one retailer presently has opened, Cannabis City south of the downtown area.

At the beginning of the licensing process, hundreds of entities submitted entries into a lottery the Board held to award application slots for consideration during the licensing process. The Board believes many of these entries were by speculators expecting to then sell the award on a secondary market. The secondary market then collapsed. Some of the numbers of the entries could have been inflated as it was revealed in some cases individuals submitted multiple entries or assigned proxies to do so on their behalf. When the Board announced that transfers would not be considered unless the business was in operation and the subsequent transferee then submitted to the same background check.

The Board claimed if applicants did not arrange for a the meeting with the background investigator after the sixty day warning period, they would forfeit their slot and it would be allocated to the next highest applicant in the lottery for their consideration.

The matter is further complicated by supply issues from producers (growers) to retail licensees open for businesses. Some shops are now intermittently closing due to lack of product. The Board states they are working with potential growers to help alleviate the supply problem but the issues facing many of the retailers are likely affecting that producer side of the supply chain.

In one example of the regulatory risk producers might be facing is artificial controls imposed by the Board upon producers. One medium sized early adopter received notification from the Board that ten percent of their potential capacity needed to be unallocated for production. The Board claimed that it was needed to control oversupply problems in the market. Later, Board director Rick Garza made a statement during an interview with the press that “Washington does not have a supply problem.” After the first few days, most retailers ran out of stock.

Regulatory risk poses another dissuasive element toward growth in any industry.

The problem with supply by artificial capacity controls by a state agency is likely, at least significantly, due to mandates by the U.S. Justice Department which expressed concern about interstate trafficking between states having prohibitions. The feds made threats of intervention if the states, including Colorado, had overcapacity or oversupply that could lead to illegal export. To avoid this it is likely the Board then became overly aggressive in curtailing supply without truly knowing what the market could actually bear.

The Board places blame on the retail applicants for delaying the process but there exists the strong possibility that interest in pursuing the business is waning among investors. The regulatory scheme, especially when seen from a producer point of view, puts greater emphasis on well capitalized investors due to the costs of opening. Those entities tend to have greater ability to analyze the market and the cost/benefit of pursuing incorporation. If their research indicates the investment is not viable, they likely will choose to walk away. Since this leaves the possibility of small business leading the growth, the upstart costs and lack of resources to contest legal barriers by municipalities and addressing often inconsistent directives from the Board could also prove to be dissuasive. The lack of entry by small entrepreneurs into the market could be significant in forming niche markets and diversity.

Time will be ultimately reveal the trend with more certainty, but unless some fundamental changes are made the full statewide implementation of legalized marijuana could be in jeopardy.

By Darren Smith


KING5 News

The views expressed in this posting are the author’s alone and not those of the blog, the host, or other weekend bloggers. As an open forum, weekend bloggers post independently without pre-approval or review. Content and any displays or art are solely their decision and responsibility.

29 thoughts on “Washington Marijuana Industry Showing Signs Of Unraveling”

  1. When a law is passed by referendum, there should be only one way to amend it; by referendum. Yes, cities can ban dispensaries—by referendum. Yes, they can tax cannabis sales—by referendum. Yes, they can put restrictions on locations, size, suppliers, amounts, taxes etc.—by referendum. To approach it any other way is undemocratic. The people have spoken, and now the bureaucrats are blocking the will of the people. The courts erred in not putting this requirement into effect.

  2. Wonder if maybe the chief requirement for someone to be hired into the Washington State Liquor Control Board’s new “marijuana division” was a long history with the product.

  3. If we need to be protected by government then let’s get on that horse and ride it, alcohol in any form is banned, there is no right under the constitution that says that you can uses that BMW or Benz or any car that is capable of exceeding the federal speed limit I am amazed at the TV ads promoting these high powered autos, now you can own the car just not put it to use on public roadways any activity that has an inherent danger to it would be banned, end the fried foods and greasy diet. And lets regulate all risky behavior, because the government is so much smarter than our educated and trained citizens. Oh don’t forget guns and steak knives I am sick of this government doing what it feels is right when the people have voted in laws like the marijuana law, Here in Nevada the law has been on the books for over two and half years and yet there is not medical pot. Why vote, the presidential election when Young George was placed into office is a prime example. I will never vote again nor will I serve on a jury. Either protect us from ourselves or get out of the way. And this business of the government being allowed to violate its own laws make my blood boil. Its time to drag these people out into the street and let the people deal with them and then the next group of people might listen to the will of the people.

    1. fdunham1- forget steak knives. My wife just got cooking knives that never have to be sharpened. The end is nigh.

  4. The Washington Liquor Control Board is barely a year old, having just been formed when state liquor stores were disbanded. They’ve been a mess from the git-go. and continue the trend with weed. Too much poorly thought out structure and re-inventing the wheel. …

  5. Bill McWilliams, you are fine with subsidizing the marijuana lifestyle through free welfare, free food stamps, free jobs, free tuition, free health care, free rent (subsidized), free utilities (subsidized), free WIC, free social services, free bus transportation, etc.?

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