Renee Barnes doesn’t use marijuana, never has. But a decade ago, when Oregon made cannabis legal, she saw it helping people she knew deal with medical issues — and she saw that a small marijuana shop her daughter opened was thriving.
After decades working in back-office jobs at Oregon factories, followed by years running bars and taverns, Barnes saw an opportunity to get in on the ground floor with something new.
“The prices were right. She was raking in the money and I say, well, I want a piece of that,” Barnes said. So she and her daughter went into business together, opening a Portland shop on Southwest Macadam Avenue called Little Amsterdam.
It worked great, for a little while.
Demand soared, and Oregon marijuana rapidly grew into a billion-dollar industry. Taxes and fees were high, and banking was nearly impossible. Because marijuana remains illegal under federal law, Barnes pays her bills in cash.
The high costs and logistical hurdles were bearable, Barnes said, because the money was good. Oregonians had a bountiful appetite for cannabis and people came from all over the country to partake legally.
But for Barnes and countless other industry pioneers, it turned out to be too much of a good thing.
Aiming to make the new industry open to all, Oregon hadn’t put any upper limit on the number of marijuana shops or growers. They were quickly serving up more cannabis than Oregon residents could possibly consume.
Since it’s still illegal to sell marijuana out of state, Oregon faced a basic problem of supply and demand. The state has far too much of the former, and far too little of the latter.
Retail prices cratered, falling by more than half in the past six years. After a brief burst of sales during the pandemic’s stay-at-home era, demand began to slide, too. But the taxes stayed high, and staying in compliance with regulations cut further into profits.
The result has been a crisis threatening the foundation of Oregon’s experiment with legalized pot. Industry giants are giving up on Oregon, walking away from billion-dollar investments because they can’t make the numbers work.
Homegrown businesses are struggling, too, unable to pay their vendors and falling behind on their taxes. Mom-and-pop shops like the Barnes’ may be faring the worst, having bet families’ livelihood and retirement plans on an industry that doesn’t appear economically viable.
“I’d like to be able to make some money, but I can’t tell you what that looks like anymore,” Barnes laments. She’s working seven days a week at her shop, but with annual sales down by $375,000 compared to 2020, she’s struggling just to cover her costs.
Professionals working in Oregon’s cannabis industry have a range of ideas for how to ease the economic pressure, including reduced regulation and more state support. There’s broad agreement, though, that any structural fix to the market’s broken economic model risks causing more pain — at least in the short run — to businesses that are already struggling.
Barnes’ daughter already shut down her original shop. Barnes, now at retirement age, would like to be able to step back but doesn’t feel she can afford to walk away from a shop she spent the better part of a decade building.
“At this point in time you can’t sell your business for what you think it’s worth because everything’s so depressed. So you just keep running,” Barnes said. “You either hold onto it and hope it changes or you just get out to get out, with whatever you can get.”
Boom, then bust
Oregon voters legalized recreational marijuana in 2014 by passing Measure 91. Retail sales began in October 2015.
Oregon was just the third state where recreational marijuana was legal. The number now is 23.
By going early, Oregon had the opportunity to set a path for other states to follow. But as a trailblazer it had to work out how to structure, tax and regulate the market with little precedent to follow.
And then, as now, Oregon cannabis operates in a kind of purgatory, since marijuana remains illegal in federal law. That means Oregon operators can’t use federally chartered banks, can’t deduct business expenses from their federal taxes and can’t legally sell their product across state lines.
Cannabis proved immensely popular in Oregon nonetheless, with retail sales topping $1.1 billion in 2020 — the year COVID-19 shut bars and restaurants.
Marijuana sales generate about $160 million in state taxes, money Oregon uses primarily to fund drug treatment programs. Boosters say cannabis businesses employ as many as 20,000 statewide.
So cannabis quickly became a big industry for Oregon, though not a healthy one.
“The cannabis industry is about to crumble,” said Hunter Neubauer, co-founder and chairman of Oregrown Industries, which sells its own line of cannabis products and has stores in Portland, Bend and Cannon Beach. Neubauer is also president of the Oregon Cannabis Association board.
Retail sales that grew by double-digit percentages from 2018 through 2020 plateaued two years ago and then began to tumble – down 16% last year and down another 8% so far this year.
Retailers and growers betting on continued growth found themselves in sudden peril.
“There are very few businesses that are successful. It’s pretty scary. It’s going to consolidate considerably,” warned Neubauer. “We’re going to lose a lot of the businesses that can’t survive.”
Smaller operators have already begun shutting down stores or selling at fire-sale prices. Big companies are trying to cut their losses.
Curaleaf, one of the nation’s largest marijuana businesses, announced in January that it was pulling out of Oregon, California, and Colorado altogether. The company had invested hundreds of millions of dollars to tap the West Coast market, including a huge deal to buy the Portland-based Select brand of cannabis oil products. But with Curaleaf’s share price tumbling and cannabis prices depressed, the company walked away from three of the biggest markets in the country.
Chalice Brands, among Oregon’s major marijuana retail chains, said in May that it was out of money and couldn’t pay its debts or rents. The company sought protection from its creditors, lamenting “a lack of federal deregulation that had been expected by many.”
And Willamette Week reported last spring that marijuana retailer La Mota – Oregon’s second-largest chain – and its owners owed millions in federal and state taxes, plus $1.7 million owed to vendors and contractors.
No help from the feds
Federal legalization has been a tantalizing possibility in Oregon’s cannabis market from the very beginning. As an early entrant in the legalization push, and in a region where marijuana grows in abundance, boosters felt Oregon was positioned to lead a brand-new industry.
That’s a big reason why Oregon didn’t put any initial constraints on the number of licenses for growers or retailers.
“We did not want anybody to get left out, that everybody get a fair chance. I do believe a lot of that came from the anticipation that we would get federal legalization much sooner,” said Jesse Peters, a veteran of Oregon’s industry who now runs Mantis Growth Investments, which backs cannabis businesses.
In the heady days after legalization, when Barack Obama’s White House was taking a hands-off approach to states that were embracing cannabis, federal legalization might have seemed a genuine possibility.
Optimists might have envisioned Oregon leading the way back in 2014, ready to cash in with ready supply when recreational marijuana became legal across the country. Politicians seeking donations and clout encouraged that notion, according to Beau Whitney, an Oregon cannabis economist.
“For these nine years, every year, full federal legalization has been five years off. And you hear that from the politicians in D.C. all the time,” Whitney said. “It doesn’t seem very imminent to me.”
National political leaders never seemed to make legalization a top priority. And with Republicans in control of the House, and Congress mired in deadlock, the prospect of federal legalization – or even interstate commerce — appears remote.
That leaves Oregon cannabis operators being suffocated by their own product. It’s a structural failure that dates to the beginning of legal marijuana in the state.
“One thing that a lot of us didn’t realize at the time was that if you had unlimited licenses, you might also have unlimited supply,” Whitney said. “The sky was the limit, but what people weren’t assessing was the balance between supply-and-demand and looking at capacity.”
It’s a problem plaguing other states, too. Cannabis businesses in Washington and California have likewise struggled with tremendous oversupply and falling prices.
Oregon cannabis insiders like to note that the state has more cannabis shops than Starbucks coffeehouses — more than twice as many, in fact, with over 800 licensed retailers around the state.
Marijuana operators proliferated because Oregon wanted a level playing field, available to all. Industry backers were responding to decades of racial disparities in drug policy.
“Low barriers to entry were really important to everybody,” said Neubauer, with Oregrown Industries.
Oregon had an inclusive, underground cannabis culture established in the decades before legalization, according to Neubauer. He said the industry wanted to preserve that ethos as the industry came out of the shadows and so placed few constraints on new operators.
“It created an environment where everybody said, ‘Hey, let’s give this a shot,’ which was really cool,” Neubauer said.
Legalization proponents had two goals in 2014, according to Anthony Johnson, who was lead petitioner and co-author of Measure 91. Advocates wanted to turn the underground cannabis economy into a legitimate, taxpaying industry, and eliminate criminal penalties for those who were selling or using marijuana.
“In that realm it’s been a great success,” Johnson said.
But Johnson acknowledges that Oregon failed to anticipate the industry’s economic challenges, especially for small businesses. Prices are so low that shops and growers can’t make a profit. Looking back, Johnson said it’s clear Oregon should have built in protections for small cannabis operations from the beginning.
“I think everybody would say it’s in a crisis when small farmers and small businesses find it harder and harder to survive, let alone thrive, in this industry,” Johnson said.
Calls to cull supply
Annual sales across the Oregon marijuana industry peaked above $1 billion in 2020 and 2021, buoyed by customers who were stuck at home during the pandemic with little else to do but light up at home. Producers stepped up production to meet rising demand.
When bars, restaurants, theaters and concert halls reopened, though, Oregonians found other sources of entertainment. Retailers say high inflation left consumers spending their paychecks on rent and food instead of cannabis.
Marijuana sales plunged 16% last year and are down another 8% in 2023. If current trends hold, Oregon cannabis sales in 2023 will be $270 million below their peak just two years ago.
Last year’s harvest was down 13%, which could ease pricing pressure. But in an annual report on Oregon’s cannabis market in February, state regulators noted the toll that self-correction will take.
“It represents scores of cannabis businesses scaling back their ambition, often laying off employees or going out of business entirely,” Oregon Liquor & Cannabis Commission staff wrote.
Oregon lawmakers put a two-year moratorium on new producer licenses in 2019 and then renewed and expanded it last year, prohibiting new licenses for growing or selling cannabis until March 2024.
The drastic step failed to stem the dramatic fall in retail prices, which fell below $4 a gram for the first time this spring and remain near an all-time low.
Oregon businesses had more than 3 million pounds of unsold marijuana on hand in January, according to state figures. That’s almost double the inventory they were holding just two years earlier, a backlog it could take years to work through.
Selling across state lines remains illegal. Yet it’s clear growers can get much better prices elsewhere, especially in states where marijuana isn’t legal.
“Do you really think the whole country isn’t already getting Oregon cannabis? I mean, it’s going somewhere,” said Peters, with Mantis Growth Investments.
It’s not clear how much Oregon marijuana is diverted into other markets, but whatever the total, these illegal cross-border sales are plainly undermining one of the key objectives of legalization: legitimizing the cannabis industry, reducing criminal exposure for those who work in the field and eliminating violence and other harmful behaviors associated with underground markets.
Some in the industry hope Congress might relax financial regulations rules to allow marijuana businesses to use banks to deposit money instead of dealing only in cash. There’s also some optimism that the federal government might allow marijuana to be sold across state lines, among states where it is legal.
Neither change appears imminent, though, leaving Oregon on its own to address the imbalance between supply and demand that is devastating cannabis businesses. Industry leaders have suggested several reforms to reduce the financial burden on suppliers.
Some proposals include:
- Reducing testing and security protocols, which growers and retailers maintain are unnecessary and add considerably to their operating costs.
- Expanding the number of state-operated centers where cannabis operators can pay their taxes in cash (since they cannot access the federal banking system).
- State-sponsored marketing efforts to make Oregon cannabis more appealing to residents and more attractive to those visiting from out of state, analogous to efforts to promote Oregon wines and microbrews.
Industry advocates say reforms – some of which were endorsed by a state audit last spring – could meaningfully reduce their operating costs and boost their visibility in the state. Many ideas are very controversial, though, including proposals to relax state oversight over quality testing.
And it’s not clear how much appetite Oregon politicians will have for engaging with the cannabis industry, after the scandal over Secretary of State Shemia Fagan’s financial ties to marijuana retailer La Mota forced her from office in May. Fagan’s involvement with La Mota, and her apparent efforts to revamp the audit plan after feedback from the retailer’s co-owner, may have tainted the audit’s credibility among policymakers.
Moreover, any reforms that fail to address the chronic imbalance between supply and demand would be unlikely to change the underlying dynamics crippling the state’s cannabis economy. Since Oregon cannabis demand appears to have peaked, many feel the state must do more to limit supply.
“We’re in a position where we have to look at reducing the licenses and shrinking the amount of people that are involved just because of outdated policy and overregulation,” said Neubauer, with Oregrown Industries and the Oregon Cannabis Association.
That’s a controversial notion within the cannabis industry, which is infused with a libertarian spirit and is generally reluctant to invite even more government intervention.
Oregon has already begun limiting cannabis licenses, though. Gov. Tina Kotek ordered in May that the state block renewals for businesses that are behind on their taxes.
Rather than confiscate more licenses, Peters suggests allowing operators to buy their rivals’ businesses and retire their cannabis licenses. That would provide struggling shops and farms a path to cash out while reducing competition — and, eventually, reducing supply.
“It would create a market in Oregon where the mom-and-pop dispensary or the mom-and-pop cultivation that is just clinging to life … their licenses would be worth money now,” Peters said. “People would want to buy them out just to close them down and get their market share.”
Such a program would favor large operators with the resources to grow, process and sell marijuana in their own shops. That runs counter to Oregon’s original goal of creating an equitable, accessible market that give entrepreneurs as much chance to succeed as big corporations.
Johnson, Measure 91′s co-author, said it’s clear reforms are needed. But he suggests limits on licenses be temporary, adjusted as the market allows.
“The cannabis industry is not going to go away,” Johnson said. “The only question is who is going to benefit from the revenue? Is it going to be Oregon-based businesses?”
— Mike Rogoway | mrogoway@oregonian.com |
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