Staying Power: Why California’s Cannabis Market is Worth the Investment

by Jason Piazza on November 14, 2024

The exodus of cannabis companies from California, spurred by high taxes, regulatory burdens, and competition with the illicit market, has led many multi-state operators (MSOs) to seek opportunities in emerging markets. However, this shift away from California may be shortsighted, especially for MSOs aiming for long-term dominance once federal legalization arrives.

Staying rooted in California offers strategic advantages that may outweigh the current challenges, positioning these companies to capture market share and consumer loyalty in a state with unique cannabis industry significance.

• Market Size & Cultural Significance: California remains one of the largest and most culturally influential cannabis markets in the world, reinforcing brand value and consumer loyalty.
• Future Growth Potential: Newly opened local markets in California are expanding opportunities for legal cannabis sales, weakening the illicit market and opening avenues for cultivators and processors.
• Regulatory Positioning: Staying in California positions companies for an advantage when federal legalization occurs, with established brand equity and experience in navigating stringent regulations.
• Competitive Edge: Remaining committed to California helps build brand reputation as resilient and quality-focused, appealing to the state’s discerning and knowledgeable consumers.
• Long-Term Investment: Despite immediate challenges, California offers strategic opportunities for MSOs to dominate the U.S. market in the future, capitalizing on regulatory changes and new investor interest.

Strategic Reasons to Stay Invested in California’s Cannabis Market

California is not only one of the largest cannabis markets globally, but it also holds a cultural cachet that reinforces brand value. Over the years, the state has faced criticism for its restrictive regulations and hefty tax burdens, which include a state excise tax capped at 15% and various local taxes that push the overall tax rate up to 40% at retail.

While the state has removed its cultivation tax and adjusted some policies to ease operational burdens, an upcoming increase in the excise tax, which could reach as high as 19% in 2025, poses an added obstacle for legal operators. This increase is expected to offset revenue losses from the cultivation tax elimination, a move that some fear could drive more businesses into financial trouble or even default (Vicente LLP; Cannabis Risk Manager).

Despite these hurdles, California remains a cornerstone of the U.S. cannabis industry, with untapped growth potential in newly opened local markets. Many cities and counties in California initially resisted allowing retail cannabis, leading to a limited number of legal outlets and, consequently, a booming illicit market. However, more municipalities are gradually opening their doors to cannabis businesses, a trend that could reshape the supply and demand dynamics within the state.

Increased access to legal cannabis in these new markets could help weaken the illegal market by making legal cannabis more accessible and affordable, thus drawing more consumers into the regulated industry. This expansion is particularly promising for non-retail operators like cultivators and processors, who will see new avenues for sales as more cities permit retail operations.

California’s Legal Cannabis Infrastructure Is Growing

Choosing to stay in California, therefore, positions MSOs to capitalize on this potential shift as the state’s legal cannabis infrastructure grows. Federal legalization would likely bring additional regulatory changes and new investor interest to California’s already-established market. MSOs with a robust California presence will be poised to leverage their brand equity and experience in the state, providing them a competitive edge over operators who left for other states with less stringent regulations. Furthermore, a commitment to California, where consumers are often discerning and knowledgeable, can enhance a brand’s reputation as an industry leader committed to quality and resilience.

While it’s understandable for MSOs to seek immediate profits in states with lower taxes and lighter regulations, California’s long-term potential shouldn’t be underestimated. Abandoning this market entirely could mean forfeiting significant market share, brand loyalty, and strategic positioning when federal laws inevitably change.

For MSOs aiming to dominate the U.S. cannabis industry, California is more than a challenging market—it’s an investment in future leadership.