Talk about an OG! For more than 100 years, California has been the epicenter of American cannabis production. In 1910, with scarcely more than 25,000 inhabitants, California produced more than 220,000 pounds of hemp. For those of you scoring at home, that’s more than eight pounds of hemp per person! In the 1960s, a counterculture of joint-smoking hippies emerged in the Haight neighborhood of San Francisco. During the 1970s, Humboldt County became famous for cannabis and cannabis outlaws. In 1996, with the passage of Proposition 215, California became the first state in the union to legalize medical marijuana. In 2016, 106 years after those early pioneers with their eight pounds of hemp had come and gone, California finally legalized the recreational use of cannabis.
Since legalization, the California market, kept underground for so long, has seen explosive growth. Flower, vapes, edibles, dabs — you name it, we’ve got it. It is not an exaggeration to say the best cannabis products have come from California, home of the largest, oldest, most robust cannabis market in the United States and, really, the world.
The Adult Use of Marijuana Act (Proposition 64), which legalized the use, sale, and cultivation of recreational cannabis in California for adults twenty-one and older, was signed into law in 2016. However, the sale of legalized products didn’t start until 2018. That’s only about four years ago — not very long ago at all.
For Falcon, the beginning of 2018 was an exciting, if anxious, time. We had carefully studied the new laws, worked with regulators, and were ready for opening day. We were among the first in the state to have pre-packaged, properly labeled products ready to go. We understood the future of this product would be more like a consumer packaged good (CPG) than the traditional large jars or bags offering little to no information on things like harvest date, batch information, THC levels, etc. Many “California experts” laughed at the concept of pre-packaged weed. They claimed that in California, this wasn’t how weed was sold. They predicted our early demise. They were wrong.
It is hard to operate here. The competition is fierce. The regulations are exacting. Taxes are high. The illicit market is still significant. It takes scale to operate profitably. But for companies that have achieved scale, the possibilities are endless. The legal cannabis market has seen steady growth, while the illicit market is expected to decline, which is good news for licensed producers.
The rumors are true: It is hard to achieve scale here. But once you do, you are protected by those same competitive barriers that exist for companies trying to enter the market de novo. In other words, the California market — with its competitive barriers, demanding customers, and fragmentation — is set up for large companies to continue to gain momentum and achieve success.
We also believe California is a template for all cannabis markets. Most cannabis markets, like Colorado, Oregon, Washington, and even California, began as limited-licensure states. This meant in those states, there was a premium on opening locations but not necessarily on the quality of products. One need only go to some limited-licensure states on the East Coast to know this dynamic still exists today: quality is poor, and prices are high. Over time, early limited-licensure states became more free-market-oriented. For example, Colorado used to require that dispensaries grew the flower they sold, but that law has long since changed. As that happened, great companies—ones that sell great products to devoted customers — rose to the top. It’s what has happened here in California, and it’s what we expect to happen throughout the country. Throughout that process, we expect California will lead the way. If you can win in California, you certainly can win in other markets.
For investors, operators, and customers, the fun is just beginning. Large, successful companies are in a California state of mind.
Steve Gutterman, chief executive officer at Falcon Brands, possesses more than two decades of success building and leading high growth businesses in highly regulated industries, with a record of having increased annual revenue and market capitalization of the companies he led. He was president of Harvest Health & Recreation (acquired by Trulieve), one of the largest cannabis multistate operators in the U.S., where he was instrumental in taking the company public and led its global operations. Previously, he held a variety of senior roles at high growth companies, including E*TRADE Financial (acquired by Morgan Stanley), where he was chief operating officer and executive vice president of E*TRADE Bank.
