- Mon 01/20/20 by The Cannvi Team
The 3 Biggest Challenges for Cannabis Delivery In LA
These are the challenges anyone starting a delivery service in Los Angeles must know
So you want to open a cannabis delivery service in Los Angeles. You want a slice of that “Green Rush” pie.
There are no two ways about it: legal cannabis is a mammoth business in California. With a market that’s estimated to reach $3.1 billion in licensed sales by the end of 2019, it continues to grow apace compared to a 2018 revenue of $2.5 billion.
Despite having the world’s largest legal weed market, not all is sunshine and rainbows. Since the approval of Proposition 64 in 2016, which legalized recreational sales starting in 2018, the licensed cannabis market has faced severe setbacks. These have led to a diverse set of challenges that hamper the capabilities of businesses in the state and stifle the local market.
This is doubly so in California’s largest city, Los Angeles. The massive, populous metropolis adds its own flavor to the already-existing statewide complications.
Here are three challenges to be aware of before entering the Los Angeles cannabis delivery scene. Accounting for these challenges in your business operations will set you ahead of cannabis deliveries that are struggling to thrive.
Traffic That’s Even Worse Than You Think
Los Angeles is the United States’ second-largest metropolitan area. Home to an estimated 18.5 million people, it has the dubious honor of having the worst traffic jams in the world. It’s been awarded this distinction for the seventh year in a row, and it doesn’t look like things are going to improve any time soon!
With a crisscrossing, labyrinthine maze of highways weaving in and out, traffic is a chaotic nightmare. Here are some statistics to put things in perspective.
- The average driver suffers a yearly delay of 120 hours in traffic.
- They spend 35 gallons of extra fuel per year.
- The average congestion cost per driver is $2400.
Services that endeavor to bring products to clients, like cannabis dispensaries and deliveries, will easily incur extra costs by additional exposure to traffic. Longer wait times (thus higher per-delivery times), higher fuel costs, greater time spent in suboptimal and unsafe driving conditions; all of these factors add up and add extra costs and complications to cannabis delivery operations.
An Enormous Tax Burden
This is probably the greatest challenge currently faced by all LA canna-businesses. Taxes are sky-high and have an asphyxiating effect on the legal cannabis economy — the current tax stands at a whopping 34.5%.
With businesses already struggling to keep their heads above water, some were expecting a tax relief package in 2019. Unfortunately, it seems the California Department of Tax and Fee Administration (CDTFA) has doubled down and announced an increase in taxes starting Jan. 1, 2020. Business owners were “shocked and outraged” at the decision.
The new average markup rate from wholesale to retail is now calculated at 80%. This is seen as a “consumer-facing” tax which will undoubtedly have an effect on the bottom line. Cultivation tax rates would also be adjusted for inflation, resulting in further price increases.
The California Cannabis Industry Association published a statement that says “As California’s regulated market spirals towards collapse from taxes on cannabis consumers, local bans, onerous regulations, slow growth, and a thriving illicit market, we believe that the CDTFA’s decision to increase tax burdens on compliant cannabis operators is counter to developing a safe industry.”
The future of this matter remains unclear. Industry experts wait for new developments with bated breath. The success of the California marijuana industry hinges on providers being able to surmount these obstacles in 2020.
Stiff Competition and the Illicit Market
Heavy taxation, cities that don’t endorse marijuana shops, stringent government protocols, high prices; all of these factors create a perfect storm for struggling dispensaries and delivery services. Many retailers went under after the legalization of adult-use marijuana, as they couldn’t keep up with the ever-increasing list of demands.
About 76% of cities and 69% of counties in California have banned cannabis. This means that the necessity of doing business in the LA area becomes more pressing. Any licensed delivery business has to face the LA County’s extremely high land prices before setting up shop, ensuring further financial strain for shopfronts and fulfillment centers.
In-effect taxation protocols have only continued to make legal cannabis more expensive as well. Black-market weed has a selling price of about half of legal products. This causes consumers to flock to the black market, even if the move may be ill-advised.
Black-market cannabis products are untested and don’t follow any regulatory protocols. That means that in the best-case scenario, a consumer doesn’t have any information about the origin of what they are ingesting. In the worst case, they may be risking life and limb. Deaths associated with illegal weed vape pens had a crushing effect on 2019 legal sales.
The double whammy of cheaper prices and tragic health scares negatively affects legal canna-businesses. The aggregate is less business for legal suppliers. In the first case, consumers go black-market and, in the second, they move away from cannabis altogether until the mass panic subsides.
Undeterred, the weed black market soldiers on, overshadowing the legal one by nearly 3 to 1, with 2019 spending rumored to be in the $8.7 billion range.
A Glimpse of Calm Past the Storm
Being a marijuana delivery service in the Los Angeles area is no joke. The strange brew of high prices, bad traffic, extreme taxation, and illegal competition poses significant challenges to legal providers.
Canna-businesses continue to forge on despite these roadblocks, but some are left wondering if there will be an industry left to tax after the 2020 tax hike adds to these difficulties. Regardless, more optimistic predictions for growth continue. Market projections indicate that the legal industry will overtake the black market and reach $7.2 billion in 2024.
The market is at a turning point: tough challenges vs. the promise of growth. If cannabis businesses account for and survive this hurricane of challenges, they may find smooth sailing in their future.