The law of supply and demand takes on outsized importance, to the detriment of thinner wallets
EDITED BY GEORGE W. HIGHTOWER
Cannabis home delivery has been a hot topic in Massachusetts since May 2020 and will likely remain in the news for some time to come. In this multi-part series we explore what’s going on and how it might impact the various groups who have a dog in this fight. Rumors and speculation abound about how home delivery will work when the rubber hits the road.
Presently, some corners of the more established cannabis industry are creating and stoking fear in hopes of scuttling the license class before it gets traction. In our sixth installment, we explore the dramatic friction between competing interests battling over this license class.
Behind the smiling faces
Mention social equity or restorative justice, and nearly everyone in the cannabis community becomes supportive. It is simply politically incorrect not to.
But behind the supportive smiling faces are traps, risks, and impediments that have kept Social Equity [SE] and Economic Empowerment [EE] applicants from gaining any sort of meaningful foothold in the Massachusetts industry.
It didn’t take long before municipalities realized how fierce the competition was for local marijuana approval, and that desperate operators would pay for municipal approval. The controversies surrounding home delivery should be viewed in a wider lens that includes the spillover effects of other related issues described below.
Securing a license is a complex process, often dragging out over multiple years. The easiest part is the final step—applying to the Cannabis Control Commission and getting an actual license. In 2020, the CCC finally caught up on application processing. Prospective operators are no longer waiting in the intake queue up to eight months for their application to be reviewed and designated complete so the 90-day application review clock could start. It now appears that submitted applications are processed in a smooth and timely manner (kudos to Executive Director Shawn Collins and his staff for that).
The Commission requires several “packets” of information. Once the information passes review and is approved, a provisional license will be issued. In simplistic terms, the provisional license is the authorization to start building out the facility. When everything is set up and ready, an inspection is scheduled and a final license can be issued. The final license is the authorization to start stocking marijuana products and entering those products into the state’s seed-to-sale system of record, METRC. When that process is complete, the licensee can request an authorization to commence operations.
Much more daunting is the challenge of addressing the packet that requires evidence of local approval by way of a Host Community Agreement (HCA) certification form. Overwhelmingly, municipalities (Maynard and Westfield appear to be the exceptions) require the applicant to first secure a location before approaching municipal government to negotiate the terms of the HCA.
Pre-COVID, landlords had the clear upper hand: Mention cannabis and the rates go up, followed swiftly by the hold fees. Landlords were requiring prospective operators to either commence paying rent immediately, or to pay the landlord a hold fee while the operator secured the local municipal approval. In one instance, a landlord that was still using the space and would not move out for some time demanded $5,000 per month for the right to “hold” the space. One party paid that fee for a year before walking away, while another came right after to pay for an additional two months.
Many communities maintain a limited area for marijuana zoning, tightly constricting viable real estate options. The law of supply and demand takes on outsized importance, to the detriment of thinner wallets. The Massachusetts roadside is littered with entrepreneurs who depleted their cannabis capital while struggling to get through the various approval stages.
Numerous incidents in various municipalities became common lore, as SE and EE applicants tried to find a sympathetic ear with the authority to help level the playing field for smaller entrepreneurs. In March 2019, the CCC completed a study of HCAs that found similar and widespread abuse of the CIF. But we digress, as the current subject is home delivery.
Through all of the above challenges, the wealthiest investment groups were able to absorb landlord hold fees and municipal tolls on the roadway to licensure. Social Equity candidates often lacked that excess capital and were therefore marginalized in the process or unable to get a toehold to start.
While community impact fees were originally written to simply make a community whole for the costs imposed by hosting a marijuana business, in practice, most of the CIFs flowed directly into municipal coffers for general use.
Cannabis establishments tend to have very few impacts upon a host community. In the early stages of legalization, retail stores would be overwhelmed with customers, often requiring police details. The operators generally paid for those details, without receiving a credit against the CIF. Municipalities viewed the CIF as a windfall, and have disavowed any legal obligation to demonstrate actual costs. With COVID-19 straining government budgets, the local 3% retail tax can generate meaningful revenues, in some instances over $1 million a year.
Meanwhile, those same municipalities see all of the Amazon vans roaming their streets, ferrying retail goods to their residents, and speculate that cannabis home delivery could take a bite out of cannabis retail sales and potentially diminish their tax take. They seem to overlook the opportunity to have the biggest tax contributors become the home delivery operators, without the headaches of inbound customer traffic tied to a storefront. Additionally, registered delivery vehicles generate far more excise tax than personal property taxes on iPads outfitted as check-out stations.
Building upon this fear and the budget crunches created by COVID-19, opponents of the home delivery model (not the courier model) and its exclusivity period peppered municipal officials with emails, stoking unfounded fears of the risks of siting a home delivery business.
Meanwhile, having been locked out of much of the industry by the host community process, SEs and EEs see home delivery as their chance to finally participate in the industry in a significant way. Meanwhile, the Commonwealth Dispensary Association and its members see the potential for home delivery to take a big bite out of their business. While the original CDA members apparently had no issue with the preference given to RMDs (registered marijuana dispensaries—the original term of art for a medical marijuana store) to receive priority licensing, they now object to a preference for Social Equity and Economic Empowerment applicants.
Much of the controversy rests at the feet of the existing retailers, many of whom attempted to exert control over the prospective licensees, insisting on owning part of the delivery business (often the magical 9.99%, but many times even higher). They also demanded that while the retailer could contract with several home delivery operators, the home delivery licensees would not courier for any other stores. UberEats and other home delivery agents charge around 30% of the order value as a fee from the restaurant to complete a home delivery, and the cannabis technology platforms were suggesting a similar fee (25% to 30%).
Selfishly, the retailers were generally firm that they would not share any of their profit margin with the Social Equity delivery agents. In the end, it was that greed and heavy-handedness that undermined their position, driving desperate applicants to rightfully complain about the business model to the CCC. Had the retailers demonstrated any sense of fair play or equitable distribution of profits with the Social Equity operators in the first place, it is unlikely they would now be in a position to directly compete with these very same operators.
[Note: since the writing of this article, the CDA has sued the CCC to overturn the home delivery license model. We will explore that in an upcoming installment.]
Next Up: Part VII: All the current efforts to shape and control the home-delivery market.
David Rabinovitz is a cannabis business consultant in Massachusetts and involved in various cannabis ventures. He is a former Director and Treasurer of MassCann (the Massachusetts Cannabis Reform Coalition), a past Trainer for the Massachusetts Cannabis Control Commission Social Equity training program, and the original host of The Green Rush cannabis business talk show on ProCannabis Media. David speaks at various industry events on creating winning financial presentations that investors love. David’s industry insights and analysis are featured in several media outlets. Connect with David on LinkedIn at https://www.linkedin.com/in/davidrabinovitz/ or reach out to him at firstname.lastname@example.org or DavidR@CannaVentureLabs.com