In 2024, after three years of ups and downs, New York's recreational cannabis market began to gain momentum, notably marked by the opening of approximately 50 licensed dispensaries so far this year.
However, these licensed retailers, totaling about 85, find themselves vastly outnumbered by over 2,000 unauthorized head shops. These establishments have drawn complaints for diverting customers, selling to minors, and attracting criminal activity.
This swift and audacious incursion has left many frustrated with the government's slower and more stringent approach to expanding the legal market. It has emerged as the primary challenge confronting the rollout, as authorities grapple with fulfilling the state's pledge to provide a $5 billion market to a range of small businesses and individuals adversely affected by past anti-marijuana policies.
"There needs to be swift action on this," remarked James Stephenson, co-founder and CEO of oHHo, a wellness brand reliant on dispensaries for distributing its cannabis-infused chocolates, gummies, and seltzers. "There can't be one group adhering to the rules while others operate outside of them."
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Challenges in Dispensary Rollout
As illicit shops proliferated, the opening of legal dispensaries hit a snag, with months-long delays due to lawsuits, the intricate rule-making process, and the state's failure to fulfil its commitment to fund the leasing and refurbishing of the initial 150 licensed dispensaries. Currently, only 10 stores are operational with state assistance, while another 375 dispensaries, licensed for nine months or longer, remain closed.
Governor Kathy Hochul, expressing growing dissatisfaction, recently initiated a review of the Office of Cannabis Management, the entity overseeing the rollout. Additionally, she proposed legislation to empower local authorities to crack down on unlicensed shops and landlords complicit in their operations. Furthermore, she introduced a bill to reduce taxes that inflate the prices of legal cannabis products, a move widely supported in the State Legislature.
The review commenced shortly after Damian Fagon, the cannabis agency's chief social equity officer, was placed on administrative leave pending a misconduct investigation. This action followed allegations by Jenny Argie, the founder of a licensed cannabis business, accusing Fagon of retaliation after she recorded a conversation with him, subsequently cited in an article criticizing the agency.
Argie subsequently filed a lawsuit against the state, joining a slew of legal challenges against the agency. These include allegations that the state's social equity policies unfairly favor women and minorities over white men, and efforts to halt the use of lotteries in determining the order of new application consideration. Other lawsuits contest decisions regarding dispensary locations and oppose the use of taxpayer funds to support them.
Chris Alexander, the executive director of the state cannabis agency, has stood by his agency's deliberate and systematic approach to licensing businesses owned by a diverse array of individuals, which regulators believe can thrive in a notoriously challenging industry. He highlights the shortcomings experienced by states that rushed their processes. Additionally, officials express frustration that the criticisms of the rollout have overshadowed the accomplishments made in the two years since the agency's inception.
Licensed Dispensaries vs. Illicit Market
New York currently boasts more licensed recreational dispensaries than any other state on the East Coast, second only to Massachusetts. These establishments are owned by individuals with diverse backgrounds, including those with criminal records, veterans, women, nonprofits, and individuals of Black, Latino, and Asian descent. These dispensaries have significantly contributed to job creation in a retail sector grappling with the aftermath of the pandemic, alleviated the state's surplus of unsold cannabis, and generated substantial tax revenue, amounting to millions of dollars. Many of these businesses are profitable and expanding, with numerous newcomers on the brink of breaking even.
Despite these achievements, licensed dispensaries face challenges in attracting consumers away from illicit shops, as many consumers are unaware or indifferent to the distinction between licensed and unlicensed establishments. In the first full year of legal sales, state-licensed dispensaries in New York generated approximately $150 million, considerably less than the $673 million generated by dispensaries in New Jersey, where recreational sales commenced eight months prior.
Unlike New Jersey and Massachusetts, which permitted medical dispensaries to transition into recreational sales, New York initially prioritized retail licenses for individuals with criminal records and only recently allowed medical dispensaries to serve the public. Critics, including some supporters, argue that this decision exposed the program to legal challenges, leading to delays in the rollout while the illicit market flourished.
With limited avenues to sell their products, cannabis farmers in New York are facing financial hardships amidst an expanding market.
During a recent Cannabis Control Board meeting in Brooklyn, the first since the governor ordered a review, several applicants and licensees expressed their frustrations. Some defended the regulators, acknowledging the daunting task of developing the industry with insufficient resources.
Reform Efforts and Support Initiatives
The board passed a resolution that exempts new licensing fees for those wishing to continue cultivation for the state or establish craft businesses.
Damien Cornwell, president of the Cannabis Association of New York, which advocated for the exemption, argued that the fees, reaching as high as $40,000, pose a significant barrier for farmers. Many have depleted their funds on taxes while awaiting payment from retailers for product orders.
"They're cash-strapped," remarked Mr. Cornwell, who also operates a dispensary named Just Breathe in Binghamton. "Their liquidity is insufficient for this endeavor."
Despite numerous raids by local and state authorities on illicit stores, hefty fines and pressure on landlords to evict unlicensed businesses, these retailers persist undeterred. They often reopen shortly after raids and contest fines through lengthy administrative hearings.
In addition to Governor Hochul's proposals for enforcement and tax reform, state legislators are considering measures to provide financial aid to struggling farmers and safeguard a special licensing program for individuals with prior marijuana-related convictions from legal challenges. New York City prosecutors are also seeking expanded authority to evict shops involved in the marketing and sale of cannabis.
"I want an effective system," stated Jeremy Cooney, a state senator from Rochester and chairman of the cannabis subcommittee.
Pilar DeJesus, a housing activist and advocate for cannabis legalization, emphasized that the state should offer more assistance to individuals adversely affected by anti-cannabis policies in establishing legal businesses.
The demand for such support has surged. Last autumn, the Office of Cannabis Management received 7,000 license applications, with approximately 4,800 applicants qualifying for mandated loans and grants. These funds are designed to aid businesses owned by low-income individuals with previous arrests, as well as by women, minorities, veterans, and struggling farmers.
While the Office of Cannabis Management offers some reimbursement to organizations aiding applicants, Ms DeJesus argued for increased funding directed towards grassroots organizations already assisting in developing the necessary skills for operating businesses in the cannabis industry.
"We're talking about a range of skill sets that the community lacks due to barriers created by the war on drugs," she emphasized.
Bottom Line
New York's cannabis industry faces significant hurdles as it navigates the challenges of legalization. Despite progress in licensing dispensaries, the proliferation of illicit shops remains a pressing concern, highlighting the need for swift regulatory action. Governor Kathy Hochul's proposed reforms and support initiatives signal a commitment to addressing these issues, but substantial work lies ahead to ensure the industry's equitable and sustainable growth. Collaboration between regulators, legislators, advocates, and industry stakeholders will be crucial in overcoming obstacles and realizing the full potential of New York's cannabis market.
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