Bengal Bite #1 - Shades of "Gray"
Welcome to our first edition of “The Bengal Bite.” As a valued member of the Bengal investing community, we would like to share with you our perspective on some of the topics we’ve found to be most important in the ever-changing cannabis industry.
Going into 2020, cannabis in some form is legal in ⅔ of America. The regulatory landscape is complex and varies from state to state, but one constant exists everywhere - the “black” market. Analysts estimate that the black market accounts for 75% of cannabis sales in California ($9bn in illegal sales out of $12bn total). The black market is massive, and it is potentially the biggest threat to legal cannabis operators everywhere. A fully legal market does not yet exist anywhere in the US. At best, licensed operators are operating in cannabis markets colored in varying shades of “gray.”
Black market eradication is dependent upon action from government entities and will require years of effort. We expect the black market will remain vibrant into the future, but it is our view that legal operators with a strong culture of compliance will be the winners over time. We believe recent vape illnesses will be a catalyst to weaken the black market as consumers turn to safe, trusted brands, and government officials press to eliminate the public safety risk presented by black market products.
The articles below highlight the challenges legal operators face due to the black market. We hope you find them informative.
The Bengal Capital Team
Step inside New York City's marijuana black market in the era of legalization
New York City’s black market illustrates the sophistication of illegal operators and the competition they are to licensed operators. A plethora of unregulated, illegal products - concentrates, vape pens, edibles, and flower - are easily accessable in New York City’s $2bn cannabis market through a network of dealers, couriers, and online services. The black market in New York City and throughout the country has dedicated clientele, develops unique products (see the chocolate drizzled pretzel sandwiches), and presents a serious challenge to legal operators everywhere.
Vapes on black market may contain toxic chemicals, pesticides, harmful flavorings
Even for licensed producers with regulated products the vape crisis was difficult as consumers retreated from the vape category. However, education campaigns as well as the publication of federal and state research has led to a rebound in sales of legal vape products. The consensus view is clear - illegal, black market vapes are the threat, not legal, regulated vape products. Following this crisis, it is our view that consumers will begin to turn to regulated, safe cannabis products.
Newsom's budget calls for changing how California regulates its cannabis industry
California is contemplating an overhaul of how it regulates cannabis. A licensed operator’s cost of compliance is passed on to customers, resulting in a huge discrepancy between the price of legal and illegal cannabis products. Current regulation allows bad actors to produce illegal cannabis, charge lower prices, and flourish. Governor Newsom has signaled that he backs a decrease on the state tax for cannabis in order to support the fledgling industry. Until there is a more favorable regulatory and tax environment in California, the companies that can find ways to contain costs through supply chain management (via supply agreements, vertical integration, or partnerships) we believe will survive the early days of the legal cannabis industry.