Business

Basket Case No Longer: Oregon emerges as model market

avatar Hilary Corrigan / May 20, 2020

Oregon cannabis sales hit a new monthly record in April, a further sign the pandemic has compelled Americans to reach for the weed.

The numbers follow trends in REC states nationwide as consumers stockpiled “essential” product and then continued buying. One analyst is calling the state an emerging model market. This is a reversal of the state REC market’s early days when it was plagued by oversupply. Oregon’s success comes as many states will be tempted to shore up pandemic related budget shortfalls by legalizing.

According to Oregon Liquor Control Commission data released this week, April sales reached nearly $90M, up about 7% from the previous record, set in March. Before the pandemic, monthly sales had hovered around $70M, of late.

‘Running Strong’

To Jesse Bontecou, deputy director of industry group Oregon Retailers of Cannabis Association, the numbers show how cannabis plays a valuable role in peoples’ lives during a difficult time. “We’re glad that our industry is running strong,” he said, noting it continues to employ people and contribute to state revenue.

But as everyone in the industry knows, cannabis doesn’t have access to the financial system and is subject to tax rules that prevent businesses from deducting certain costs. Those include costs for PPE, safety protocols, paid leave, security and other measures related to the pandemic. A lot of the money from increased sales goes right back into stores to take care of employees and customers, Bontecou said.

Does he think the strong sales will continue? “It’s very hard to predict what will happen month to month.”

More states to follow?

Oregon’s sales surge reflects an increase seen in many REC states, said Tom Adams, principal analyst with cannabis industry tracking firm BDSA.

Regulations loosened regulations during the pandemic—allowing delivery and curbside pickup, for instance—helped businesses too. But even discounting COVID-19, Adams said cannabis is the fastest growing industry in the country. 

He called Oregon a “raging success story” and “kind of a model case” for how to transition to legalization. It is well run, reasonably regulated and reasonably taxed, he said.

For years after REC went on sale in fall 2015, Oregon’s market had problems with overly strict testing regulations and an over-supply. A lot of stores opened and prices dropped fast.

“That’s kind of all worked itself out,” Adams said.

The state kept taxes and licensing fees low, allowing for a lot of relatively inexpensive stores. And the illegal market can’t compete.

“The legal market, you know, really puts a hit on the illegal market,” Adams said. “The legal market’s more convenient.”

“Dire, dire fiscal trouble”

In California, on the other hand, the REC market has barely outgrown the MED program three years ago, he said. Since people may not have access to a store in their city or county, they know where to get cannabis illegally.

“Regulators are not really learning the lessons that they could learn from places like Oregon,” he said. The state has a 17% retail cannabis state tax and a 3% city and county tax.

“States are going to be in dire, dire fiscal trouble in the months ahead,” Adams said. The pandemic and its aftermath has crushed mainstream retail, hotel occupancy and tourism, with housing values and property taxes likely to follow.

Seeing cannabis tax revenue come into Oregon will likely prompt other states to say, “We should get this ball rolling,” Adams said. And those with MED might find it makes sense to move toward REC.

‘Remains to be seen’

Along with the lottery, the cannabis industry is a leading contributor to state revenue, Mark Pettinger, spokesman for the Oregon Liquor Control Commission, said. That’s especially true now that social distancing has limited access to the use of gaming terminals, like video poker, which the state allows in bars.

“This is a reflection of cannabis consumer behavior right now, but will that be impacted if their economic circumstances change?” Pettinger said. “That remains to be seen.”

As more states flirt with legalization, a bipartisan group of attorneys general for 31 states, the District of Columbia, Guam and the Northern Mariana Islands sent a letter to Congressional leadership urging them to include cannabis banking access in Covid relief legislation.

In addition to more familiar arguments about public safety, the letter says large cash transactions put law enforcement, tax regulators and consumers at greater risk of virus exposure. Efficiently collecting taxes on an industry “estimated to have generated $15 billion in sales in 2019” could provide critical support to state and local governments, the letter says.

The rapidly growing market without access to banks “has resulted in an untenable situation,” the letter states. “We stress that current legislative models are available to fix this situation.” Banking access, it adds, would not be an endorsement of legalization. “It reflects a recognition of the realities on the ground and an embrace of our federalist system of government that is flexible enough to accommodate divergent state approaches.”