Jan 09 A Look Into the New Jersey Cannabis Market Through the Lens of Other States

In 2020, the people of New Jersey voted to legalize recreational cannabis. In 2021, it became legal in NJ for adults aged 21 and over to possess cannabis and related products for personal use. In 2022, it became legal for New Jersey’s medical dispensaries to sell cannabis and related products to non-patient buyers.

As you can see, in New Jersey, the legal cannabis market is quickly developing. As we close out 2022 and look ahead to 2023, the legal cannabis market will take another step as non-ATCs (Alternative Treatment Centers) are expected to begin operations.

With any emerging market, there are going to be a few growing pains. Legal cannabis in New Jersey is no different. And fortunately, New Jersey isn’t the first state to experience these specific growing pains…which means we can learn valuable lessons from how other states have handled them.

UNDERSTANDING ATCS VS. NON-ATCS

Before we dive into the changes that will likely change the NJ cannabis market in 2023, let’s clarify a key vocabulary term.

An alternative treatment center, often shortened to ATC, is a retailer licensed by the New Jersey Cannabis Regulatory Commission (CRC) to sell cannabis and cannabis-derived products to patients who are part of the New Jersey Medicinal Cannabis Program. In other words, ATCs are medical dispensaries. On April 21, 2022, New Jersey ATCs that had acquired the local and state licensing to do so began selling cannabis to non-patients as well.

As of December 2022, ATCs are the only retailers permitted to sell cannabis in New Jersey. This is slated to change in 2023. Non-ATC retailers aren’t bound to the same requirements as ATCs. There also isn’t a limit on retailer licenses in New Jersey.

NJ CANNABIS CULTIVATION LICENSE CAP WILL EXPIRE

Currently, there are only 37 Class 1 Cultivator licenses available in New Jersey. That means that by law, the number of cultivators that can supply the NJ market is capped at 37.

That statute expires in February 2023 which is well before any non-ATC operator will begin operations. With the opportunity for a potentially unlimited number of new cultivators to enter the market, many worry this will mean there will be too much supply to meet the current demand. Too much supply can cause prices to crash—we’ve seen this happen in other states.

CHALLENGES OTHER STATES HAVE FACED

Every state has handled cannabis legalization and market development a bit differently. Three states in particular, Massachusetts, Michigan, and Illinois, can give us a preview of how New Jersey’s market will look in 2023.

Massachusetts

Before any cannabis-derived product (including raw flower) can be offered to Massachusetts consumers, it needs to be tested in a statelicensed facility to ensure it meets safety and potency regulations. This is true in most states with a legal cannabis market. New Jersey is one of those states.

In Massachusetts, one of the issues that occurred when non-medical retailers entered the scene was a bottleneck at the testing stage. There were only a few licensed testing facilities, and with more product entering the market to meet the new retailers’ demand, the state’s testing labs became backed up. This bottleneck led to supply chain backups, limiting the products patients and recreational consumers could purchase in dispensaries.

As the bottleneck kept supply levels low, new retailers continued to open. This only exacerbated the issue of an oversaturated market with too little supply to meet demand. So where did consumers go?

Many went to the underground cannabis market.

Massachusetts’ underground cannabis market thrived as regulatory testing slowed the legal market, pushing dispensaries to keep prices low to compete. This led to cash flow challenges for dispensaries.

Beyond supply issues and competition with the underground market, the Massachusetts cannabis industry faced another challenge we’re also seeing in New Jersey: low municipality opt-in. Few towns chose to allow cannabis retailers to set up shop, so in the towns that did opt for legal cannabis sales, retailers are in fierce competition for market share. In New Jersey, more than 60 percent of municipalities have opted out of allowing retail cannabis stores to operate, with many of these municipalities banning all types of cannabis businesses. As non-ATC retailers in New Jersey map their 2023 launches, they’re limited to a minority of New Jersey towns— and there might not be enough room for everyone to be profitable.

Michigan

Next, let’s look at the challenges Michigan’s cannabis industry faced when it transitioned from medical retailers only to permitting nonmedical dispensaries to operate. Similar to Massachusetts and New Jersey, Michigan saw low municipal opt-in, corralling cannabis retailers into a small number of cities.

When it came to supply, Michigan had the opposite problem to Massachusetts: too much supply. With far more cannabis available than consumers are buying, prices have dropped dramatically. That means low profit margins for growers and retailers, which is only magnified by pressure from the underground market.

Illinois

Last, let’s take a look at Illinois, another state that can provide valuable lessons for New Jersey’s cannabis industry.

In Illinois, only a small number of cultivator licenses were issued. By limiting the number of cultivator licenses, Illinois attempted to prevent the oversaturation issue that occurred in Michigan.

But did it work?

We’d say so. Although the move was controversial among industry professionals, it protected Illinois’ cannabis industry from the supply and demand challenges that plague other states.

But that doesn’t mean New Jersey should copy Illinois’ cannabis playbook word-for-word. Currently, Illinois’ cannabis industry is dominated by multi-state operators—another polarizing subject among industry professionals.

WHAT CAN NJ LEARN FROM OTHER STATES?

New Jersey can learn a lot from other states’ cannabis industries. With our cultivator license cap expiring, New Jersey could see the same issue that plagued the Michigan market: plummeting prices because there’s simply too much cannabis available.

And that’s just cannabis that was grown by licensed cultivators and tested at state-regulated facilities—something that can be cause for concern in New Jersey if there are not sufficient testing labs for the market. New Jersey’s underground cannabis market is going strong, offering lower prices to consumers and pressuring dispensaries to keep their prices low.

Then there’s the issue of inflation. New businesses entering the market are entering during a period of high inflation, which makes launching more complicated no matter what industry you’re in.

So what can NJ operators do to combat this?

The same thing business owners in every industry do when they’re facing inflation and volatile pricing: maintain healthy cash reserves. If you’re a business owner in the cannabis industry, over-plan and have contingencies in mind. Your overplanning can—and should—include having larger capital reserves than you think you reasonably need.

WORK WITH AN EXPERIENCED CANNABIS ADVISOR

As an entrepreneur in New Jersey’s developing cannabis industry, keeping up with industry developments and changing laws as you build your own business can be a headache. It can also be difficult to know the most profitable way to move forward as the industry adapts to changing trends and regulations.

Protect your business by working with a tax and business advisor who understands the unique challenges you face in the cannabis industry.

Steve Tellian is a Senior Manager at Sax LLP who works within the tax and A&A departments for both the firm’s Cannabis and Construction Practices and assists in 401k audits. Within the cannabis practice, he specializes in cannabis tax and Section 208E. Lastly, Steve plays a vital role in training younger staff to mitigate any concerns or challenges they may have. He can be reached at [email protected].