SF's Cannabis Businesses Aren't All Living the High Life Amid COVID
Overall sales are a rare pandemic bright spot, but the city's commitment to equity is held back by bureaucracy.
The Green Cross founder Kevin Reed: “I’ve been confused by these articles that say everyone’s doing great.” Many cannabis stores are struggling in the pandemic, hurt by demand for delivery, loss of foot traffic and tourism, and no access to to federal stimulus relief. (Photo: Pamela Gentile)
Inthe worst economic plunge since the Great Depression, several local businesses have found success. Grocery delivery services like Good Eggs have changed consumer habits enough to promise lasting success after COVID fears subside. Tech has been on a tear; look no farther than the city’s gilded-age IPOs and Salesforce’s blockbuster acquisition of Slack.
Here’s another economic success you might have missed: cannabis. Nationwide, locked-down and stressed-out Americans have been smoking more pot than before. In COVID-crushed San Francisco, the local cannabis sales tax is the only tax projected to exceed budgeted expectations — by about $700,000, according to a recent city controller’s report.
Those figures, however, do not reflect a shared success. Most city cannabis merchants have struggled under the pressure of a citywide shutdown. They might lack capacity for low-contact delivery, or are in inconvenient locations, or don’t have strong investor support. Because the San Francisco Office of Cannabis is not the custodian of any tax or sales records, it declined to comment as to which businesses might be responsible for the revenue increase — but evidence shows the success hasn’t been evenly spread.
These problems speak to a larger issue. When SF forged ahead with legal recreational cannabis, it pledged to make social equity a priority. Black, indigenous, and other people of color were disproportionately impacted by the war on drugs. The pandemic, as well understood by now, also has hit those communities especially hard.
San Francisco’s Cannabis Equity Program, which began accepting applications in 2018, is supposed to give these communities an extra boost with exclusive rights to apply for a new business permit in the city. One of those people is Cindy De La Vega. Despite the doom and gloom of downtown’s white-collar workers fleeing to the suburbs and out of state, De La Vega opened the doors of Stiiizy, a shiny new Union Square dispensary, in October, as part of a well-financed statewide chain. Nothing but green pastures, right?
It turns out the reality isn’t as pretty a picture. Despite partnering with investors, De La Vega has faced difficulty keeping afloat during the pandemic. “Dispensaries are not immune to the variables all other retail businesses face,” she says.
Smaller shops without corporate backing have complained they can’t get a leg up without big investors behind them. Many closed out 2020 with losses.
“I’ve been confused reading all these articles that say everyone’s doing so great,” says Kevin Reed, founder and president of iconic San Francisco dispensary the Green Cross, which predates the city equity program. Even though he’s running one of the most well-known dispensaries in SF, Reed reports he has had to reduce hours and lay off employees to combat a near 50 percent decline in sales along with higher operating expenses. Other dispensary owners who spoke with The Frisc tell a similar tale.
Blazing the trail
San Francisco has, in many ways, shown the rest of the nation how to rethink its pot policies. Proposition 215 in 1996 legalized medical cannabis in California after years of advocacy and lobbying out of San Francisco — mostly by the gay community, which found relief in cannabis when buffeted by HIV/AIDS. Many of the city’s best-known dispensaries opened under Prop 215, and the city’s consumption lounges are holdovers from the days of medical cannabis advocacy, where patients needed safe places away from law enforcement and stigma to medicate.
In 2018, San Francisco joined Oakland and Los Angeles in creating the country’s third social equity program. However, the program has been criticized for bureaucratic hurdles and understaffing, which limit its ability to process applications in a timely manner. (While there were 380 applications waiting for approval in October, only 139 had been processed since the equity program’s founding.)
The program is also conducive to “vulture investors” keen to take advantage of applicants who often don’t have formal business experience. Because the program does little to show applicants how to navigate the complex permitting process or raise capital independently, many turn to monied interests who take an outsized share of the business but don’t have the applicant’s best interests in mind.
Though equity operators like De La Vega emphasize that the SF Office of Cannabis is well intentioned, they say there aren’t enough resources to meet demand. There also are no city-sponsored programs to support the businesses, like Reed’s, founded before the equity program was in place. There shouldn’t have to be, but various taxes and regulations make cannabis enterprises exceptionally expensive to operate.
The Green Cross dispensary has spent over $31,000 on gloves alone, which are replaced between every transaction. ‘Everything is hard to get, and everything you do get costs three to four times as much as it should.’ — Kevin Reed, the Green Cross
In response, the Board of Supervisors passed legislation in November to suspend implementation of a 2.5 percent to 5 percent local cannabis excise tax until January 2022 to reduce the strain. District 8 supervisor Rafael Mandelman, who is often a proponent of cannabis industry interests, sponsored the ordinance.
“We acknowledged that these cannabis businesses need relief from and a change in regulations,” says Tom Temprano, an aide in Mandelman’s office. Temprano adds that many taxes and regulatory hurdles are deployed at the state level, with additional legal restrictions that keep businesses from banking services, for example, occurring at the federal level. “Locally, we just don’t have the scale of resources to even come close to meeting the need.”
No city data are available to show which cannabis businesses are driving the higher-than-projected tax revenue for the city. One possibility is that delivery services are responsible, and there is some anecdotal evidence to support it. Andrea Brooks of the delivery company Sava says they saw a 60 percent spike in sales when 2020’s shelter in place orders were first enacted, and “have been able to hold onto that growth throughout the year.”
Similar boosts have come to larger delivery companies statewide: Eaze saw a double-digit jump in signups in the first few days of the pandemic, for instance, and has seen average order volume increase 18 percent. “A lot of people just don’t want to go out — they want contactless delivery,” says David Goldman, president of the San Francisco Brownie Mary Democratic Club.
For dispensaries, the loss of customers wary of in-person contact is compounded by other shifts too. Reed points out that the reputation of the Green Cross drew plenty of tourists before the pandemic, but that flow has been nearly cut off.
In addition, the decline in tourism and the move to remote work has decreased foot traffic dramatically downtown and South of Market. Urban Pharm — unique for its licensed “open-flame” lounge that allowed for the consumption of cannabis flower, joints, and concentrates on-site — closed its doors during the pandemic. It was located in SoMa steps away from Market Street and the tech headquarters of Twitter, Square, and Uber.
Operating costs have climbed as well. Prices for PPE and hand sanitizer, for example, often rise when demand is high or supplies run low. According to invoices shared with The Frisc, the Green Cross has spent over $31,000 on gloves alone, which are replaced between every transaction. “Everything is hard to get, and everything you do get costs three to four times as much as it should,” says Reed.
No federal help
Though these expenses are familiar to anyone running an essential business the past 10 months, cannabis businesses have even fewer resources to turn to for relief. For many, the extent of the damage is partially determined by whether they have committed investors behind them. “We’re not able to benefit from the federal loans or stimulus programs that nearly every other industry can,” says De La Vega of Stiiizy. Having opened just recently, she noted that “were it not for my partner Shryne Group or the San Francisco Equity Group, I would be in a much different position.”
Stiiizy’s parent company Shryne Group plans to open two more dispensaries in SF with equity program partners in the coming months. Workers at their Mission location unionized and signed a contract in December for higher wages, health insurance, and other benefits.
Even in the absence of U.S. government support, SF has done little to help cannabis enterprises, aside from the local excise tax suspension. The city has had to deal with the slew of businesses citywide working to stay afloat. Mandelman aide Temprano points out that there’s stiff competition for financial assistance. “There are entire industries, like music and nightlife venues, that haven’t been able to open their doors at all during the pandemic,” he says, and they’re looking for relief.
Temprano suggests some improvements. For instance, the city could streamline the onerous and lengthy permitting process so that new cannabis businesses don’t pay rent on a storefront for months before obtaining clearance to open. Indeed, the red tape that has hog-tied SF’s merchants for years is just as bedeviling for cannabis sellers, the new kids on the block.
Many blame intense regulation and taxation for exacerbating what was already a precarious financial position going into the pandemic. “California is just known for taxing and regulating people to death, and I feel like that’s what they’re doing to our industry,” says Reed.
Regardless, he still holds out hope. The San Francisco cannabis industry, Reed notes, has seen ups and downs over decades. If legacy operators like himself have withstood run-ins with federal law enforcement, an economic downturn is something they could be able to endure.
“We go through a lot, and normally we prepare for the worst, like the feds busting down our door or something,” says Reed. “2020 — it was hard. It was very hard. But it didn’t knock us down.”
The Frisc Link: https://thefrisc.com/sfs-cannabis-businesses-aren-t-all-living-the-high-life-amid-covid-5428d0021139