Marijuana Venture: Several states have recently adopted legalization efforts either for recreational or medical purposes. Have you been involved in helping other states establish regulations?
Rick Garza: It’s kind of been a fascinating ride for the last couple years. We’ve probably met with 26 states, eight countries and in the example of Canada, three of the provinces and a couple different meetings with the federal government. As you know, the new prime minister is looking at bringing a proposal for legalization in Canada I think this spring.
It’s interesting that Massachusetts and Maine, which just legalized, are two states we spent considerable time with. We actually spoke with a couple committee hearings and co-committees between the House and Senate of those states, as well as California over the last year. And of course, Steve Marks, my counterpart in Oregon, and Cindy Franklin in Alaska, both of them have spent considerable time with us the last year and a half.
The way it usually works is that they’re either going to Colorado right after meeting with us, or coming from Colorado after having met with officials there. In fact, Washington and Colorado are going to co-host a regulators summit for cannabis this spring. It’s going to be the first of its kind in the nation that I’m aware of.
MV: Who will be attending this first summit?
Garza: Initially, it will only be for those who are regulators. It doesn’t have to be just recreational; it will also include medical. In discussions with my counterpart in Colorado, we had so many people visiting, it was like, ‘Dude, why don’t we get together and bring the states in and let’s put a day and a half of panels together around banking; effective enforcement strategies; how do states position themselves like we have to get regional credit unions to work with the cannabis industry; what are the legal issues that are occurring; what are the health and prevention issues that states need to be aware of; how in the hell do you package and label cannabis; what’s pesticide testing and what are the protocols for that?
We’re kind of excited to do this.
We’re going to do it in Seattle the first year, then hopefully we’ll do it in Denver. It’s something we’re going to do once a year at least.
MV: What kind of guidance would you provide other states that are following the path that Washington and Colorado established?
Garza: We’ve been so involved with helping other states. The interesting thing is that the other states, whether they did it by initiative or referendum, have addressed the creation of their marketplace a little bit differently, just like we did. For example, in Washington does not allow businesses to be vertically integrated.
The fact that businesses had to be separated made it very difficult initially because a lot of the people who were in the business, whether it was medical or otherwise, did not want that kind of structure. They wanted to be able to do what they’ve always done, which is grow, process and dispense.
I would say that was a bit of a headache walking in, but we didn’t write the initiative. That wasn’t us deciding that there could be no vertical integration.
Now you’ve got eight states for recreational and more than 25 for medical. I think one of the only concerns, if there is a concern, is how the new administration is going to address the Cole Memorandum. Everything we set up in Washington was based on the Cole Memorandum’s eight enforcement priorities.
I’ll be honest with you: Not to slight any other states, but we’ve got such a restricted, conservative approach that we used to set up our marketplace, that I think we’re in the best position if issues were raised, or the Trump administration took a different position than the Obama administration about legalization.
MV: How do you measure your success in the Washington market?
Garza: The growth of the industry is much larger and faster than even we were predicting. When we talk about success from our point of view, the only thing that can stop this industry, honestly, is the federal government.
From a regulator’s point of view, when you think about the government’s job, it’s to make sure we have public safety. That’s really why the initiative was written in the first place. It’s also making sure we’re not in a position where the federal government steps in and says, ‘We’re not going to let this go any further.’ We’re the one agency that is doing compliance checks in its retail stores, just like for alcohol. Our youth compliance rate is better for cannabis than it is for alcohol. Our compliance rate is over 90%, so we’re doing a pretty good job there. That shows what a good job we’re doing in trying to keep it out of the hands of kids, at least in our retail stores.
We visit a retail outlet typically at least three times a year and do compliance checks. That’s even better than we do for alcohol, because there are fewer retail stores for cannabis. We have so many bars, restaurants and grocery stores — thousands — compared to just over 400 retail marijuana stores. It’s a little easier to regulate them because they’re smaller, but I think one of the surprising things for the agency, is that we almost hit a billion dollars in retail sales in fiscal year 2016.
MV: What other factors do you look at to judge how well the state is handling the Cole Memo’s eight enforcement priorities?
Garza: I think one is the whole seed-to-sale tracking program that we have. That’s the piece that helps us explain to the Feds that we have an eye on what’s moving through the system.
It’s been difficult to administer, both with the vendors, and I know it’s been tough at times for the industry. But that keeps us confident that we’re doing everything we can to prevent illegal product from coming in or product being diverted out of state.
Where else do you have businesses that have to tie into a program every time they move product? Whether they’re a producer, processor or retail, they have to report that to the board. You don’t find that for wineries or breweries. Maybe the only thing more strict than that is gambling.
MV: What have you seen in terms of the industry’s growth in the past few years?
Garza: When we originally set up the system, we had anticipated that the legal market industry have anywhere between 5% and 13% of the cannabis marketplace in the first year. To be honest, because medical was still thriving, we didn’t have any way of knowing where we were. In that first year, we hit almost $260 million in sales, and our then our second year, $972 million in sales. Now we’re projecting for the fiscal year we’re in right now, at least $1.3 billion and maybe $1.5 billion, another substantial increase.
In Colorado and Washington, there were 1,000 consumers surveyed in each state in 2014 and 2016. Two years ago, when the retail stores had only been open for about three months, when consumers were asked where they had gotten their marijuana, I think it was 17% from a legal, recreational store. This past September, that had jumped dramatically to around 66%. So, 66% of those 1,000 consumers were obtaining their marijuana through the legal market. It was the first time I’d seen any figures like that with respect to consumers. Do you know what was driving that shift to the legal market?
MV: We’ve got an idea, but would like to hear your opinion …
Garza: It’s price. When we first entered the marketplace about two years and three months ago, the assumption in the black market was that grams were being sold for $8-10. Right now, I think you can get grams for $6-8, maybe even as low as $5 in the black market. But once you hit that spot where you’re selling grams at black market prices from two years ago, then the legal market is effectively competing with the black market.
If I’m a consumer, and I’m paying $8 a gram at a retail store, and I can have an experience, I can know that it’s been tested, I know what the THC level is, I have so many choices, then why would I ever need to buy from the black market?
Initially, we had a pretty low supply as we were getting the market up and running. Now we have over a thousand producer/processors who are licensed. We have more than 400 retailers statewide. We’ll use the city of Yakima as an example; they just lifted the ban and they’re going to be allowing several new stores. So, we continue to license more retailers, and we’ll do that for the next year.
The market continues to grow, and I think price is so important to people. Plus, the concern about going to a place to buy marijuana has worn off. We’ve got a couple hundred more producer/processors to license, and we’ve got a few more retailers to license. It will be interesting when we get to the spot where the market is kind of set. I don’t know when that will happen, but I suspect it will be another year, maybe two. I never would have thought that the legal industry could have such a large grab of the marketplace in only two years. I honestly didn’t expect that. I thought we would struggle with the black market, and certainly there’s a lot of product out there on the black market that’s always going to be sold. People are going to grow their own, or they’re going to grow for others. I don’t see that changing. It’s been around too long.
But it seems to be a pretty healthy legal marketplace.
MV: Looking back on the process Washington went through, what are some of the things that you would have done differently with the benefit of hindsight?
Garza: Not that the policy around the Cole Memorandum was incorrect — you want to keep marijuana out of the hands of kids, and you don’t want it coming across your borders, and you want to keep the criminal element out — but the way the initiative was written and the level of scrutiny you have to go through as an applicant and when you have that gorilla on your shoulders of the federal government saying they consider cannabis a Schedule I controlled substance, I think that makes it harder for the industry.
I think we need to look very closely and work with the industry over the next year or two. I feel like the last four years, all we’ve doing is moving from one phase to the next. I think now with the reconciliation between medical and recreational, and the fact that the law is very clear that if you don’t have a license with the state, you can’t run a medical dispensary, that just changed everything. I think we can move toward operations now, and I think that gives us the ability to sit down with the industry, which we’ve been doing throughout this process, and remove some of the barriers to allow them to further thrive in the industry. We were so caught up in implementing the law, now that we have a little bit of time, it’s time to look at how we can assist the industry. Maybe some of the regulations that we created are so cumbersome that in a practical sense, they might not even provide the assurance we were looking for.
MV: Can you give an example?
Garza: I’ll give you a small example: Some of the packaging and labeling requirements we have for edibles and infused products, some of the stuff I look at is so crowded with the wording and some of the requirements. It gets to the point where you can’t even read it, so what are we really getting out of that?
I want to take a look at what kind of information we really need on the packages. Obviously, we need to know what the levels of THC or CBD are. We need to know to keep it out of the hands of kids, but I think we might need to remove some of the data we require, or make it easier for businesses to comply.
Some of the restrictions that the producers and processors have, we’d like to look and see if there are things we can do to help them. There are several proposals that the trade associations have brought; remember that right now, you can only hold one producer license. Right now, they’re restricted to 30,000 square feet of canopy. There are a number of them that have been very successful and I think they’d like the opportunity to increase that, because there are people out there who would like to sell their businesses, maybe because they don’t have the acumen or the experience that other folks do.
You’re going to find that with any industry, whether it’s restaurants or whatever. Some people are just better at it.
This interview has been edited for length and clarity.[contextly_auto_sidebar]