Dr. Jason Iannuccilli has invested a lot in his lab in the past year.
Like many entrepreneurs in the cannabis industry, the co-founder of PureVita Labs LLC, a West Warwick lab that conducts regulatory testing on marijuana products, was thrilled when Rhode Island passed legislation to legalize recreational cannabis in May 2022.
The milestone was supposed to bring a whole new consumer base to an already profitable business and reel in up to $110 million in annual sales, according to early projections from the state.
Chasing the promise, Iannuccilli doubled the lab’s analytical equipment, hired four new employees, opened a new lab site and increased PureVita’s capacity to serve customers. It was a costly investment that surpassed half a million dollars, but he says he felt it was necessary to remain competitive in the growing industry.
He hasn’t regretted the investment. Not yet. But he acknowledges he’s grown a little nervous since recreational use officially became legal in Rhode Island on Dec. 1 and sales at the state’s licensed retail marijuana locations have been lackluster.
“It’s a big commitment as a business,” Iannuccilli said of his investment. “This is a small market and no one really wants to put in a ton of money if they don’t know if they’re going to make that up again.”
Iannuccilli is not alone in feeling apprehensive.
At the six-month mark of legalized recreational cannabis in Rhode Island, key players in the industry are lamenting a glut of products that is forcing price cuts, fierce out-of-state competition and a slow regulation rollout.
Some also point to a persistent black market as playing a part in tamping down sales figures at licensed cannabis retailers.
Observers say a prominent problem is the stiff competition from shops in neighboring states – particularly in Massachusetts, where the retail cannabis sector is several years ahead of Rhode Island – siphoning business from Rhode Island, making it difficult for the industry to unlock its potential in the Ocean State.
The delay in establishing the R.I. Cannabis Control Commission, the regulatory panel charged with overseeing the regulation, licensing and control of adult use and medical cannabis, has put much on hold, too – from doling out new retail licenses and the creation of the social equity program to allowing the advertising of cannabis businesses.
“Growth has been slower than expected or then comparatively speaking to other markets like Massachusetts,” Iannuccilli said. “Part of that is because we already have legalized markets around us that we’ve been competing with. Part of that is that the regulatory structure in Rhode Island is not conducive to people knowing that they can actually buy recreational cannabis here.”
[caption id="attachment_439713" align="aligncenter" width="1024"]
CASH CROP The legalization of the sale of cannabis for recreational use has boosted total cannabis sales in Rhode Island since December, but early results didn’t meet expectations.
In fact, medical marijuana sales declined steadily over the last year. / SOURCE: R.I. Office of Cannabis Regulation[/caption]
SALES SLUMP
Indeed, despite the anticipation around the long-awaited sale of adult-use cannabis, Dec. 1 – the day it officially became legal in Rhode Island – came and went with relatively little excitement.
The long lines and crowded parking lots outside cannabis shops in the first weeks of retail cannabis sales in Massachusetts in 2018 never materialized in Rhode Island.
The muted reaction was reflected in the initial sales figures.
Data collected by the R.I. Department of Business Regulation showed an uptick in sales in December 2022, when the state saw $7.4 million in total sales, split between $3.9 million in medical cannabis and $3.4 million in recreational.
While this was a 62% increase from the month prior – November 2022 saw $4.6 million in sales when only medical marijuana was available – the result appeared less impressive when compared with the sales figures in December 2021, when medical marijuana sales alone topped $6.2 million.
In projections before Dec. 1, the state had estimated recreational cannabis sales would total as much as $41 million in the first seven months of legalization – or an average of nearly $6 million a month.
Matthew Santacroce, chief of the R.I. Office of Cannabis Regulation, acknowledges that the sales numbers – and likewise the state and local tax revenue collected from those sales – have been below what was expected.
At the Revenue and Caseload Estimating Conference in May, state officials said $3.4 million in state and local taxes had been collected in the first four months of recreational cannabis sales – about $2 million short of what was expected.
But Santacroce points to indicators of recent improvement: Recreational sales have increased each month and reached a high of $6 million in May, although medical marijuana sales have been on the decline, dropping to $3 million in May.
“The awareness has grown month over month and the sales numbers are reflecting that,” Santacroce said. “I don’t think this will be a linear exercise; we’ll see some more rapid monthly growth.”
CONTROL PANEL
Some have blamed the unmet potential of the cannabis sector on the delay in forming the state’s Cannabis Control Commission, the board tasked with regulatory oversight and licensing of the industry.
The Cannabis Control Act that was passed in May 2022 gave Gov. Daniel J. McKee 40 days to submit three commission nominees for approval by the Senate. That didn’t happen until May of this year.
Why? McKee’s press secretary, Olivia DaRocha, cited the “extensive” background checks conducted on each potential nominee as a cause for the delay. She declined to offer further explanations.
A Senate subcommittee approved McKee’s nominees, but as of June 6, the full Senate had yet to give final confirmation.
Even without the commission in place, legalization moved ahead on Dec. 1. As of now, there are seven licensed compassion centers that can sell marijuana for recreational and medical use.
The selection process for another 24 retail licenses has yet to begin.
Even with the appointments in, it’s hard to say how long it will be before the commission is operational, observers say. Sen. Joshua Miller, D-Cranston, insists the delay has hurt the industry.
If the state had followed the original timeline – selecting a commission within a few months since passing the cannabis act – Rhode Island would likely be a few months away from seeing new licenses being distributed, says Miller, who played a prominent role in negotiating the details of the Cannabis Control Act.
Instead, an expansion is likely to be over a year away, he says.
Others believe the delay in doling out new licenses is nothing to fret over.
“I don’t think we’re at that point where we need more dispensary capacity to be able to handle the demand,” said Magnus Thorsson, a professor at Johnson & Wales University’s Cannabis Entrepreneurship Program. “What we need to do is we need to educate the consumer base that we have now so that people who will benefit from cannabis can take advantage of it.”
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HIGH
ANXIETY:
Chris Plakias, head cultivator at CultivatingRI LLC in West Warwick, tends to the crop in one of the flowering rooms. CultivatingRI’s CEO, Karen Ballou, says businesses such as hers are suffering because the cannabis market is in a slump.
PBN PHOTO/
MICHAEL SALERNO[/caption]
‘HANGING ON’
Karen Ballou isn’t sure she can wait.
Ballou is CEO of CultivatingRI LLC in West Warwick, one of more than 60 cannabis cultivators in Rhode Island that grow and harvest plants to sell to the state’s compassion centers.
Plummeting marijuana prices, caused by a flood of products and lagging demand, have hit her and other cultivators hard. Her sales have dropped by 70% since the legalization of recreational cannabis six months ago. At the same time, other expenses – from utilities to plant nutrients to payroll – have skyrocketed.
“Every single cultivator is experiencing the same hardships, and everyone is hanging on day by day,” Ballou said. “Maybe [by] the end of June, we’re going to see a handful of cultivators out of business.”
Ballou says the black market is also “alive and well,” serving as an invisible source of competition that is holding down prices, sidestepping a 20% tax on sales and eating into the profit margins of licensed cannabis businesses.
Spencer Blier, the owner of cultivating company Mammoth Inc. in Warwick, says there’s another challenge: Many licensed compassion centers in the state also hold cultivator licenses, which gives them little to no incentive to buy from other cultivators in the state.
“Rhode Island has this very interesting market where five or six stores are vertically integrated,” Blier said. “A good market only functions right when you have roles that all work off of each other.”
Blier says his business has increased since recreational use was legalized, going from a maximum of $90,000 in sales each month to an average of $125,000.
Still, he’s worried because cannabis prices continue to remain too low. One-eighth of an ounce of marijuana, which used to sell for $22, goes for $15-$17, Blier said.
“The problem is the race to the bottom,” Ballou said. “[Cultivators are] cutting prices just so they can make payroll for the week, but it’s a short-term fix.”
“It’s killing us,” she said. “There needs to be an intervention.”
The intervention might come in the form of more licenses being issued when the Cannabis Control Commission is operational, which would give cultivators more places to sell their harvest. They are now prohibited to sell to shops outside Rhode Island.
And it might prove helpful to the state and local communities, too.
Recreational marijuana sales are subject to a 7% sales tax and a 10% excise tax charged by the state, and another 3% tax that goes to the municipality where the sale took place.
While there will be only 24 licenses available, 33 Rhode Island municipalities – all but Barrington, East Greenwich, Jamestown, Little Compton, Scituate and Smithfield – have given the go-ahead for retail cannabis sales in hopes of getting an additional tax windfall.
In North Providence, where voters approved cannabis sales last November, Mayor Charles A. Lombardi says he’s in no hurry to see the licenses issued. He and several town officials are opposed to having a cannabis shop, and doesn’t think it’s worth the extra tax revenue.
Lombardi, who serves as president of the Rhode Island League of Cities and Towns, has heard from leaders in other communities who feel the same way but must abide by the wishes of voters.
“I’m not interested in it at all,” Lombardi said of cannabis sales.
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WHAT’S IN STORE? Tamami Kataoka, assistant general manager at Mother Earth Wellness in Pawtucket, is at the counter of the dispensary with the menu board of cannabis products behind her.
PBN FILE PHOTO/MICHAEL SALERNO[/caption]
AD UP, THEN DOWN
Edward Dow doesn’t think doling out more licenses is the answer.
That shouldn’t come as a surprise since Dow, CEO of Massachusetts-based Solar Cannabis Co., recently opened Solar’s first location in Rhode Island, making it only the seventh licensed compassion center in the state.
Solar uses a “vertically integrated approach” in Massachusetts, responsible for the cultivation, production and retail sale of its cannabis products. But in Rhode Island, the company focuses exclusively on retail, selling products purchased from local cultivators. This is easier, Dow says, because of the large network of existing cultivators.
Since opening, he says sales at his Rhode Island location have been steady, while sales at his Massachusetts location have dropped by about 10%.
To retailers such as Solar, the delay in creating a Cannabis Control Commission is hardly hurting. In fact, he warns against issuing too many licenses, at the risk of oversaturating and destabilizing the Rhode Island market, causing prices – and tax revenue – to fall even further.
“I think the misconception is that markets will magically appear,” Dow said. “And of course, that’s not the case. The amount of people is the amount of people in any given state. The more licenses you issue, the more diluted in nature the market will become.”
For Joseph Pakuris, co-owner of the dispensary Mother Earth Wellness Inc. in Pawtucket, it’s a matter of marketing.
His biggest problem – and a problem for other cannabis retailers – is they’re prohibited from advertising their businesses until the cannabis commission puts the regulations in place.
Adding insult to injury, out-of-state cannabis businesses, which are outside the jurisdiction of the Office of Cannabis Regulation, have been advertising inside Rhode Island.
“Sales have been steady,” Pakuris said. “But if we could advertise, I think our sales would double.”
Indeed, Mother Earth recently defied state regulations by leasing billboards on Interstate 95, advertising the Pawtucket dispensary. The billboards came down under threat of a $10,000-a-day fine and the revocation of Mother Earth’s license.
Now there’s an effort to solve the businesses’ advertising woes before the arrival of the commission. Rep. Scott Slater, D-Providence, one of the champions of legalized recreational cannabis, introduced legislation that would allow the Office of Cannabis Regulation to temporarily set rules for advertising until a commission is formed.
I wish we could have done this six months ago,” Santacroce said. “It’s not an ideal situation. We look forward to getting that changed.”
The measure was approved by the House, but was held for further study by the Senate Judiciary Committee on June 6.
HAZY FUTURE
Even if advertising is permitted, those in the industry say they need to brace for an extended period of uncertainty. Many other markets outside Rhode Island are faltering under the weight of oversaturation, low demand and competition from the black market, and some fear the Ocean State might be headed in a similar direction.
“From a market perspective, the cannabis market nationally and regionally is not headed in a good direction,” Santacroce said. “You’re starting to see the effects of that in Massachusetts with businesses closing, layoffs, etc. Rhode Island is not immune to those market forces, so we have to make sure we are staying ahead of the ball on that.”
Some say Rhode Island can use its late introduction to allow it to learn from other states’ mistakes. And many players in the market say Rhode Island’s selling point will not be competitive prices, but rather quality products, which are tested by the state for heavy metals, molds and other contaminants.
“The tactic is going to be focusing on the quality, consistency of product and level of service,” Thorsson said. “It’s going to create a better industry and promote healthier business practices. We don’t want cannabis dollar stores. We want it to be an experience.”
That strategy sounds good to Iannuccilli, whose business PureVita Labs, is based on conducting regulatory testing on marijuana products.
“We are still at the very beginning,” he said. “How we play this game going forward is going to make a difference on whether or not this market is able to be the sort of sustainable entity as a craft cannabis market the way that we all want to see it.”
