Does Legal Cannabis Retail Push Out the Black Market?

Orange County hopes to weed out its many illegal dispensaries

Customers shop for marijuana products at Catalyst Cannabis Dispensary in Santa Ana, Calif., on Feb. 18, 2021. John Fredricks/The Epoch Times

SANTA ANA, Calif.—As cities in Orange County, California, continue to debate allowing retail cannabis, proponents argue that legal dispensaries will help drive out black market operations. But while that might be the case in some cities, the reality is much more complex.

Elliot Lewis, founder and CEO of Catalyst Cannabis Co. in Santa Ana, said the tension between the two markets creates a conundrum with no clear solution.

“I’m not one of these guys that’s like, it’s gonna go away in a couple of years. It’s gonna be a decade,” he told The Epoch Times.

Lewis, who aims to triple his number of retail stores in Southern California in the near future, said the illicit market poses a long-term problem for licensed dispensaries.

“I know guys that are never getting into the legal cannabis industry. Why would [they] do that? I mean, it’s a lot of red tape,” he said. “You can make a lot of money in the illicit cannabis trade.”

Black market operators are often creative entrepreneurial types who “tend to be smarter than government officials,” Lewis said. Some have been selling marijuana illegally since the 1980s, and don’t see the benefit of entering the legal market when the penalties of running an illegal operation are relatively minimal.

This summer, Bob Groesbeck, co-CEO of Planet 13 Dispensary, is bringing the largest cannabis store in California to Santa Ana. But even though his superstore will have 16,000 square feet of retail space, he says his biggest competitors will be illegal operators.

“That’s who we’re fighting against every day. They’re producing product, selling it, and they pay no taxes. They pay substandard wages to their employees, and they’re not accountable,” Groesbeck told The Epoch Times. “They should be shut down immediately … because they’re playing by a different set of rules.”

Big Business

Apparently, the illicit market’s strategy is paying off substantially. While California’s legal cannabis industry brought in a record $3.1 billion in 2019, illegal spending that year was $8.7 billion, according to a study conducted by Arcview Market Research and BDS Analytics.

“The illicit market is thriving, whether you have dispensaries or not,“ Kevin Sabet, the president and CEO of Smart Approaches to Marijuana (SAM), a nonprofit organization dedicated to a health-first approach to marijuana policy, told The Epoch Times. ”California has a lot of dispensaries, and they have a thriving black market. Why? Because the dealers undercut the legal price.”

Sabet spoke with an illegal marijuana dealer in Michigan while writing his upcoming book, “Smoke Screen: What the Marijuana Industry Doesn’t Want You to Know,” an exposé about the rise of today’s highly potent cannabis. The dealer reported making as much as $13,000 per day in cash at her unlicensed pot lounge—after Michigan legalized recreational marijuana in 2018.

“She’s very happy about legalization, because it’s brought her much more demand,” Sabet said. “She’s able to compete with the legal price, she’s open at any time, she sells to whomever she wants, and it’s thriving.”

He called the notion of legal marijuana reducing the black market “a nice theory, but it doesn’t really pan out in reality.”

Santa Ana’s Black Market

Others cite Santa Ana as a good example of how legalization stomps out illegal dispensaries—including the Santa Ana Police Department (SAPD).

Cpl. Anthony Bertagna, the department’s public information officer, told The Epoch Times there were “approximately 110 to 120 illegal locations” selling cannabis in Santa Ana immediately prior to legalization. Today, that number fluctuates, he said, ranging from three to five locations.

“We’ve gotten rid of most of them,” said Bertagna. “We have them, and they pop up. When we get informed about them, we build cases on them and serve warrants.”

Kandice Hawes, executive director of the Orange County chapter for the National Organization for the Reform of Marijuana Laws (OC NORML), said Santa Ana shows how legalization reduces black market operations.

Their decrease in illegal dispensaries shows “bringing legal cannabis into a city is a way to get rid of these illegal operators.”

“The industry was already there,” she said. “Like in Fullerton and Anaheim, they already have a proliferation of illegal dispensaries. So usually that’s always a point that city council[s] will make [during] city council meetings—look at Santa Ana.”

A 2018 report in the police journal Behind the Badge detailed efforts made by the Anaheim Police Department (APD) to stamp out illegal dispensaries, first by cutting electricity and later by red-tagging entrances, making it a misdemeanor to go inside.

“Despite their best efforts, APD officers and city officials say illegal dispensaries keep popping up like mushrooms in Anaheim—even after the businesses have been red-tagged,” according to the report. Police said there were two dozen illegal dispensaries in Anaheim, where retail cannabis is not allowed, at the time of the report—more than double the number when cannabis became legal in California earlier that year.

But SAPD’s Bertagna said that “illegal marijuana operations are less of a problem than the grow houses,” adding that since legalization, most of the city’s criminal activity had shifted to illegal gambling establishments.

This point was brought up when a retail cannabis ordinance was discussed at an Oct. 6, 2020, meeting of the Fullerton City Council. The ordinance passed late last year, but was ultimately canceled this year.

Matt Foulkes, a community and economic development director, cited Santa Ana’s success in pushing out illegal dispensaries in a City Council discussion.

He noted that concerted code enforcement efforts, as well as licensed retailers who reported on illegal activity, were responsible for the reduction.

“It’s not a direct one-to-one relationship to say if you allow legal you can drive out illegal, but I think anecdotally there’s a number of cities where that has proven the case,” Foulkes said.

In addition to Santa Ana, Lewis said cities like Long Beach and Bellflower, where he also owns storefront locations, consistently shut down illicit operations.

“[If] they open one up, they’re gonna close you down quick,” he said. “L.A. is the worst one. It’s the wild, wild West out there. There’s so many of them, and they never really enforced [the law].”

Is More Retail the Answer?

Mike Moussalli, CEO of Se7enLeaf, a cannabis manufacturing and distributing company in Costa Mesa, said more legal retail will solve the illegal market problem.

The illicit market has “a huge dominating presence,” he said, and estimated its share at nearly 80 percent of the overall market of cannabis in California.

“The taxation and cost of doing business for legal cannabis is extremely high,” he told The Epoch Times. “Essentially, that cost gets passed along to the consumer. And at the end of the day, a consumer’s like, ‘Well, why am I paying 35 percent more for a product when I can just buy it over here?’”

Moussalli, who is also a board member on the Orange County chapter of the Cannabis Chamber of Commerce, said about 70 percent of California cities and counties still don’t permit legal cannabis sales.

“The more cities that open retail, the better it is for the legal industry to help eliminate the illicit industry,” he added.

James Shih, founder and CEO of My Green Network, agrees.

“When you legalize the entire industry, those dispensaries which right now are being able to sell products, they’re slowly going to be wiped out,” he told The Epoch Times. “The faster we get more retail stores that are licensed, the faster the black market gets destroyed.”

Another Option

While the illicit market poses competition that Lewis deems unfair, he’s reluctant to report such operators and favors a different approach: bringing them into the fold.

“I don’t have any ill will towards the illicit market. It’s just people trying to make a living,” he said. “I would never want to see anybody do even a night in jail over cannabis. … We would love to see [illegal operators] in the end become compliant and build a business that actually has staying power.”

Lewis said he would support a program to help enable “people that know the game, but … [face] barriers of entry,” like access to capital and knowledge of the licensing process.

“There’s no argument that communities of color were disproportionately impacted [by] the War on Drugs,” he said, while those who were least affected took over the legal market. In his view, following a social equity policy with licensing could “right some of those wrongs.”

The Minority Cannabis Business Association has outlined a program that grants a set number of business licenses to individuals of family members who have been arrested or convicted for cannabis-related crimes.

But thus far, Lewis said, city governments in Orange County haven’t been as receptive to such equity initiatives as areas in Los Angeles, San Francisco, Oakland, and Sacramento.

“Orange County’s a little bit different animal,” he said.

Jack Bradley contributed to this report.