Like any prominent figure of a movement, be it in politics, business, sports or entertainment, Steve DeAngelo has his share of supporters and detractors.
He’s beloved as a freedom fighter, a bare-fisted brawler who waged legal combat against the cannabis industry’s mortal foes — the IRS, the DEA, the U.S. Department of Justice, the misguided narrative of marijuana’s dangers — and he’s admired as a forward-thinking business leader who saw far more potential than just buying and selling pot. Even as the state moves into the recreational space, DeAngelo remains a fervent, outspoken defender of the power of medical cannabis.
Like every captain of industry who’s come before him, his approach can be polarizing. Some revere his tenacity, his panache, his passion; others are jealous of his success and his willingness to build the biggest business in an industry that truly was born of the mom-and-pops.
He’s an author, an aficionado, an entrepreneur. He’s risked everything to be a pioneer in this industry.
And now at the age of 60, the man who started Harborside, once the biggest — and perhaps still the most well-known — dispensary in the world, has the opportunity to tackle North America’s largest cannabis market unfettered from the restrictions of California’s medical marijuana laws.
Serving California consumers since 2006, Harborside is now in expansion mode.
Market Volatility
Harborside, like every other legacy cannabis business in California, is adapting to a radically evolving marketplace, DeAngelo says. Success yesterday guarantees nothing today and even less tomorrow.
For the unprepared, the adult-use transition in California can be back-breaking: moving from a largely unregulated medical market to what DeAngelo believes is the probably the most tightly regulated system in the United States; converting from a mandated nonprofit structure to a for-profit entity; introducing distributors as a required component of the supply chain; changing from a minimal tax burden to an egregious 40% in many parts of the state; and adapting to an endless litany of new regulations for cultivation, packaging, testing, tracking, transportation and licensing.
The rollout of California’s adult-use cannabis regulations has been — not surprisingly — rocky, to say the least. Much of the volatility has mirrored the states that went recreational years before California.
DeAngelo believes Harborside is in a better position to navigate these changes than the majority of other retailers “because most dispensaries just don’t have the depth of talent and resources that we have,” he says.
“We understood what was coming. We were well-prepared. We were able to brief our staff on it and have been handling it better than most people have. But we still have to deal with the same kind of market volatility that everybody else is living with here.”
DeAngelo says many retailers, including Harborside, bought a very large amount of cannabis in preparation for the transition, knowing that after Jan. 1, 2018 they would no longer be able to buy product from anybody without a state license.
“We knew from talking to the small growers who had been supplying us that a very small minority of them were going to be licensed as of January 1,” DeAngelo says.
However, the expected uptick in demand never materialized, DeAngelo says. While some dispensaries did see a boost in sales, Harborside’s numbers remained relatively flat. As retailers were forced to phase out non-compliant products before July 1, many offered blowout clearance prices to clear out inventory and then were left with barren shelves just after the deadline. The market went from massive oversupply to drought, almost overnight.
Quick hits with Steve DeAngelo
On testing regulations:
“The majority of growers in California do not grow organically. They do use some type of pesticides and they’ve never had to really dial in that pesticide use to meet testing requirements before. And it’s going to take some adaptation. People are going to need to learn how and when to use pesticides and they’re going to have to learn how to grow organically.”
On artisan cannabis companies:
“I think that there’s always going to be room in the market for high-quality, special-service small operators in all parts of the supply chain from cultivation to distribution to retail to on-premises consumption. Consumers want and expect a variety of different choices. … There will always be a market for a small retailer where consumers can go in and get a much higher level of attention and knowledge and service than they would in a larger retailer, and they’ll pay a higher price at the smaller retailer.”
On the top cannabis retailers (aside from Harborside, of course):
“I’ve been so busy in my own operations I haven’t had as much opportunity to visit some of the newer dispensaries I’d like to see. But I am impressed in San Francisco by what Harvest is doing with their lounges and with some of the events they’re doing. I like to see cannabis retailers explaining the plant and teaching their customers about the plant as part of their mission.
“And I’m really impressed by the interior design at Sparc because I like how open it is. I like the way they integrated natural materials into a sleek and clean design. I especially like their clone displays there, so those are my two picks in the Bay Area.”
“I saw a tweet that came in talking about a shop in Southern California that had entirely run out of cannabis,” DeAngelo says.
Changes
The burdens of uncertainty and changing regulations will gradually ease over the coming months, and it’s almost inevitable that the market will shift once again toward oversupply.
But what DeAngelo sees as the biggest problem — ultra-high taxes — will require intervention by the state Legislature.
Because individual municipalities can add additional taxes on cannabis above and beyond the state levels — a system similar to Oregon — the average tax rate on a gram of cannabis in California is 38%, according to BDS Analytics. It’s one of the big factors that has likely curbed users from buying marijuana at retail.
“There’s no social or public health policy that justifies these high taxes,” DeAngelo says. “And in fact, what they’re doing is empowering the illegal market, so one way of dealing with the price disparity is for the Legislature to come to their senses and actually create the circumstances that we need for a viable legal cannabis market in California.”
Growers and retailers in Washington experienced a similar rift when the Evergreen State launched its adult-use program in 2014. The state eventually tossed out a 25% excise tax at three different levels of the supply chain in favor of a (slightly) more reasonable 37% excise tax at retail.
But the biggest hit to Washington’s illicit market came as growers ramped up production, driving wholesale prices to all-time lows and creating a shopper-friendly retail environment.
DeAngelo recognizes the same trend is headed for California.
“We’re pretty well prepared for the eventual price drop,” he says. “The cultivation facility that we’ve built (in the Salinas Valley) has a lot of automation, so it’s going to allow us to produce cannabis at pretty low prices. We have a vertically integrated supply chain so whatever is grown at the farm could always go onto our shelves. … Our expectation is that by the time we see really serious price drops in California that our farm is going to be among the lowest cost producers of the highest quality cannabis that you can find in this state. We expect to be able to weather that storm fairly well, but there are a huge number of growers who are not so well positioned.”
Steve DeAngelo speaks with attendees at the New West Summit.
Growth
Despite the challenges that have plagued the early months of California’s adult-use cannabis market, businesses and brands across the state are rushing to establish themselves as leaders, frantically chiseling out their share of the expected $7 billion market.
Harborside will be expanding with both traditional cannabis retail outlets and social-use clubs, DeAngelo says.
The company has shops under construction in Desert Hot Springs and San Leandro, as well as a pending license application in West Hollywood and agreements to operate stores for a number of groups with pending licenses.
Harborside also has big plans in the social-use space, including a tasting room at its Oakland location.
“The concept of the tasting room is basically try-it-before-you-buy-it,” DeAngelo explains. For a fee, the tasting room will allow customers to try different strains, delivery methods or producers without committing to a large investment.
“And of course the staff who’s going to be working in that room is going to have great depth of knowledge in both the type of cannabis that’s being provided and the different ways that you consume that cannabis,” DeAngelo says. “Say you have somebody who comes into the room and they want a little different flavor or maybe they try something that’s a little too strong or not strong enough. They can give that feedback to our person behind the counter and the next one that they try will be more keyed into their preferences.”
Legacy
Those who have survived in the cannabis marketplace are already familiar with change and operating on shaky grounds. DeAngelo co-founded Harborside Medical Center in 2006 and he’s stared down more challenges than most business owners would care to endure.
Businesses like Harborside have learned how to adapt to an ever-changing landscape — and California’s modern cannabis industry offers nothing if not a tumultuous but exciting atmosphere.
And despite having more than a dozen years of experience building a cannabis business in more uncertain times, DeAngelo recognizes that little if anything is set in stone.
“I don’t think that anybody is fully prepared for the world that we’re going into,” DeAngelo says, “because I don’t think anybody can really accurately predict what that world is going to look like.”