Trends: Pot industry looks for stabilization amid market, global uncertainty

“One thing that’s certain is that people want their cannabis.”

After nearly five years of cannabis legalization in Alaska, there are now hundreds of cultivators, retailers and manufacturers across the state, but some in the industry feel that there are still a few issues to be worked out before businesses can reach their full potential.

The state of Alaska has allowed for legal, recreational cannabis use since 2015 after a successful ballot initiative passed in the previous year. The state’s first cultivators and retailers opened their doors in 2016, and since that time, Alaska’s legal cannabis industry has become a significant part of the state’s economy, contributing $19,204,109 in tax revenue in fiscal year 2019 alone, according to data from the Alaska Department of Revenue.

There are currently 373 active and operating licenses in the state for marijuana cultivation, retail stores and product manufacturing, according to a list of active licenses from the state’s Marijuana Control Board. Sixty-five of those licensed operations are located on the Kenai Peninsula, which is four more than were in operation on the peninsula this time last year.

One of the newer businesses on the peninsula is Herban Extracts, a cannabis product manufacturing company based in Kenai. The owner, Lisa Coates, spent most of her career working in laboratories for the petroleum industry, but decided in 2018 to change things up and start a more eco-friendly business.

“I just think cannabis can benefit us in so many ways,” Coates said. “And I wanted to do something and make a difference in people’s lives.”

Coates’ business takes the cannabis that cultivators grow and extracts the tetrahydrocannabinol (THC), breaking it down into an oil that is vaporized by consumers. The “vaping” of cannabis using e-cigarettes or other means sparked some controversy at the end of last year, when multiple outlets reported people, often minors, dying or becoming ill after using THC oil products. Studies from the Centers for Disease Control and Prevention have shown that the deaths and illnesses from THC oil products often corresponded with products that had been manufactured illicitly and contained additives such as Vitamin E Acetate.

Coates said that black market manufacturers sometimes mix additives like Vitamin E acetate into their THC oil in order to give it the appearance of being higher quality. Coates originally added botanical terpenes — organic compounds found in a variety of different plants — to some of her products to give them certain flavors, but she said that when the vaping controversy hit the news, Herban Extracts stopped using any additives and went to “100% cannabis.”

“I can’t sleep well if I think I’m putting out a bad product that I wouldn’t use myself,” Coates said.

Unlike those made in Alaska’s legal market, the products made in the black market are not tested by anyone, so Coates said the consumer has no way of knowing the value or safety of what they’re purchasing.

When the news started coming out about deaths from vaping, Coates’ business started to take a hit. In order to counter the narrative that vaping was dangerous, Coates said that she started focusing more on educating her clients by doing things like including brochures in her deliveries that provide transparency on the manufacturing process. Coates also took the opportunity to have more “vendor days” where she would set up shop inside one of the retail establishments that sells her products in order to answer questions from consumers. These days, Coates said that every store that sells her products also has brochures that consumers can take with them to learn more about the product.

While new businesses continue to open around the peninsula, some in the industry feel that the market is close to reaching its saturation point, and others have begun to call for a limit on the number of licenses issued by the state.

The industry also continues to struggle with a tax structure that requires cultivators to pay a flat tax of $800 on every pound of cannabis flower that they produce. That tax is collected monthly and creates an artificial demand for cash flow for cultivators that they otherwise wouldn’t have. Coates said that, on the manufacturing side of things, this means that the black market manufactured products are sold at a price lower than she can compete with, and she often has to forgo quality for affordability when placing orders for cannabis flower from cultivators.

“I would like to buy based on quality, not weight,” Coates said. “Because right now if I’m buying a pound of weed, the state’s getting $800 in tax money whether it’s a good pound or a bad pound.”

Ryan Tunseth, the owner of East Rip, a retail store in Kenai, said that part of the trouble with changing the tax structure is that any proposed changes are not likely to have universal support within the industry. Some have pushed for shifting the tax burden onto the retail establishments, but retail owners like Tunseth have pushed back on that, arguing that their tax burden is high enough as it is. Tunseth also serves as treasurer of the Alaska Marijuana Industry Association and said another idea that has been floated by industry members is making the tax a percentage of the sale of the product rather than a flat tax on its production.

The issue with that proposal, Tunseth noted, is that “fair market value” for cannabis products has yet to be determined in the state. Another possible compromise solution, Tunseth said, would be to encourage the Marijuana Control Office to crack down more on cultivators who have become “delinquent” through not paying the flat tax and begin revoking or suspending their licenses, a move which would level the playing field for cultivators that have kept up with their payments. Tunseth said he doesn’t expect to see any major changes to the tax structure anytime soon, given that state legislators have prioritized finalizing the state’s budget and, more recently, dealing with the impacts of the new coronavirus outbreak.

Another issue for legal cannabis businesses has been the inability to bank with major financial institutions due to the federal government’s continued classification of the plant as a Schedule 1 narcotic. Last year, Rep. Don Young, R-Alaska, co-sponsored the SAFE Banking Act, which would ensure these businesses access to financial institutions. The bill was passed by the House of Representatives but has not been taken up in the Senate.

Recently, the outbreak of COVID-19, the disease caused by the new coronavirus, has created disruptions in overseas supply chains for manufacturers and forced cannabis retailers to step up their cleaning practices as they wonder how much longer they’ll be able to keep their doors open. Recent health mandates from the State of Alaska have limited the types of businesses that can continue to operate as well as people’s ability to travel within the state, but as of March 30 the retail cannabis stores have not been ordered to close.

At Tunseth’s store, his employees have taken to wiping down surfaces after every interaction with customers. Only five customers are allowed inside the store at any given time, and Tunseth has the front counter roped off with the product menus clearly on display, but not to be touched. Bright blue tape is on the floor as a guide for customers to maintain 6 feet of social distancing during their visit. Tunseth even taped off the area behind the counter so that his employees also know to maintain their distance.

“I’m like one step away from installing automatic aerosol sprayers in the lobby,” Tunseth said.

East Rip employee Cierea Giles said customers have expressed their appreciation in the last few days, not just for the extra cleaning but also for remaining open during a time when many people are feeling stress and anxiety from being stuck at home.

“They appreciate that we’re wearing gloves and cleaning and stuff like that, because people are concerned about it.” Giles said. “When they notice that we’re cleaning they make comments on it.”

Tunseth said that he hadn’t yet noticed a significant shift in sales that he can attribute to the COVID-19 outbreak, but he did notice that when the outbreak first started to hit Alaska, more people were buying their cannabis products in bulk because they weren’t sure how much longer it would be available.

“I would say, overwhelmingly, it’s just been people thanking us for being open,” Tunseth said.

Mariah Schloeman, another employee at East Rip who has been there since the store opened, said that she’s noticed people feeling more at ease after coming in these days. “I think a lot of people aren’t certain about what’s happening even around town, so it kinda puts this fear inside them,” Schloeman said. “And then they look to us and we’re here for them. I’ve noticed a more relaxed feel on their way out the door.”

Coates said that she orders her vape cartridges from China, and the packages she uses for her finished products she gets from California. Both supply chains have been disrupted, Coates said, and she’s hoping to find an alternative cartridge manufacturer before she runs out.

“I placed my order for some boxes on a Monday; the whole place (California) went into lockdown like that Tuesday,” Coates said. “So they’re not making my boxes anymore.”

The summer in Alaska is traditionally a time of heavily increased tourism, which helps businesses across the state, including the cannabis industry. The COVID-19 outbreak, however, forced cruise lines to cancel their ships scheduled for Alaska, and Coates said she’s been unable to budget for a summer with no tourism.

“I think everyone’s worried about what’s going to happen, but this too shall pass, you know,” Coates said. “I think everyone’s going to think of the world and how it operates differently, but one thing that’s certain is that people want their cannabis.”