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July 7, 2022

Can marijuana bring about social equity? In Massachusetts, a case study

YEHYUN KIM / CTMIRROR.ORG Jordyn Zembrowski, retail agent at Major Bloom, sells a recreational cannabis product to a customer. Adult-use cannabis has been available for sale in Massachusetts since 2018.

In the industrial kitchen at Major Bloom, staff are assembling joints using a gadget that turns out nearly 200 so-called “pre-rolls” in one go. A large bag of multi-colored fruit cereal sits ready to be baked into marijuana-infused treats. And owner Ulysses Youngblood is explaining the business philosophy he subscribes to, a “blue ocean” strategy.

“Blue ocean is basically like saying that there’s enough space for everybody to have their own lane, essentially,” he says. “There’s enough water in the sea for us to kind of sail and do our own thing.”

The concept comes from Chan Kim and Renée Mauborgne, best-selling authors of several books on “red ocean” and “blue ocean” theory. Red oceans are existing markets, where competition is cutthroat, or bloody; Blue oceans are niches in the market, where innovative businesses can carve out new demand.

In the fledgling cannabis industry, large companies have quickly risen to dominate the market in states where pot is now legal. But Youngblood says he believes there’s room for everyone, if they think about cannabis as a blue ocean, like he does. “That’s what’s important, you know. You don’t look at anyone as direct competition.”

Retail sales of recreational weed got going in Massachusetts in 2018. Here in Connecticut, they’re slated to begin by the end of this year.

But as state regulators begin awarding licenses to select adult-use operators and businesses scramble to build out capacity, cannabis entrepreneurs, customers and communities around the state are increasingly concerned about equity — whether there really is room for everyone.

Some are already raising questions about the licensing process in Connecticut. The application to enter a lottery for the limited number of available licenses was cumbersome and the paperwork requirements extensive. Fees to enter the lottery varied by business type, but some applicants argued the process favored those who could afford to apply more than once. Already to some, the odds seem stacked against those without significant financial resources.

And that’s only the first step. Those lucky enough to win the lottery have to formally apply for a license. Then the real work begins: raising capital to start a business and trying to turn a profit in a highly regulated and complex industry.

Massachusetts adult-use operators like Youngblood offer a case study for upstarts here in Connecticut, and a theme emerges when they talk about the experience thus far: It’s wicked expensive.

Setting sail

In Connecticut, as in Massachusetts and several other states that have legalized recreational pot, lawmakers designed “social equity” programs to create opportunities in cannabis for those who’d experienced the negative effects of its prohibition.

Connecticut intends to award half of the few dozen newly available licenses to entrepreneurs with lower incomes, who have resided in areas with high unemployment or a high historical conviction rate for drug-related offenses. The state has also been offering workshops for applicants, and it plans to provide technical assistance for recipients of social equity licenses.

Massachusetts also has a social equity program, providing technical assistance and waiving some fees for applicants that meet similar criteria. So far, only a few of the program’s participants have gotten cannabis businesses off the ground.

“A lot of the people who qualify for social equity and who are from these communities do not have the background and the resources that it takes to get into this industry,” said Julia Agron, project coordinator for the Cannabis Education Center at Holyoke Community College in Massachusetts. “So when they, in good faith, come to these classes or participate, the gap between what they think is being offered them and what it really means to enter this industry can be huge.”

As of June, the Massachusetts Cannabis Control Commission had approved 1,399 applications for licenses. Of those, 235 were social equity program participants and 94 qualified for “economic empowerment” priority status; fewer than three dozen of those have commenced operations.

All licensees in Massachusetts have to include plans for how their businesses will have a positive impact on the community and promote diversity in the industry. Aside from the social equity program, the state cannabis commission also gives priority status to businesses owned by women, minorities and veterans.

But equitable licensing programs alone likely won’t fix decades of social disparities and injustice. Agron said she’s seen many people looking to start up a cannabis business get discouraged — or, worse, lose everything. Since few traditional banks will lend to marijuana entrepreneurs as long as pot remains illegal at the federal level, business startups have to find financing elsewhere. That makes them vulnerable to predatory lenders. 

“Part of the problem is that people don’t see what their other options are,” Agron said. “They see that something may not be the best deal, but they’re not sure what else to do.”

Frank Dailey, co-owner of Boston Bud Factory in Holyoke, recalls being turned away by at least eight different financial institutions when the business was starting out. A handful of locally based banks in Massachusetts do provide depository services to cannabis businesses, Dailey said, but the fees are high, and it’s difficult to get loans or lines of credit at affordable rates.

Dailey sought out a lender when Boston Bud Factory wanted to purchase an extractor to make cannabis concentrates (used in vapes and a range of other products), but the only rates available were over 50%, he said. Another financial institution offered Dailey similar terms on a $30,000 line of credit, which the businesses had planned to put toward purchasing inventory and materials. Dailey decided against it.

“The rates are just ridiculous,” Dailey said. “We’re just two small guys trying to survive.” Ultimately, Dailey and his partner Carlo Sarno resigned themselves to self-funding most of the business. But he knows that’s not an option for many budding entrepreneurs.

Youngblood said he met with angel investors, venture capital and private equity firms and banks, “you name it, most of those fell through.” Major Bloom is a certified “economic empowerment” business within the state’s social equity program, but Youngblood and his business partner Valentin Faybushevich ended up raising the capital they needed primarily through friends and family. That included $50,000 of Youngblood’s own money.

Bruce Stebbins, a commissioner with the Massachusetts Cannabis Control Commission, said in light of the financial issues social equity applicants have faced, state lawmakers are considering legislation that would establish a “Social Equity Trust Fund” to provide funding support for those entrepreneurs.

“We’re hoping that if that gets signed into law, and the fund is created, that we’ll be able to see more social equity applicants get to the finish line,” Stebbins said. The deadline for the legislature is July 31.

The red ocean

As small businesses struggle to find a toehold, cannabis conglomerates known as multi-state operators appear to be clearing many of the same obstacles with ease. 

There are now several large publicly traded cannabis companies that, relative to small startups, have access to far more capital they can use to grow. Multi-state operators, or MSOs as they’re known, also have lawyers and accountants to gather and file the intricate paperwork many states require. Deeper pockets means it’s less burdensome to endure the inevitable delays in license processing and zoning — common issues in this new industry.

Once they’re up and running, MSOs’ scale can allow them to purchase larger quantities of raw product, often at discounted prices, and to occupy more expensive retail locations in upscale areas. Their brands are recognizable to many cannabis users, another advantage in new markets. 

With each new state that legalizes recreational marijuana, those advantages could multiply, exacerbating inequality rather than alleviating it — as many legalization policies have attempted to do. 

In the coming year, retail sales of adult-use cannabis are slated to begin in Vermont, Rhode Island, New York, New Jersey and Connecticut, expanding the region’s market beyond Massachusetts and Maine and raising the prospect of fierce competition.

Still, the CCC’s Stebbins says he gets the sense Massachusetts’ “microbusiness” operators are confident they can take on the industry’s heavyweights.

“They don’t seem to shy away from the competition,” Stebbins said. “I think they really are focused on, ‘I want to establish my brand, I want to build my customer base.'”

Dave Cichocki, co-founder of Pioneer Valley Extracts in Northampton, believes in carving out a niche. By establishing a name, building trust and making good products, he says it’s possible for plenty of smaller operators to turn a profit.

“It’s like every other business, and it takes a while,” he said. “Just don’t think you’re going to make a million dollars tomorrow.” 

Pioneer Valley Extracts manufactures vapes and pre-rolled joints, and it holds a local license to produce California-based Kanha brand’s edible gummies. Cichocki and his sister self-funded the business — they were not participants in the state’s social equity programs — and today they distribute their products to about 60 dispensaries around Massachusetts. Cichocki expects the company will do about $7 million in sales this year — nowhere close to a multi-state operation, but a steady and successful endeavor. 

Both Dailey and Youngblood are borrowing a page from the conglomerates: vertical integration. Major Bloom’s operations include manufacturing, retail, wholesale and home delivery. Youngblood and his team also record and produce a radio show and a podcast at Major Bloom’s Worcester shop. 

The state has established limits on the number of licenses that each business can own and made some license types — for delivery and social consumption — available only to participants in the social equity and economic empowerment programs. The goal of those policies is to even the playing field, Stebbins said, by not allowing the larger operators to fully vertically integrate.

Boston Bud Factory is licensed as both a product manufacturer and a retailer. Dailey said profit margins on the manufacturing side are higher than they are for retail, which helps the overall business stay afloat. 

He also saves money by doing a lot of the administrative work himself. Before entering the cannabis field, Dailey worked in chemical engineering and manufacturing operations, and he has tapped that expertise in setting up the manufacturing side of Boston Bud Factory’s business and in handling all of the company’s license filings and legal documentation.

“We haven’t yet utilized a lawyer or a consultant,” Dailey said. “I’ve done our special permits, I’ve done our compliance, I’ve done all of that. And that’s basically just learning the regs inside and out. Anybody can do that.”

Toward equity

Inside Boston Bud Factory’s three-story brick building on a quiet street in industrial South Holyoke, Dailey has set up an alcove where he offers “educational demonstrations,” teaching anyone who’s interested how to make rosin — a cannabis concentrate — from the plants they grow at home.

Behind the retail counter, and through a set of security doors, a staff member monitors the extractor. A vast factory floor beyond will soon house more processing and packaging operations, but for the moment it’s the site of a food truck refurbishing project. Dailey plans to periodically park the truck out front, inviting local restaurants to take turns serving up their fare to the shop’s patrons and the community.

As a social equity program participant, Dailey says it’s important to him to be a presence in the community and to teach and support cannabis customers and growers. Boston Bud Factory is working to open a second location in Springfield’s East Forest Park neighborhood, where Dailey lives. 

“It’s supposed to be community businesses — isn’t that what everybody says? But if you look at this, all of the money, everything is being sent out of state,” Dailey said. “The profits aren’t going to equity, the profits aren’t going to residents … those corporations are taking their money and sending it back to Chicago or Colorado or wherever they’re based out of.”

On their websites, top MSOs such as Curaleaf, Trulieve and Green Thumb highlight a range of corporate social responsibility and diversity, equity and inclusion efforts. 

Youngblood finds much of it inauthentic.

He stresses how critical it is for Major Bloom to maintain the trust and respect of its customers and the cannabis community, which is why he lends his own voice to the weekly radio show and uses original artwork on the company’s packaging.

Youngblood’s focus on “the legacy market,” long-time cannabis lovers still adjusting to buying pot from a legal dispensary, means he’s attuned to their skepticism toward the standardized image marketed by multi-state conglomerates.

This is Youngblood’s “blue ocean” niche.

On Major Bloom’s website, they avoid using stock photos, favoring images of real cannabis users. 

“You’d be surprised how much people catch on to that shit,” he said.

Major Bloom’s stone-and-frosted-glass storefront sits nestled between a spa and a package store, just down the street from a handful of Polish delis and markets. A smiling attendant with a calm demeanor buzzes patrons through a door from the sunny lobby to the main room, where the retail counter sits. Customers, for the most part, pay with debit cards, not cash.

Years ago, before Major Bloom moved in, the property was vacant and often hosted illicit drug pushers and users. The neighborhood still has its challenges, but Youngblood believes the presence of the shop — the foot traffic it generates, the cameras and security — has made the block safer.

Stebbins says that’s happening across the state: “We’re seeing buildings that might have been delinquent or underutilized or even an eyesore in the local community that are now being brought back to life.” Cannabis businesses are now becoming “part of the economic development of each small community,” he said.

Every licensed business has to track its progress on the community and diversity plans they submitted, providing an annual update when they apply to renew their licenses.

HCC’s Agron says legalization has had many positive effects in Massachusetts communities. Older customers and many women, who previously weren’t able to access cannabis legally in a way that felt safe to them, no longer have to worry. And the social equity programs, for all their challenges, have helped create a number of businesses that are fiercely dedicated to helping their neighborhoods recover from the war on drugs.

“I’ve seen people get discouraged. I’ve seen people get angry,” Agron said. “I’ve also seen people push through and, with more determination and raw willpower than any other resource available to them, pull it together and make it happen.”

“The mythical ‘green rush’ is over, if there ever was such a thing, and it’s a real industry now,” she said.

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