Behind the scenes at a California dispensary preparing for legal pot on Jan. 1
For years the only way to get marijuana was to grow it at home illegally or buy it on the black market. But today 205 million Americans live in a state where marijuana is legal for either recreational or medical use. Kristen Hwang/The Desert Sun
CATHEDRAL CITY, Calif. — John Chaisson didn’t get into the marijuana business to turn customers away.
But Chaisson reckons that his dispensary, Atomic Budz, sends a handful of would-be customers home without so much as a gram every day. Unless they have prescriptions, it’s illegal for him to let them step into the store.
Not for long. California is less than a month away from allowing any adult 21 and up to purchase marijuana from a licensed dispensary. No doctor’s note needed.
With that change on the horizon, pot shops like Atomic Budz that are a part of California’s $2 billion-a-year medical cannabis industry have spent the past year hustling to stay on the right side of state and local laws. They’re stocking up on different cannabis products and staffing up in anticipation. And they’re doing whatever it takes to thrive in the largest legal pot market in the nation.
“If you don’t have good product in the market, you’re not going to last,” Chaisson said. “But if you do, what’s going to differentiate you?”
Chaisson thinks he’s found the right formula to make his dispensary off of Highway 111 inthe Southern California desert town of Cathedral City a hit. It’s a combination of strict adherence to the law, savvy marketing, vertical integration and attention to detail that he compares to the craft beer industry.
“How did handcrafted beer stand up to the big beer makers?” he asked. “They went in and they built a brand based on quality.”
BACKGROUND: Marijuana goes legal in California on Jan. 1 – what you need to know
Atomic Budz can already check off the first item on its list of preparations for the brave new world of recreational marijuana: showing up.
“Being in the game early and paying attention to where the industry is going to go – that I think determines your success in this industry,” Chaisson said, sitting in his office above the retail floor of his dispensary.
That’s why Chaisson, who once managed information systems for the University of Washington and ran a tile store in downtown Palm Springs, is glad to have a foothold in California prior to legalization.
Chaisson has been through his fair share of economic boom times. He’s flipped houses, played the stock market and worked for a tech company when each of those sectors was riding high. He thinks catching the cannabis wave is also a matter of timing.
His company’s Cathedral City storefront is hard to miss: a lime green, corrugated metal box with a mural of Coachella Valley mountains and windmills on one side and a large Atomic Budz sign slung over the front door. It opened in January 2017.
Inside, the waiting room has the vibe of a funky doctor’s office, with a white couch facing the front window where a clerk checks in customers and a long wall covered with white porcelain tile.
“Our place looks like the places in LA,” said Chaisson, who holds an MBA from St. Edward’s University in Austin.
Looking the part of a big city pot shop is a start. Now Atomic Budz needs the paperwork.
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Readying for regulation
To continue operating after Jan. 1, Atomic Budz will seek its microbusiness license through the Bureau of Cannabis Control, one of the agencies in California that is developing regulations for medical and adult-use cannabis.
The BCC anticipates that it will open up applications for temporary licenses in December. Temporary licenses will become effective on Jan. 1. After that, dispensaries will have to go through a more detailed application to get an annual license.
Expanding from medical to recreational pot appears to be a consensus among Chaisson’s neighbors in California’s Coachella Valley. Like Atomic Budz, all but one out of more than two dozen dispensaries polled by The Desert Sun said they plan to sell recreational pot as soon as state and local law allows them to do so.
“Regulation is coming, whether people like it or not,” Chaisson said. “For me, I’m going to stay as compliant as possible, because I don’t want to lose my license.”
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Besides the necessary paperwork, Atomic Budz is adjusting its business operations to stand up to the same scrutiny it will face as an annual licensee.
For example, the business is weaning itself off of vendors that don’t test their products for microbes, pesticides and other contaminants, a requirement once adult-use laws are fully phased in.
Atomic Budz also plans to hire a guard in keeping with state law. It recently erected a stall outside its entrance that resembles a phone booth, where a security guard can stay out of the elements.
“We’re going to air condition it, too,” Chaisson said.
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Tallying up taxes
Chaisson hopes that legalizing adult-use in California will encourage fellow marijuana businesses to sell higher quality pot.
But he fears that competitors will be tempted to cut corners or slip into the black market because of one huge downside to regulation: With added tax and compliance costs, the margins on selling pot are about to get much thinner.
“We are going to make less money, and we’re going to have a lot of compliance and oversight,” Chaisson said. “But what’s the alternative?”
Starting Jan. 1, the effective tax rate on adult-use marijuana in California could be as high as 45 percent, according to research firm Fitch Ratings.
That estimate takes into account a 15 percent excise tax on cannabis retail sales and a cultivation tax of $9.25 per ounce of dry flower and $2.75 per ounce of dry leaf. Both taxes are levied by the state. The Fitch Ratings estimate also includes a ballpark percentage for local taxes.
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The net effect is that many cannabis industry observers anticipate pot prices will rise in California on Jan. 1. So as not to spook existing customers with sticker shock, Atomic Budz has already started raising its prices.
“We’ve decided not to wait until Jan. 1 or Dec. 31 to take our prices and just go poof,” said Jeff Wolter, who co-owns Atomic Budz. “We want to make it more palatable to our patients.”
But the business isn’t tacking on taxes quietly. Atomic Budz plans to break out each tax as a line item on receipts so that customers know the money is “not going in our pocket,” Chaisson said.
Learning from the past
Chaisson and Atomic Budz have been through legalization before.
Chaisson has smoked pot for years to relieve stress. He’s watched loved ones use the drug to sooth the symptoms of cancer. His experience with the product made him eager to try his hand in the business.
First, Chaisson tried to get into the industry in Arizona. He says he spent $42,000 over two years trying to get a medical marijuana license there, but came up short.
Chaisson had better luck in Washington state, where Atomic Budz today holds a license that allows it to grow marijuana and to manufacture cannabis products.
The business didn’t get off to a very promising start.
“Our garden blew up the first year and everything died,” Chaisson said. “I made some very expensive mistakes in Seattle.”
But Atomic Budz managed to regain its footing and Chaisson looked to California next.
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Again, setting up shop in Cathedral City was more difficult than Chaisson bargained, in part, he said, because litigation between marijuana businesses and the city delayed its opening.
Chaisson said he and Wolter have invested $1 million in cash into both businesses. He thought the grand total would be $400,000.
Staying in the black
Competition is tight. The costs of doing business are high. Taxes are getting higher.
“If you’re doing anything in cannabis – cha-ching! – everybody thinks you have deep pockets,” Wolter said. “Those deep pockets get emptied real quick.”
Chaisson sees potential cost savings in vertical integration. He plans to apply for a microbusiness license, which would allow Atomic Budz to cultivate, manufacture, distribute and sell cannabis. The change would cut middle men out of the dispensary’s supply chain and let it control every part of production, from seed to sale.
“It makes it a lot easier to make a profit,” Chaisson said, “because anybody that’s even remotely attached to this business up-charges a lot.”
Atomic Budz plans to hire more staff to manage the new parts of its business.
Chaisson would like to open a cannabis club, too, if city rules allow. Like restaurants with different menus, Chaisson thinks permitting on-site consumption will help dispensaries in Cathedral City to differentiate their businesses from one another.
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One last strategy: casting a wider net. Chaisson said he’s adjusting his marketing and product selection to cater to recreational customers – the same people he’s been turning away for months.
“My philosophy in all of this is that we should have something for everybody that walks in the store,” he said.
Sales have risen steadily since the shop opened at the beginning of the year, Chaisson said, and are now in excess of $55,000 a month. He’d like to see them keep climbing.
“We’ve managed to be profitable,” Chaisson said, “but that margin is pretty thin most of the time.”