After more than seven years of legal marijuana sales, fully licensed businesses in California have managed to capture just 40% of the state’s entire cannabis market, while the thriving underground trade still has a hold on about 60% of it and continues to illegally export millions of pounds of cannabis.

In total, legal marijuana production in California came to 1.4 million pounds last year, but illicit production far surpassed that with 11.4 million pounds produced with a street value of between $7.8 billion and $17 billion. And about 9 million pounds of that illicit cannabis was shipped out of state.

That’s according to a new report commissioned by the California Department of Cannabis Control and conducted by ERA Economics, which was shared with reporters during a press briefing on Monday.

The report’s findings were stark, but Duncan MacEwan, managing partner at ERA, put a rosy spin on it, saying the indications are that the regulatory framework in California is working – slowly but surely – in replacing the illegal market, with plenty of room to grow.

MacEwan said that licensed cannabis retailers have picked up 13% market share from the unlicensed side of the industry since 2019, and legal marijuana production has continued to grow, up 11.8% just last year alone from 2023. Still, according to the ERA report, the legal market has plateaued since 2021 in its quest to win more market share in California, holding steady at about 38% total, which has “not significantly changed” in three years.

Looking at another measure, the legal cannabis trade has gone from 580,000 pounds in 2018 when the market launched to 1.4 million pounds last year.

“Is the market working?” MacEwan said. “Yes is the answer we’d come to … We’re showing production increasing. That’s kind of the bottom-line metric.”

MacEwan acknowledged that there’s been plenty of market contraction and business failures, and he noted there are still plenty of challenges ahead for operators – ranging from the illicit market to high tax rates to price compression. But the macro level picture is a positive one, with key metrics moving in the right direction.

And given how little of the entire market is actually owned by legal companies, that signifies plenty of opportunity, he said.

“The industry is actually growing. Production is up, but unit prices for that production is down a little bit, so the gross value of the industry is down. This is really just a function of decreasing unit prices,” MacEwan said of the widespread perception that the legal California cannabis trade is in trouble.

The ERA report noted that “retail sales revenues have been decreasing since Q3 2021. This trend is driven entirely by lower prices.” Quantity of cannabis sold – “in terms of weight and units” – has increased over the same time period, the report said.

“I’m more optimistic than maybe most, but I do see this as a growing market. These are growing pains you’d expect for a brand-new industry that didn’t exist really, most places, a decade ago,” MacEwan said.

The cannabis wholesale market was also up significantly last year, the ERA report found, with prices up 11.7% after three straight years of decline, although wholesale prices are still down by 57% from a peak back in 2020.

Much of that is due, the report notes, to consolidation across the supply chain, which has led to relative stability in recent months. Over the course of last year, the number of active cultivation permits dropped by 18%, the number of delivery operators is down 25%, storefront retailers are down 1%, and license statistics for manufacturers, testing labs, event organizers and microbusinesses are all also down.

“The short-run market outlook for 2024/25 is similar to 2023/24, namely a period of continued adjustment,” the ERA report asserted. “Tax and licensing fee changes are expected to improve the health of the licensed market, although a potential increase in the state excise tax in 2025 would mute some of these effects. In the long run, prices are expected to converge in California and other states with adult-use markets as the licensed and unlicensed markets approach a competitive equilibrium.”

“However, as long as interstate trade remains federally illegal, licensed market participants are at a competitive disadvantage relative to illicit market participants who distribute across state borders,” the report warns.

The report also issued several policy recommendations for lawmakers and the DCC, including:

• Lowering costs for legal cannabis companies so they can better compete with the underground market.
• Refining industry data collection, including on illicit operators and legal cultivation.
• Encouraging more localities to both embrace the industry and lower their own taxes and fees on businesses.

ERA Economics 2024 Market Report