What New Jersey did right - and New York did wrong - with recreational-cannabis launches

By Steve Gelsi

New Jersey is now on track for $1 billion in cannabis sales, while New York is launching an overhaul of its licensing program as illegal shops flourish in the state

While New York and New Jersey share a border along the Hudson River, they've been far apart in their rollouts of licensed recreational-pot sales over the past three years.

The neighboring states both approved recreational-cannabis markets in 2021, but New Jersey's rollout has been quicker and smoother in terms of overall sales generation, industry players told MarketWatch.

The Garden State is now home to 100 legal stores, many of which have been up and running for the past couple of years, and that number continues to grow.

New Jersey's legal dispensaries for medicinal and recreational cannabis generated more than $800 million in combined sales last year. The state expects to generate at least $1 billion in sales this year.

New York continues to roll out its program more slowly after lawsuits and other complications caused delays that were partly responsible for keeping legal cannabis sales at $150 million in 2023, with a limited number of stores open.

Now, New York is trying to play catch-up after recently bringing its total number of legal stores statewide up to 80, even as thousands of illegal stores continue to operate in New York City and across the Empire State.

'The unlicensed shops can sell products for a lot cheaper. They don't have to pay taxes or test their products. ... In terms of the opportunity, New York City is seen as the bright, shiny object. But you may do better elsewhere.' Justin Singer, a partner at cannabis law firm Feuerstein Kulick

New York initially awarded licenses to people convicted of cannabis offenses and to nonprofits that work with ex-inmates, under its Conditional Adult-Use Retail Dispensary program.

Then late last year, New York started allowing medical-cannabis companies already operating in the state, including Curaleaf Holdings Inc. (CURLF), RIV Capital Inc. (CA:RIV), Green Thumb Industries Inc. (GTBIF) and privately held PharmaCann, to serve the adult-use market.

This week, New York Gov. Kathy Hochul unveiled plans to revamp the state's Office of Cannabis Management, ordering the state's general services commissioner, Jeanette Moy, to conduct a review of the department over the next 30 days and recommend improvements.

Still, New York continues to face challenges, such as an oversupply of locally grown marijuana that may have to be destroyed due to a lack of retail outlets.

Also read: New York cannabis farmers may have to throw away 250,000 pounds of product due to retail-store bottleneck

A lawsuit by disabled veterans also kept licensed stores from opening for several months last year. The delay caused shop owners to face the prospect of paying rent for months with no sales until the legal action was settled.

Holders of CAURD licenses also faced challenges including finding landlords that would rent to them and raising money to start up a retail business.

Cannabis-industry members said New Jersey's market launch has been helped by its decision to allow existing medical-cannabis companies to flip their dispensaries over to adult use as the state developed its licensing program for independent operators.

New York did it the other way. It did not allow companies with existing medical licenses into the adult-use market, because officials had intended to give the independent entrepreneurs in the CAURD program a head start.

That backfired, however, as it allowed illegal stores to flourish and to compete with licensed locations.

"Most consumers have no idea - they don't know there's this difference between licensed and unlicensed shops," said Justin Singer of ApptitudePlus, a consulting and advisory firm in the cannabis space. "The unlicensed shops can sell products for a lot cheaper. They don't have to pay taxes or have to test their products. The market dynamics are interesting. But in terms of the opportunity, New York City is seen as the bright, shiny object. But you may do better elsewhere."

For his part, Singer has avoided New York state for his own dispensaries. He's teamed up with a partner, Sarah Stretchberry, to open a woman-owned dispensary called Queen City Dispensary in Plainfield, N.J. They plan to open a second store in Boonton, called Boone Town Provisions, in June.

In another potential advantage for New Jersey, the state legislature late last year passed a measure that allows a larger cannabis company or other investor to purchase up to a 35% stake in a maximum of seven independently owned dispensaries and other cannabis businesses.

This is seen as a way to encourage bigger cannabis companies to provide expertise and capital to independent shops to help them ramp up.

Ziad Ghanem, chief executive of TerrAscend Corp. (TSNDF), said the company is in "deep discussions" with several businesses about providing backing in the form of an ownership stake of up to 35%.

The company is in a position to provide much of the infrastructure support needed by independent operators, such as information technology, capital and coaching on workflow and efficiency, he said.

"They're not experienced in these types of things, so they need corporate support. Their odds of success are much higher [with backing]," Ghanem said.

Meanwhile, TerrAscend has grown its wholesale business to supply about 110 stores while operating three Apothecarium dispensaries in the state. It also operates a 140,000 square foot cultivation and manufacturing facility in Boonton.

It has yet to venture into New York state.

"New York, I believe, is a case study in how not to launch," Ghanem said. "They grew the illicit market."

David Goubert is chief executive of multistate cannabis company Ayr Wellness Inc. (AYRWF), which operates dispensaries in New Jersey, but not in New York.

"New Jersey is a very strong market," Goubert said. "With more dispensaries there, it creates some [competitive] pressure on the retail locations. We've done a pretty solid job at maintaining market share in retail with the added statewide locations that give us opportunity in wholesale. We've seen good stuff in New Jersey. Obviously it's a good time to grow there."

Partly due to the size of the New York market, however, Ayr Wellness is considering a push into that region through potential license applications.

"We're careful about how we approach it," Goubert said.

Venture-capital investor Morgan Paxhia, co-founder and managing director of Poseidon Investment Management, said that company is working toward making its first investments in retail cannabis businesses in New Jersey by the end of June.

The firm is now considering investments in New York as well because of the recent gains made by legal shops there.

"There's been chaos in New York, but we're finally seeing progress," Paxhia said.

Green Thumb Industries made a major investment in its wholesale growing facility in New York, and the state is steadily approving new retail locations, he said.

"There are more legal stores. It's moving, but it's not easy to open them," said Paxhia, who grew up in Buffalo. "As former New Yorkers, we want [the state] to do well."

Beau Allulli and his partner, Doo Kim, are getting ready to open their licensed New York City marijuana store, Mighty Lucky Dispensary, next month at 259 Bowery in downtown Manhattan, next to a Whole Foods Market and a YMCA.

Allulli was in the illegal cannabis business for 15 years, with a client list of more than 12,000 people, and was arrested in 2010 and in 2011 for selling cannabis. He applied for a CAURD license, which he won about a year ago.

While he felt he had been a success in the illegal trade, he could never share that fact with his family. He has also run his own photo studio.

"When you're doing something that you have to stay underground with, you're living two lives and you're not really getting close to people in your life," he said. "I finally told my mom after 15 years, because now it's a legitimate business."

Getting his shop open has been a journey over the past 12 months.

Allulli had already signed a lease for a space last summer when the lawsuit against New York state put his license in limbo in August. He was lucky that the landlord allowed the previous tenant to remain in the space and pay rent on a month-to-month basis until a court lifted the injunctions against cannabis licensees in November.

Since then, he's been working on getting the Mighty Lucky Dispensary renovated and ready for its opening. It will be the first legal cannabis store in the area.

"You're in a race," Allulli said. "Everything is about being first."

The store will sell home goods, plants, cameras and records in the front to give it a homey feel, with cannabis offered in the back. He's planning to have 16 employees including himself and Kim.

"I'm grateful for the state setting up the program the way they did, because I was afforded this opportunity," Allulli said. "We knew it wouldn't be perfect anyway. I didn't expect there would be thousands of stores to open up overnight. It was a surprise to everyone involved."

Also read: MedMen goes from height of $3 billion valuation to zero as stock draws cease-trade order and top execs leave

-Steve Gelsi

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03-23-24 1001ET

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