Would-be cannabis entrepreneurs might commit a drastic act to have Christopher Schroeder’s problems. The founder of Somatik, a San Francisco Bay Area-based cannabis startup that manufactures THC and CBD-infused coffee drinks and chocolate-covered espresso beans produced in concert with existing, well-known consumer brands, Schroeder launched his company to a round of positive press in 2017. The warm reception was an object lesson that in the cannabis legalization era: there was a big market for high-end cannabis edibles. Schroeder’s stated dream — to see Somatik cold-brew coffee on tap in high-end cafes, next to the “unleaded” cold crew and the kombucha — seemed within reach.
Then legalization happened.
Just shy of two years into the age of commercial recreational cannabis sales in California, Somatik is struggling to turn a profit, Schroeder told Cannabis Now in a recent interview. The problem isn’t the buying public, who like infused coffee beans and drinks as much as they did in 2017. Somatik’s problem is the same problem negatively affecting almost every cannabis company in California, the country’s oldest and largest market: the taxes are just too damn high and getting higher.
Crying poverty and decrying the government’s cut is an ancient ritual in American business, but in Somatik’s case, it’s hard to argue with the math. The company’s glass jars of cold brew and chocolate or coffee bites are meant to sell for between $8 and $24 at the dispensary retail counter. But because the company “works hard to source only organic, above-fair trade ingredients,” Schroeder said, “we already have a slim margin on product we bring to market.”
Consumers are currently paying $11 for a bottle of cold brew that generates only 90 cents of profit for Somatik, he said — meaning there really isn’t anywhere along the supply chain Somatik can make a further efficiency in order to generate more profit.
“At this moment, the state makes almost top line tax on each unit as a small brand like mine makes to produce, sell, and distribute it,” Schroeder said. “We don’t think we’ll survive a tax increase.”
And comes now the state of California, asking for more. The state Department of Taxation and Finance recently adjusted both cultivation taxes as well as the estimate used to generate the 15% excise tax mandated by Prop. 64, the legalization initiative approved at the November 2016 ballot.
The end result will be more taxes, at a time when it is near-universally recognized that California’s cannabis taxes are too high and are perpetuating the underground market. Consumers have so far demonstrated an affinity for lower-priced products, even if that means a compromise on quality or a devil’s bargain with product safety.
But unlike cannabis flower or even vaporizer cartridges, the underground market is not known for high-end edibles made with coffee roasters or chocolatiers recognizable from “normie” brands. If Somatik and its ilk go out of business, it will be the end of high-end edibles. And that’s the way things are headed: California tax collectors are simply taking too big a cut for businesses to remain viable.
Even before the tax increase, legalization’s attendant regulations have hit edibles particularly hard. Legalization came with strict new limits on dosage sizes, packaging and labeling. Edibles-makers had to move to licensed and permitted commercial kitchens. These were hard to find, and expensive to rent when they were found. Multiple respected and award-winning brands from the medical-cannabis era (Auntie Dolores, RIP) went out of business.
Somatik survived, but the company’s initial offerings — an eight-ounce bottle of coffee with 15 milligrams of THC — were replaced by smaller editions: four ounces, with 10 milligrams, priced roughly the same but at a much smaller profit margin. Now that that margin is shrinking even further, the brand’s future is in serious jeopardy, a parable of how to kill success with regulation.
“I used to sell a high dose bottle for $6, people would pay $12, and everybody was happy,” Schroeder said. “Then I had to move to lower doses for compliance and then things got tricky.”
“I don’t think customers realize they are paying a 24% tax on cannabis plus sales tax plus often times a local tax. When voters legalized cannabis no one thought they authorizing a 31+% increase on the price of cannabis which is why it’s so obvious that the illicit market is thriving.”
“I never thought someone would say we’ve won multiple state awards, gotten great press, make awesome high quality medicine and still struggle to make ends meet due to state legislation that was meant to legalize,” Schroeder said.
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