Start up of cannabis industry has posed challenges for small operators

Jan. 3—MADRID — It was 11 a.m. on a recent Sunday at what Cid Isbell calls the "best little weed shop in New Mexico."

Isbell, co-owner of the shop, opened the doors to CannaBliss, housed in an old miner's shack on the main drag of the village of Madrid, waiting for his first customers.

The place has a homey, welcoming feel.

Isbell, in his mid-50s, loves his work at CannaBliss, a second career after he toiled for years as an information technology expert. In the IT world, "you rarely have happy people," he said. "But here — people are happy to be in a weed shop."

He said the shop has grossed about $279,000 in sales, including non-cannabis products, since recreational cannabis became legal for adults 21 and over in April.

It's not a lot of money when you consider the costs to run a cannabis retail business, Isbell said. His plans to grow his own cannabis have stalled due to easement issues at a nearby property, forcing him to contract with a grower and reducing his profit margin.

There are other challenges for small cannabis operators in New Mexico, many of whom are feeling a sense of what could be called struggling optimism in a new $40 million-a-month industry that immediately was dominated by large established growers, manufacturers and retailers that had long operated under the state's Medical Cannabis Program.

Some new operators spoke of problems obtaining building leases or navigating local zoning rules. Others may be stumbling with poor business plans in a competitive industry that could quickly become oversaturated with dispensaries, as well as unexpected wait times to receive licenses and difficulty accessing water rights for production, said Ben Lewinger, president of the New Mexico Cannabis Chamber of Commerce.

Banks will not provide loans to cannabis businesses because the plant remains illegal on the federal level. Isbell said that has forced him to rely on investors who charge interest rates between 25% and 30%.

"It's kind of like going to a loan shark," he said.

"This last year has been a challenging year in terms of raising money. We've hit some roadblocks out there."

He's also expecting a federal tax hit in early 2023 because cannabis operations cannot deduct most expenses, such as rent, in their IRS filings.

"I am concerned about that," Isbell wrote in an email. "We can file an extension if necessary, which would give us the summer to make money, but we will pay penalties."

'There's definitely going to be closures'

As of mid-December, the state Cannabis Control Division has authorized just over 1,800 licenses for producers, manufacturers, couriers, testing labs, retailers and others involved in the industry. More than 550 cannabis dispensaries are open, a number some industry insiders and experts say could be more than the market will support.

"There's definitely going to be closures," said Duke Rodriguez, president and CEO of New Mexico Top Organics-Ultra Health, the state's largest cannabis company. "The big guys will not be the first ones to pull that lever. The smaller businesses are going to be the ones who fall."

It's tough to say if any have fallen so far. The Cannabis Control Division does not track business closures, said acting Director Andrew Vallejos.

The first indications of whether some business owners will fold are likely to come in the first quarter of 2023, when the state marks the one-year anniversary of issuing its first cannabis licenses.

"We may be able to get some information from people who don't renew licenses," Vallejos said.

Municipalities don't necessarily track closures, either.

Santa Fe City Clerk Kristine Bustos-Milhelcic said the only way officials would know if someone has closed a business is if the owner informed the city.

Lewinger, from the Cannabis Chamber of Commerce, said he has not yet heard of any closures.

"I have heard stories of people being surprised at certain types of expenses, like paying several months of rent on a lease without being able to open" because of challenges posed by local regulations, he said.

Industry newcomers have to learn to budget for delays and other difficult-to-predict obstacles, he added.

A good business plan can make all the difference in a field still being tested for durability, Lewinger said. But he also noted competition with large cannabis companies may not be the reason smaller operations fail.

"This is a highly competitive industry, and like any other industry, the businesses that are successful will be successful because of something creative they did and not because of the [legacy] industries that existed before they came in," he said.

However, some people expressed concern that large legacy operators, most of which had a head start while providing medical cannabis under the program that predates the legalization of recreational use — may swallow up newer, smaller players.

"It's something that is going to happen," said Matt Muñoz, one of the founders of Albuquerque-based Carver Family Farms and a board member of the New Mexico Independent Cannabis Association. "It's a natural progression of this market for some of these small companies to get bought up by the bigger companies."

Ultra Health's Rodriguez said it's already happening.

A smaller legacy operator and four new independent operators have approached him to see if he wants to buy them out, he said, adding his company will opt to acquire businesses if it fits into its plan to expand into specific areas of the state.

"If we saw an opportunity in the South Valley [of Albuquerque], we would look at it," he said. "Santa Fe? That's oversaturated."

Striving to find a niche

Lewinger, Muñoz and Vallejos all agree on one thing: Small cannabis operators must stamp their business with a mark of originality, high-quality product, small-time charm or anything else that makes them stand out.

Many retailers, producers, would-be producers and manufacturers indicate that's what they are doing.

But it's still not easy.

Their stories are somewhat similar.

Many came into the industry from other backgrounds — finance, advising, construction, mining — hoping to find an anchor spot in a promising new market. They emphasize they are local people who want to offer more personalized service and one-of-a-kind products.

One business owner in Farmington came up with an idea to market cannabis creamer. "We sold out the first few batches, and we're making more," said Gregory Hill, co-owner of THe alChemist LLC.

Another plus for his business: a cannabis courier's license. He runs the only cannabis delivery service in Farmington.

He faced no obstacles from state or local officials in getting his company started in mid-May, Hill said.

He would not discuss financial details but said he is at least breaking even. He believes his family-run business, located in an old drugstore dating back a century or so, may be able to expand and flourish as it produces and manufactures more cannabis, and he's looking for investors to help with the growth.

"We have about 15 or 20 stores wanting our product," he said.

While he doesn't have the "deep pockets" of the larger cannabis operations, he is earning the loyalty of his customers, who have about a "65 to 70% return rate" in his store, Hill said.

The advantage of being an independent operator, he said, is simple: his wife, son and daughter work in the store.

"There's nothing more important than family," he said. "Having us together is number one for us."

A retailer in White Rock has a cannabis consumption license — one of only 10 approved so far statewide — and opened a shop that offers coffee, tea and food.

"I have a crowd that comes in just for pastry and tea," said Christa Tyler, co-owner of 420 TeaTime. "About one-third do that and about two-thirds come for cannabis."

She envisions the consumption lounge offering live jazz music, games and movie screenings. She wants to make it the social hub of a small town where a lot of people say, "There's nothing to do up here."

She's had her share of challenges, and finding investors was one of them. Her first business partner backed out of the deal, her landlord insisted on a five-year lease when she wanted to commit to just three years and the state delayed her consumption license, which cost her a couple of months of business, she said.

She refinanced her house, maxed out her credit card, scrapped together money from other sources and opened in September.

Four months in, she said it's all worth it.

"We have our own wonderland," Tyler said. "My dream is definitely coming true. When I'm not there, I want to be there."

Others are getting by on luck, pluck and connections, like Jeffrey Rodriguez, a U.S. Army veteran-turned-construction contractor who runs Sierra Madre Med Rec LLC in Taos.

A lawyer friend negotiated contracts for him at no cost, his landlord is giving him a break on rent for the first year, and friends and thrift stores helped him furnish his shop. Friends in the construction industry helped him remodel his facility.

The rent deal required him to open in a space far from the main strip of Taos — where many cannabis shops are thriving, Rodriguez said: "I constantly run into people at the gas station who don't even know we're here."

Staging concerts and classic car shows has helped draw people to his off-the-beaten-path shop on Paseo del Pueblo Sur.

Rodriguez's initial investment was just $22,000. "If you find someone else who beats that, let me know," he said with a laugh.

He's pulling in $20,000 to $30,000 a month, he said — enough to keep the doors open — and he hopes business will pick up during the ski season.

Rodriguez is hopeful one minute, realistic the next.

He plans to continue operating his business at least another year. "If I'm not making money by the end of next year, then something is wrong, and I'm apparently in the wrong business," he said.

If he strikes out, he added, he will return to contracting.

Meanwhile in Madrid, Cid Isbell said he's sticking it out for the sheer joy.

"I love being here," he said as the CannaBliss shop dog, Millie, pestered patrons for petting. "I go to the store every day, and I love this world. I get to do what I love — interact with people, enhance their enjoyment of life, sell them things that help them sleep at night. I don't want to be anywhere else."

But he, too, is realistic.

"We need to make a little bit more money to make it profitable," he said.