As the industry changes, legacy cannabis operators in New Mexico shut down and downsize

Sep. 20—Zeke Shortes walks into a small building in Albuquerque on Tuesday, leading to a room that up until last month housed a Sacred Garden dispensary.

The glass cases that displayed cannabis products were empty. Customers and workers are nowhere to be seen.

Soon, other Sacred Garden stores will follow suit. The company, which has dispensaries across the state, is shutting down after more than a decade in business.

Sacred Garden — one of nearly three dozen legacy operators that got their start in the medical marijuana program — is not alone in feeling the pain.

Ultra Health, once the king of cannabis in New Mexico, has downsized the number of stores by close to 20% over the past year. And Minerva Canna, which has been in operation for more than a decade like Sacred Garden, is also closing its business next month.

The problems are a result of what some legacy cannabis operators say are a high number of licenses — leading to a saturated market — and a lack of enforcement from regulators of the industry.

In the new age of recreational cannabis, lines have been redrawn — and it's pushing some out.

"I just feel so burned by the state and the industry," said Shortes, 53. "You can do things the right way. You can do things efficiently and effectively. You can reward or punish people in certain ways, and they didn't. ... They choose incompetence and meanness over anything else."

A 'race to the bottom'

Erik Briones, owner of Minerva Canna, remembers the early days of the medical marijuana program. His company was one of the first in the state to get its license, serving a small number of medical cannabis patients over a decade ago.

Briones still has the first dollar bill he made from the first sale in 2011, which was a gram of cannabis flower to a patient for $11.

The company early on, like other legacy operators, would deliver cannabis to patients. Briones opened his first dispensary in 2013 on Fourth Street, a small but humble shop that eventually moved next door into a larger space that offered more services to the state's patients.

Seeing the opportunity for growth in the much smaller medical industry, Minerva Canna eventually opened shops in Los Lunas, Bernalillo, Santa Fe and Las Vegas. He opened just one more shop as recreational sales were underway in 2022, a shop in Downtown Santa Fe "really just to cater to tourists."

Before recreational sales, licenses were limited and Minerva was competing with a select group of legacy operators serving the state's tens of thousands of patients, allowing his company the opportunity to expand.

Those same companies are now up against a much larger fight, as the state boasts some 696 operational dispensaries as of August, according to state data compiled by Bill Sluben of The Data Heard.

Figures from the Cannabis Control Division, which regulates the state's cannabis industry, show more than 1,000 retail licenses have been handed out as of early September. The figures also show more than 400 producers, 676 micro-producers and 900 manufacturers across New Mexico.

For comparison, Colorado, which has more than double the population of New Mexico, had some 903 retail operators as of June, according to the state's Marijuana Enforcement Division.

"There's too many testing facilities; there's too many manufacturing people — everybody's making a gummy, Briones said. "It's just ridiculous how many licenses are out there, and nobody's making any money. Everybody's just kind of hanging on."

Sluben, who hosts monthly reviews for sales in New Mexico's cannabis industry, which have gained notoriety amongst entrepreneurs, said the influx of new shops has led to stagnated growth for legacy operators.

In August, legacy operators made up roughly 30% of storefronts that reported recreational cannabis sales across the state, compared to about 43% in January 2023, according to his data.

Still, the closing of businesses like Minerva Canna and Sacred Garden, Sluben said, comes as newer businesses are finding ways to find success in a rapidly evolving market.

Oasis Cannabis Co., for instance, has performed well as its stores continue to bring in some of the most revenue in the state, which Sluben says is driven by abundant product diversity, perhaps at the tradeoff of thinner retail margins.

"If you think about it, the medical patient comes to you and now that whole relationship gets flipped," Sluben said. "Now you have to go pursue people to draw them in. ... It's a different mentality."

Briones, 63, said Minerva Canna "did not play in the race to the bottom with prices as fast as we should have," noting that he kept prices higher while others were going lower.

"We tried to hang on with really good-quality (products) that everybody knows and respects," Briones said. "But in order to survive in this market, you've got to be giving everything away because that's what everybody else is doing. ... Maybe we didn't lower them fast enough and low enough to really stay competitive."

Losing market share, lack of enforcement

Duke Rodriguez's Ultra Health, at one point the largest operator in the state, is also downsizing its business.

The company has eliminated seven stores in the past 12 months, Rodriguez said, including this month a store in Los Lunas.

Also a legacy operator, Ultra Health at one point controlled about 100% of the market in certain towns across the state, like Alamogordo, which is now down below 20% as more shops continue to open.

In Ruidoso, where Rodriguez closed down a shop in mid-August, a combination of fire and floods over the past couple of years has been a devastating blow to business. But so too has the overflow of shops in the area — a town he said boasts a high number of dispensaries despite a rather small population and slowed tourism.

"It's been nothing less than devastating," Rodriguez said. "With each new competitor, each of them took a bite out of our business. When one or two or even three or four new arrivals came in, the bites were not so large that it altered our trajectory much. But in a town like Ruidoso, where you gained 15 to 20 new competitors, the math doesn't work anymore."

Like Briones and Shortes, Rodriguez blames the lack of a limit on licenses — which have swelled to over 3,000 across different categories — and enforcement by state regulators, which he said has also helped grow the illicit market.

"You can't distinguish between who has a license and who doesn't," Rodriguez said. "It creates more than a Wild West environment; it creates what I consider a market of impunity."

Shortes called the compounding problems of licensing and the illicit market a "one-two punch to anyone trying to do it the right way."

"First, they give away unlimited licenses and make it dilute the market so much that everybody is struggling, and prices are lower than I can produce stuff right now," he said "And then two, if you don't enforce the regulations, and only the legacy producers are having to follow the rules, all these other jokers (that) just started up don't really have anything to lose."

Asked how the Cannabis Control Division has enforced rules and regulations since recreational sales began, spokesperson Andrea Brown said the division has issued 33 notices of contemplated action and revoked nine licenses against cannabis operators.

Brown also also told the Journal the state division has a dozen compliance officers, nine of whom are "in the field performing general facility inspections and three (that) rotate in and out and work directly with licensees to gather necessary information to bring them back into compliance and close out inspections when violations are found."

"We will continue to work with lawmakers to revise the Cannabis Regulation Act as industry needs evolve, including discussing adding language that would give the CCD the ability to seize, embargo and destroy illicit and illegal cannabis products when found," she said.

Either way, what Shortes and Rodriguez call the lack of enforcement has led to the demise of some businesses, including theirs, they said.

Shortes said he knew about a year-and-a-half ago that Sacred Garden was faltering. He decided in January not to pay sales, cannabis excise, and state and federal income taxes that amount to about $1.6 million.

"I'm going to be left holding the bag on this," he said. "I'm going to have to deal with tax people for probably a year to two years."

Both Briones and Shortes have plans to sell off certain assets to other companies, though both declined to name the companies.

Asked how he feels about his business shutting down in October, Briones took a bit of a different tone.

"I think that we helped a lot of people. ... We've had a great ride," he said. "I'm proud of it, and I'm sorry that it has disintegrated to the point that it has not only for us but for everybody that has been a legacy company because I think it's just really unfair.

"As legacy companies, we are the ones that built this cannabis industry in New Mexico. We fought hard for it on really every level, and we're just getting squeezed out."