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City Council keeps number of dispensaries at five, for now

After hearing testimony from local cannabis retailers who say sales have been dropping, the Merced City Council voted on Monday night to maintain the current number of dispensary permits available in town — which stands at five.

The decision, however, was on a split 4-3 vote with Council members Jesse Ornelas, Fue Xiong and Shane Smith voting NO. It also came with a stipulation that the Council can consider a permit expansion a year from now, perhaps after another review of the industry.

In a related move, the Council did unanimously approve a modification to the city cannabis ordinance to allow consideration of alternative sites for applications under appeal, as well as include “local ownership” requirements for future retail permits.

Last March — during the final go-ahead of issuing Merced’s fifth retail cannabis permit and the denial of an appeal from one company who was competing for it — the City Council asked staff to come up with ideas to modify the existing cannabis ordinance with options to include more permits.

In June, the Planning Commission voted unanimously to approve the staff’s proposed amendment. During the public hearing, a cannabis group known as Jiva Life submitted a letter and left two voicemails supporting an increase in retail permits to 6 or 7.

When the proposed modifications came to the City Council on Monday night, leaders were met with strong concerns from existing cannabis store representatives.

One local manager who spoke up informed the council that her company’s sales were sliding drastically — down 33 percent in 2021-22, and a possible drop of 50 percent in 2023.

“The industry is going through a correction,” said Natasha Parra, the district manager for Blue Fire in Merced. “During this time, cities have seen revenue drop. Some cities attempt to increase the amount of dispensaries in an effort to increase revenue. It has had an adverse reaction — 100 percent of the time. It doesn’t increase the city’s customers or the consumption rate. It only increases the competition which reduces the prices, and has already drastically reduced city revenue.”

A couple lawyers speaking on behalf of the local retailers repeated the argument for the Council to consider: increasing the number of dispensaries at this time would start price wars, reduce overall sales, and negatively impact the existing business climate. They also pointed out that there was no clear reason to expand the local retail cannabis industry based on value for consumers.

A slim majority of Council members agreed.

“I don’t want to negatively impact the local business owners that we currently have,” said Bertha Perez, the mayor pro tem. “Hearing your [business owners] testimony really makes a difference.”

Said Councilwoman Sarah Boyle: “Increasing the permits doesn’t make a lot of sense right now, especially for those who have spoken tonight, and have invested a lot in our town, and the ones [with permits] that haven’t even opened yet. We don’t even know the true numbers, and by opening up to 10, it’s just the ratio of people per dispensary within our city limits, it just doesn’t make sense for us to that.”

Other Council members suggested the city not interfere so much in the market, and let it decide the demand. Council member Jesse Ornelas said he was OK with the city allowing up to 10 cannabis retail permits, but he thought if approved, only a couple more new business applications would come through.

“I don’t like the fact of government overreach in regard to businesses,” Ornelas stated. “We don’t do this to any other type of business. We don’t stop car washes from building more car washes. Right? We don’t stop coffee shops from building more coffee shops. … There was a lot of cool data from people who came forward, but the data was biased. It’s from people who don’t want competition. I want to see where this goes. I don’t think it’s going to be doomsday for the cannabis industry.”

One local lady who spoke during public testimony, but didn’t give her name, said she went around to local “smoke and vape” shops (not cannabis dispensaries) and purchased a box full of “hemp-derived” cannabis products. She said she wasn’t asked for an ID, and she said many of the products were from a company that aims to gain a cannabis retail permit from the city.

“Its actually illegal, according to California AB45, to sell any inhalable hemp product,” the woman said. “So just bear in mind that they are already selling cannabis in the city of Merced.”

The city’s zoning ordinance dates back to 2018. Basically, both retail (dispensaries) and non-retail uses (cultivation, distribution, and laboratory testing) require a commercial cannabis business permit reviewed and approved by the Planning Commission.

Dispensaries are the only cannabis use that has a merit-based approval system with a maximum number of permits (originally 4) citywide. Other cannabis uses are reviewed individually with no maximum number of permits.

In 2021, the cannabis ordinance was amended to allow a 5th retail permit which eventually resulted in the 2022-23 approval process of  “Culture Merced” at 1111 Motel Drive — the former location of the old Sir James Restaurant and Kewl Kats nightclub. The site requires remodeling work, and the proposed cannabis store has yet to be opened.

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