For Cannabis Entrepreneurs, Industry Expansion Brings Growing Pains

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A young plant in one of the grow rooms at the 3DMMC medical marijuana dispensary in Denver, Colo. (photo: Siemond …

Don’t be fooled: The marijuana business is hard work. 

Sure, the drug is now legal for adult use in the states of Washington and Colorado, and is available on a medicinal basis in 15 others, but that hasn’t made things much easier for the small-business owners that grow and sell the herb.

In fact, their jobs are only getting tougher. Increased competition, spiraling costs and continued regulatory uncertainty are just a few of the problems that dispensary owners now face. Add to that the fact that cannabis prices have fallen by as much as 75 percent in the past three years, and you’ve got a market that’s ripe for upheaval. 

 

“Looking back, I probably wouldn’t do it again,” says Toni Fox, owner of the 3DMMC medical marijuana dispensary in Denver, Colo. “I’m operating on margins where I’m basically breaking even every month. I have to make $1,000 a day to cover my overhead at this facility, and I see between 25 and 30 people a day and that’s about what my average sale is, so on a dailybasis I’m just barely covering my overhead.”

3DMMC operates out of a 10,000-square-foot warehouse and retail space on the city’s north side. She’s paying $10,000 a month in rent, another $3,500 a month in electricity to support her on-site cannabis growing operation and currently has just two full-time employees on staff. When her 7,000-square-foot hydroponic addition opens this summer it will add another $6,000 to her monthly rent.

Challenges abound

It wasn’t supposed to be this way. When Fox first got into the business, in 2010, medical marijuana was widely expected to become Colorado’s next cash crop, a simple business with an all but unlimited market of potential customers. Pent up demand was thought to be through the roof.

But with legalization came problems for small dispensaries. The market quickly flooded – there are now more than 100 dispensaries in the city of Denver alone – and, with a limited customer base of about 100,000 legal medical marijuana users statewide, prices plunged. An ounce of marijuana that once cost about $400 on the black market could now be had, 100 percent legally, for $100. Newspaper advertisements and billboards sprang up all over town: Any strain, $150. This week only: $75 an ounce.

For Fox, these prices knocked her down before she even got off the ground.

“When we did our business model, I was anticipating $400 ounces,” she says, “so pretty much the day I opened the doors, the retail price of my product plummeted 50 percent. From day one my margins were 50 percent of what I thought they would be, and every day is a struggle because prices continue to drop and the competition continues to increase.”



The great, green contraction

 

And Fox is far from alone. According to a recent report published by The Denver Post, the Colorado retail marijuana industry has shrunk by about 40 percent since 2010, to just 675 dispensaries statewide. That’s down from a high of 1,117.

 

The culprit? A mix of contradictory state and federal regulations, obscure business requirements, and a maze of compliance standards that keep dispensary owners jumping through hoops. Not only must operators manufacture and prepare most of what they sell, they have to maintain a roster of certified patients for whom they can grow (the allotment is usually capped at six plants per patient), and they still face limitations on where they can be physically located (away from schools and daycare centers). And, of course, they’ll need to be able to pay for all of this themselves, because federal drug laws mean that most banks still won’t work with them – that means no lines of credit, no payroll services, not even a basic checking account. Operators can’t even deduct dispensary expenses on their business income taxes.

Add to this the everyday pressures of running a small business and it’s no wonder that operators are having trouble.

“There is consolidation in the market that is going on as businesses come together and weed out the weaker players,” says Robert Frichtel, managing partner of the Colorado Springs, Colo.-based Medical Marijuana Business Exchange. “And the reason why they might be weak could be geographical, it could be that their market is small, it could be how they originally rolled out their operations, or it could be how they are managing just normal business operations."

A clearer picture

Fortunately for Fox and other independent dispensary owners, the regulatory side of the business is starting to come into focus. The State of Colorado’s Amendment 64 Implementation Task Force concluded its work at the end of February and presented Governor John Hickenlooper with a list of policy recommendations for the new adult-use marijuana industry, ranging from a 15 percent excise tax on recreational cannabis to a special sales tax on recreational purchases. The task force also backed efforts to limit “stoned driving,” supported sales to non-Colorado residents and suggested sticking with many of the regulations that are currently in place for the medical side of the industry.

It remains to be seen what will happen next in an industry that still has many hazy features.

The first new, recreational dispensaries are expected to begin opening in Colorado in December of 2013. Will across-the-board legalization for adults 21 and over create a healthy market for cannabis or will conglomerates eventually force out the independents? Let us know what you think in the comment section below.

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