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CANNABIS ANALYSTS

The authority when it comes to analyzing the cannabis industry

Competitor Facing Strategies: Understanding Where You Stand

Cannabis Analysts Throwback – this was originally posted on May 5, 2014 

There are many attributes that go into planning a dispensary: ensuring product excellence, hiring the right people, increasing productivity, financial forecasts – but what about having the proper strategy to tackle your market? We don’t mean just any strategy, but a competitor-facing strategy to win market share. Your dispensary will be up against large, well-backed, deep-pocketed enterprises that are spending $2MM-$10MM to open retail and cultivation facilities. There will most likely be several of these multi-million dollar dispensaries near yours. Some of your competitors will even have strong medical and political connections.

Just like with a strong army, a strong company can use its power to stay on top, with more resources devoted to developing products and keeping prices down. Playing the defensive position would also be insufficient as you stand vulnerable to being inundated by a much larger force, even if they are in a neighboring county.

You are in a creative industry that caters to the minds of medical patients and (eventually) consumers. There is no creativity in outspending your opponents; you need intelligence, imagination and nerve. Managers and entrepreneurs cannot become shortsighted, absorbed by finances and daily sales, while the competition thinks long term and stays focused on products. Here are a few thoughts you should keep in mind when formulating your strategy:

1) Determine Your Starting Point: A good strategy starts with an evaluation of the nature of the challenge, simplifying the complexity of reality, and identifying the most critical aspects of the current situation. Survey your competitors, the closest 3-4 dispensaries around you. Visit their stores. How large is their retail space? How many strains do they offer? What types of patients visit (gender, class, etc)? How inviting is the facade? How many pounds do you think they move each month? Is there room for them to expand? Local market intelligence is key– stay on top of changes– the more dynamic the situation the poorer your foresight will be. Visit dispensaries in another state and talk to their managers, if possible; learn about their experience.

2) Share Your Insights In A Blog: the industry is still young and thought leaders are needed; many tech startup founders have blogs that both explain and advertise their ideas and creations to the world. Running a business can be difficult and managing different strains tedious, but customers are now plugged in as ever to the web. It’s a white space out there, dictate the terms of the conversation and help fill it. Those with the knowledge but not the power to clearly express themselves might as well have no ideas.

3) Apple Store Appeal: remember how enticing and welcoming an Apple store is? Invest in cleanliness, sharp and able employees, and clear product display cases. Also, it may be unprofessional to allow employees to use marijuana on the job: think how you’d feel if all the Apple store employees were constantly texting on their iPhones.

We’ll return to the broader concept of strategy and marketing later on. Avoid fluff, muddled or sloppy thinking. Define the challenge to be addressed and don’t declare objectives while disregarding the means for achieving them. Any broader plan is determined by where you start, and many are unaware of just how much is going on in their current situations.

MassRoots – A Social Platform for Cannabis, But Is It Another MySpace?

Boasting over 1 million users, MassRoots (or “MSRT”) is one of the hottest cannabis social networks out there, and functions as a platform with capabilities similar to those of Instagram and Yelp where users can post marijuana-related pictures & videos and local businesses can advertise their goods and services. The app and website have come a long way since MassRoots’ inception in 2014. Overcoming numerous obstacles (e.g. the difficulties of obtaining funding due industry’s nature, being banned from app stores, etc.), MSRT has made great strides since having only 100K users in early 2014, constantly and consistently improving, and has been on a fundraising tear having recently raised over $7 million of fresh capital since October last year (when cash in the bank dipped to a paltry $126k). Yet while we are excited about the industry’s overall prospects, we believe the marijuana industry is not yet ready for social sharing of cannabis consumption, due to the fact that people are not yet comfortable posing with a still federally illegal substance. As a result, the social network effects won’t take root with MassRoots.

First, the positives. The legal cannabis market is expected to grow to ~$24 billion by 2025 according to New Frontier Data, a projection that assumes no new states will pass legalization legislations. And there are numerous exciting ongoing developments for cannabis social networks. MassRoots was recently approved for listing on Google Play, opening up the android market again after a compliance review, and is set to imminently launch a revamped website and app. MassRoots also plans to provide a business portal that will consolidate many online marketing functions for cannabis-related businesses in one central platform. When medical cannabis becomes legal in a state, MassRoots expands into it, gaining new social and business users.

Yet, cannabis social networks are stuck in low gear (and at an early stage), and won’t change unless there is more comfort surrounding marijuana usage. The main reservation we have about MSRT is that with the federal illegality of cannabis still being the strong status quo, users do not yet feel comfortable fully portraying themselves and their colleagues in the cannabis related content they publish. Simply open the app and you will see the lack of diversity in posted content where pictures are often close up shots of different strains of marijuana or smoking materials, all of which can get boring quickly. Mediums like Instagram has a wider and richer diversity of pictures. Some of the pictures on MassRoots are not necessarily visually appealing either, like a quick snapshot of an edible item or a pipe, and can be of low quality. Social networks rely on having a critical mass: because MassRoots cannot be downloaded in states without legal medicinal (or recreational) marijuana, there are challenges to it achieving viral customer growth. 

For a variety of additional reasons, we think Massroots will have limited traction:

  • Dispensary visits by customers are often done discretely: as a result, the creative potential of MassRoots’s user base is limited and you won’t find too many pictures of people out on cannabis adventures and activities. This is a fundamental characteristic of a social network that is lacking in MassRoots (or very weak). 
  • Illegal use mode as network for banned activity (such as finding black-market dealers through use of app): the only legal venues for marijuana purchase are licensed dispensaries or caregivers in accordance with state regulations. Simply look through the comment sections of a few pictures and you might come across the contact information of black-market cannabis dealers trying to get referrals. While the company has made initiatives to combat this, it is difficult to moderate this kind of behavior, and it can continue to drive MassRoots into legal gray issues. NASDAQ cited this as one of the main reasons denying MassRoots a listing on the exchange.
  • Sharp slowdown in user growth: it took MassRoots 8.5 months to get their last 100k users (bringing them to over 1 million total users as of March 20, 2017). It took them a little less than 4 months to go from 800k to 900k users and 2 months to go from 600k to 700k, so the trend is one of decelerating growth. We find this a bit surprising given the backdrop of the large amount of publicity surrounding the very successful marijuana referendums in November; that publicity has not translated to faster user growth. Might this be because most people are already familiar with the products in available markets and excitement for the app is waning? Why doesn’t Massroots share more relevant figures measuring the amount of its users’ engagement, such as the number of active users who have logged on over the past month, a metric frequently used to measure internet traffic?

 

Non-social platforms like Leafly are substantially more popular, with more than 8.4k ratings in Apple’s App Store (11.4k for Weedmaps) compared to 1.5k ratings for MassRoots. While the App Store does not release number of downloads, sites such as SensorTower have estimated that Leafly and Weedmaps have received 5-10x more downloads and do not restrict user access based on location (both Leafly and Weedmaps allow downloads in any state but MassRoots only allows downloads if the user’s state has legalized marijuana).

MassRoots had to reduce headcount by ~30% and cut salaries in Q3 2016 because of lack of profitability, noting in their filings that their accounting firm “has expressed doubt about our ability to continue as a going concern” (read: the business needs to raise money or will go out of business; fortunately it was able to raise money). If implementing marijuana rules gets delayed in the handful of states that legalized it in November, advertising revenue and user growth may slow further for MassRoots. And while we are confident there will be space for successful cannabis social media networks, we aren’t yet MSRT believers or sure MSRT will be the winner. Clearly the first mover advantage MassRoots has in social media is very valuable, and we would like to say that no matter what, they will continue to grow along with the industry but…remember MySpace? MySpace investors could have reaped a massive payday, being invested in one of the first and, at one point, largest social networks by user count. Yet it wasn’t until Facebook came along and played its cards right (both in designing the proper social network and then later transitioning to mobile) that the true market bore fruit. Is MassRoots just another MySpace?

Marijuana Real Estate: Innovative Industrial Properties (NYSE: IIPR) Profile

We think it may be helpful to examine how some successful businesses are targeting niche areas of the marijuana industry, and how that may shed light on the business conditions for our readers. So we’re profiling Innovative Industrial Properties today (or “IIPR,” its stock ticker). IIPR, which focuses on acquiring undervalued and distressed properties (mainly large buildings, 25,000 to 150,000 sq ft in size) and leasing them to growers of medical marijuana, was the first publicly listed cannabis real estate business and raised about $67 million of cash when it debuted late last year.

What few have pointed out is that IIPR is founded by Alan D. Gold, a 30-year veteran of the real estate industry who successfully sold his last real estate company  (founded 20 years ago) for almost $8 billion. His last business, Biomed Realty, shares some similarities to IIPR:  Biomed specializes in real estate for the medical/life science industry (think labs and offices) and grew from 30 properties to over 196 properties and nearly 19 million sq ft of rentable space under his able guidance. Such life science real estate, like cannabis grow facilities, has unique and specialized uses and is outside the scope of many commercial developers.

Fast forward to today, IIPR is operating with almost no competition in its niche area of acquiring real estate for cannabis use. Both its scale (transactions in the size of $5-$30 million as stated in its prospectus) and management depth have no equals in the marijuana industry. Banks are unlikely to finance real estate purchases and so far a few private buyers and private pools of capital have provided real estate financing, with growers needing precious capital to build out other portions of their operations.

IIPR bought its first property in late December  paying $30 million for three new buildings constructed by PharmaCann, the licensed medical marijuana dispensary with 4 locations in New York State.  PharmaCann in turn owes IIPR more than $5 million of rent per year. PharmaCann will use the $30 million proceeds to build out its growth operations in the sold properties, fund loses (like paying such rent), and for other business needs. IIPR in turn has about $2 million of overhead salary costs per year (Mr. Gold’s annual salary is a whopping $600k, based on its latest government filing), which doesn’t factor in dead deal costs or other costs associated with due diligence and acquiring properties.

While we like the IIPR and what it’s doing, there are a few issues with actually investing in the stock. First, there is 1 million shares reserved for incentivizing the management team. While those shares have not been distributed, that is in relation to a total of 3.35 million shares outstanding, so anyone who buys could be substantially diluted by the company (~25% reduction). Second, because there are limited cannabis properties of this size, and there are other firms looking to also purchase real estate (albeit without as much capital as IIPR), IIPR may find itself chomping away at an even smaller pool of properties which we estimate to be not more than $200-$300 million of annual transactions. As IIPR notes: “we will be competing to acquire real estate with persons who have no interest in the cannabis industry, but have identified value in a piece of real estate that we may be interested in acquiring.” Now there are quite a few posers in the industry, but some of the competition is very real and have been quite acquisitive over the past year (such as MJ Real Estate). Third, as IIPR finds more properties, it will need to issue more stock to raise funds to purchase its targeted properties. After the IPO, IIPR has about $35 million of cash and realistically can deploy about $30-$35 million this year. IIPR has a pipeline of almost $90 million worth of identified properties. While it is unlikely IIPR will be able to close on all its targets in its present pipeline, IIPR’s market capitalization is $60 million so raising even $15 million of equity to fund these acquisitions could be quite dilute shareholders. Typically real estate transactions are financed with a mixture of debt and equity (Biomed’s purchase price included about 40% of debt), but given it is difficult for marijuana real estate businesses to borrow from banks (and one of the key reasons companies like IIPR exist), IIPR will have to tap the equity markets. With low interest rates, equity is rather expensive.

And lastly, New York State has been a notoriously difficult place to conduct business for dispensaries (recreational use has not been approved yet). There are 849 practitioners available in New York State to recommend marijuana and only 13,389 patients have been certified as of early February, which translates to less than an average of 20 patients per practitioner. In other states this ratio is considerably higher by several multiples. The existing five medical dispensaries are not profitable, so there is a degree of customer risk. Medical-use cannabis sales in New York were around $33 million in 2016. Several other restrictions abound such as the ban on edibles, a conservative state legislature which may not be the most receptive to working with established (and law abiding) cannabis firms, and lack of familiarity with the medical marijuana system. For the reasons above, New York is not a state we particularly like, or recommend, for new entrepreneurs; the biggest obstacle is the shift in attitude required from its medical community/practitioners to open up the door for patients in need. Even in states such as Colorado surveys have found doctors are still hesitant in recommending marijuana. Naturally, some of the sick in New York who are in the addressable market for PharmaCann might move to neighboring states like Massachusetts with bigger programs.

As a result, a worst case scenario would be that IIPR gets stuck with a property that doesn’t generate rent and one that probably cannot be easily sold either.

Disclaimer: The opinions stated are Cannabis Analysts’ only. We do not hold any securities nor do we have any business relationship with the companies mentioned in this article and are not being paid by any party for the words stated herein.  

Thank You For Your Support: 2016

The team here at Cannabis Analysts would like to thank you for all your support this year and wish you a Merry Christmas! We will continue to strive to provide you with the most timely and actionable information on the cannabis industry, and be the authority when it comes to analyzing the cannabis industry.

2016 has been a hectic year, and the industry is on an irreversible path. California, Nevada, Maine, and Massachusetts legalized recreational marijuana and we believe that no matter what Washington does (or who is President), these decisions cannot be reversed. Progress may be slow, but progress will occur. Here’s to a great 2017 and have a Happy New Year’s!

– Cannabis Analysts

Florida Legalization Developments

Since November 9th, the medical marijuana business community is starting to mobilize in Florida. By the time the laws have come in effect for a year, sales by year end 2018 are expected to be in the $200M range, and projected to grow more than eightfold to $1.6B by 2020. Established businesses from across the country are investing in real estate, start-ups are springing up in the state, lawyers and consultants are developing relationships, and the hype keeps on increasing. On the radio (as heard earlier today), there are even ads inviting everyone to get their medical patient cards at block parties already!

When talking to industry insiders, however, the uncertainty factor is still evident. The duty of setting up regulations for cultivation & distribution rests within Florida’s Department of Health, and some important points have already been established:

  • ID cards will start being given out no later than September 2017, an important decree as it’s taken two years for Florida’s Charlotte Web access cards to become a reality, establishing a clear milestone for when patients will be able to begin getting their treatment
  • Amendment 2 does not currently give patients the power to grow flower on their own—they will depend on dispensaries (or “Compassion Centers”) for the medicine

Currently, there are six nurseries licensed in the state. But even then, Florida has not yet fully defined who will be able to grow and sell. We believe the demand will outstrip the supply these dispensaries will be able to provide initially as FL favors a more tightly regulated, limited market. Therefore, at some point the state will likely have to approve more Compassion Centers—and open up the market to more than just a few well-capitalized players (we’d hope). But if FL keeps the market’s players limited and only focuses on the already-approved entities, or even bring some of the growing and distribution operations under the state’s jurisdiction, a significant black market will remain in place. Several issues, we expect, will also be resolved in upcoming legislative meetings from January to March 2017; significant uncertainty over where opportunity will be available will be reduced and we will learn who will be the permit holders.

We have also seen numerous local governments establish moratoriums to gain more time to establish a variety of guidelines, principally dealing with zoning. These generally take six months to complete. Low doctor participation rates, at least initially, in the medical marijuana program are also a possibility, so we hope the state government will encourage the medical community to accept and engage in the program by simplifying access to marijuana and solidifying the new status quo.

At the end of the day, legislation is in the works at the state level, and at the local level governments are figuring out how to deal with a now legal substance. While some cities, especially those that are more family and community-centered, are opting to keep dispensaries secluded to more isolated industrial areas, overall we recognize state and local municipalities favor the opportunity that will come with implementation and the subsequent growth of the industry. We are confident Florida will be witness to many exciting developments over the next few months and are especially excited to see what the market will look like in 2018 as traction begins picking up and as more and more opportunities arise.

Clean Sweep for 2016 Recreational Legalization

Yes, we said it, we are predicting a clean sweep of recreational marijuana legalization in the five states that have it on their ballot this upcoming Tuesday. Recent polls conducted in September and October show several states are more ahead of others, and most surpassing that critical 50% support threshold:

Marijuana Legalization Opinion

California, well within the the error-margin range, is the clear favorite in terms of “Yes” votes (as surveyed by UC Berkeley’s poll from a week ago). On the other hand, Nevada probably has the most uncertainty. We are slightly more confident in the outcome because of several readings from prediction markets, which determine the probability of passage based on bets from the public (of Question 2, in NV’s case). For example, PredictIt indicates an 85% chance that Nevada will pass Question 2, in line with Maine’s prediction of 86% as of this Sunday. Prediction markets are not always right and can certainly be swayed by individuals and organizations pumping money to prop up these statistics (and likely has more younger participants betting than senior citizens, a population overwhelmingly in support of legalization). However, the accuracy of prediction markets has been shown to be a better predictor of the actual outcome than any other means (including surveys of experts or pundits as well as polls), so we stand by what we see from the data there: a clean sweep.

Overall, we are very optimistic about the results we’ll see this week. Medical marijuana has been legal in California for 20 years and polls show a near 60% agreement on passage. Once passed, it is unlikely to be repealed in the future, although implementation can have its own can of worms. The overwhelming direction as seen in the below chart from Gallup data is irrefutable evidence of people’s comfort with mary jane: a short ten years has increased marijuana legalization support by nearly 70% with the biggest wave of support coming from the 18-34 year age group.

Legalization Views by Age

There are a few states in the throes of medicinal marijuana legalization, like our home state of Florida. Some of those initiatives may not pass the vote on Tuesday, such as Arkansas. But there’s good evidence that marijuana’s improved recreational or medicinal status has been good to the economies of states that have legalized it in some form.

With more adoption comes increased comfort in dealing with this drug, and with more comfort people will increasingly recognize how benign, beneficial and beautiful marijuana can be.

How to Start A Dispensary Series Part II: Income Statement and COGS

This is part of an ongoing series where we explore detailed costs for starting a dispensary, from the equipment costs you should expect to the financial metrics that go into the income statement.

We base this on information we have as we come across many business plans and dispensary applications. Today, we explore the cost side (COGS which are variable costs and SG&A which is more of fixed costs).

This analysis is independent of the size of the business and mainly is a checklist of all the important income statement costs that goes into a fully functioning dispensary. To be sure, these are based on actual figures in business plans and what some dispensaries have spent.

Cost of Goods Sold (or COGS): These are items tied directly to the cultivation, processing, and manufacturing (in case of edibles) of your final product. COGS do not involve salaries paid to management, insurance, and other fixed costs mentioned in the next section, and is commonly called variable costs as these are more a function of sales volumes (like cost of cultivated plants is proportional to cost of seeds).

  1. Third-party quality testing and lab quality control (QC) testing
  2. Rent for cultivation/processing square footage
  3. Production costs and inputs such as nutrients, fertilizer, seeds, etc.
  4. Other professional services
  5. Security monitoring for cultivation/processing area
  6. Sanitation/janitorial services
  7. Cannabis supplies: used/consumed in growing and for retail sales, includes packaging, sales, cultivation supplies
  8. Inventory tracking (if annual subscription based)
  9. Transportation
  10. Utilities tied to growth/processing
  11. Insurance (general liability) for cultivation area

Aside from payroll, you will need to spend on the following items which are broadly classified as sales, general and administrative costs (known as SG&A, estimates are annual amounts): these costs are exactly as the term suggests and relate to the overhead necessary to run a business such as marketing and administrative, and not tied to the actual production of the goods sold. SG&A are also more commonly associated with fixed costs, which do not change much as business scales (to a degree).

  1. Consultants for operational support/training
  2. Office supplies/expenses
  3. Utilities for non-cultivation/processing areas, includes waste disposal and other contract services, water, telecom, etc. ($40k-$200k)
  4. Insurance: general liability ($35k-$45k), director and officers (legal action brought for alleged wrongful acts from directors/officers of company), automobile insurance, and general product liability and property insurance
  5. Ongoing security systems/personnel/monitoring costs ($40k-$70k). May include recurring seed-to-sale tracking costs not included in COGS
  6. Rent per square foot can range from $5-$15 per foot with pricing escalators
  7. Charitable contributions/community donations for goodwill (discretionary)
  8. Legal and accounting:  bookkeeping, tax payment and proper accounting
  9. Compliance and annual inspection/license renewal costs
  10. Training and onboarding new employees (there will be some attrition among budtenders and staff)
  11. Advertising and marketing (~1-2% of revenues)

In a retail or start-up environment, some of these costs may overlap. For example a store manager may be involved with retail sales and also perform administrative functions or help with advertising/marketing and wear other hats, so the cost categorization is not iron-clad, especially for small entrepreneurial businesses. That said, COGS and SG&A are well known and well used financial terms (for example, the profit after you subtract COGS from revenues is known as the gross profit or gross margin) that any business owner needs to understand and be fluent in.

A proper understanding of costs is especially if you want to compare profitability across stores/geographies of your business and determining where the highest returns are. This allows for more apples-to-apples comparisons by ensuring you are comparing profitability according to the same defined yardstick.

How to Start A Dispensary Series Part I: Capex and Equipment Costs

This is part of an ongoing series where we explore detailed costs for starting a dispensary, from the equipment costs you should expect to the financial metrics that go into the income statement.

We base this analysis on information we collect across a variety of business plans and dispensary applications as well as public information. Today, we explore capital expenses necessary for building a vertically integrated dispensary (with cultivation/processing), which will be more costly than having only a dispensary or only providing cultivation. Controlling your supply chain is important because you also control your quality and quantity, and states like California allow for such vertical integration. Leasing a bigger area may also be beneficial given the possibility for expansion. In terms of assumptions, this analysis assumes that the dispensary portion is roughly ~3,000 sq ft and the cultivation and processing area is roughly ~15,000 sq ft for a total of 18,000 sq ft (we have seen spaces ranging from as low as 3,000 sq ft to a monstrous 60,000 sq ft retail/growth/processing area). The estimates below are split out into three sections: A) Permits/Inspections and Business Incorporation: these are all the necessary legal and regulatory legwork you have to do, from getting proper permits/zoning in place as well as properly designing your facilities; B) Capex for Build-Out: includes start up costs related to new construction, renovations, installing security systems, and other space improvements; C) Equipment Costs: everything you need to grow, process and sell your product.

While the following items are estimates, they are based on actual figures coming from business plans and dispensary expenditure information.

A) Permits/Inspections and Business Incorporation

  • Proof of liquid funds in a bank account (varies based on state/application process)
  • Architectural design of cultivation/processing facility ($30k-$60k)
  • Building permit for build-out of facilities ($5k-$10k), mostly zoning and engineering related, and/or environmental survey (~$5k). Will need to survey and measure location perimeter to ensure building lots are beyond minimal clearances to schools/residences based on state laws
  • Public health review of architecture (for medical)
  • Security audit/inspection and design for site grounds, perimeters and facilities ($2k-$5k)
  • Legal incorporation of business ($15k-$50k); includes preparing governing documents, applications, operations manuals, employee handbooks, interfacing with zoning and engineering firms, preparing employment agreements and navigating banking relationships
  • Site clean-up and preparation if using existing facility ($0k-$30k;, this includes removing interior offices/walls, gutting, and preparing space for dispensary/cultivation
  • All in total of ~$65k-$180k. On average these pre-build-out planning associated costs have been in the $100k range (at minimum).

B) Capital Expenditures for Build-Out

  • Build-out of dispensary and cultivation/processing spaces ($150k-$400k). Includes all dispensary, cultivation, processing, vault and storage rooms. The large variation is due to how extensive, and intensive, the build-out will be and whether one is targeting a dispensary operation by itself or a vertically integrated business with growth and processing
  • Space improvements including finishing/painting, kitchen, office space, bathrooms, etc. ($50k-$225k)
  • Additional construction costs including painting and finishes ($50k-$375k)
  • Security system including multiple camera feeds and metal/weapons detectors ($50k-$120k)
  • Parking facility ($10k-$25k), include resurfacing and lighting of patient and staff parking areas
  • Guardhouse/gate facility and/or perimeter boundary fencing, if necessary ($50k-$95k)
  • Also potential upgrade cost the electricity usage requires an increase in the power supply from nearby substation. We have seen a handful of dispensaries budget such a cost and would require working with the local utility and an engineering firm
  • All in built-out cost of ~$360k-$1.1MM; on average, costs have come in around $450k-$775k from what we have seen

C) Equipment Costs

  • Delivery vehicles ($15k-$25k each) or $45k if using SUV
  • Cultivation and processing equipment including grow lights, CO2 generators ($10k each), trimming machine ($15k each), HVAC system (one of the largest equipment costs, ~$80k), control systems, irrigation, pots, nutrients and other supplies (total $120k-$200k). Non-safety upgrades, such as backup power capacity, fans, eye wash and cleaning station, and a reverse osmosis machine
  • Commercial kitchen, ventilation and extractors for processing cannabis or preparing infused products (total $100k-$250k). This includes stove tops/ovens and stainless steel countertops for processing sales and decarboxylation of cannabis flower beds (required pre-processing)
  • Computer equipment/tracking software, including $8k point-of-sale/inventory system with initial hardware for tracking plant, plant to weight, weight to inventory, sale to depleted inventory ratios (total $10k-$20k)
  • Furniture, flooring, safe, other misc. items (total $10k-$85k)
  • All in total of ~$255k-$585k with average equipment costs of around $500k. That said, some companies have chosen to lease this equipment (similar to taking out mortgage to buy a house) so you don’t pay the full amount in the case of buying.

As mentioned, these costs are associated with an 18,000 sq ft dispensary/cultivation and processing center, which is fairly sizable and probably bigger than what most entrepreneurs would want to start out with. And given the rough prices estimates, this might sound like an odd-against venture. But one may also not need the bells and whistles (such as a guardhouse) if one is only retail or plans to operate within a larger, protected space. Still the market is young, and having built out space to expand may end up proving highly beneficial.

Colorado Infused Edibles Space

Since legalization came aboard in Colorado over two years ago, the infused edibles space of the marijuana industry has seen great strides, especially considering all the initial hurdles it experienced from a safety & regulatory standpoint. First of all, edibles—chocolate bars, gummy & chewy candy, cookies—used to come in appealing-to-the-eye packaging that unsuspecting children would not hesitate to consume. Furthermore, the onset of the industry also saw that very frequently, the THC content readings on edibles were not very accurate– studies showed that the actual THC content on products differed substantially from advertised amounts. In addition, the snack size and packaging of these products might make people logically see edibles as single-serving treats, while in reality they might have multiple, causing consumers to accidentally ingest higher doses of THC than desired. Would you eat a small Hershey-sized bar in 8 sittings? Along with the fact that THC is absorbed significantly more slowly by ingesting edibles than by other means of consumption (making these slightly more dangerous due to their unpredictability), these factors caused initial strong opposition to edibles.

These concerns led Colorado authorities to quickly and efficiently draft new regulations, such as laws requiring the number of servings (each serving is 10 mg of THC) to be displayed on packages. Stricter packaging and labeling requirements have been established, making edibles more easily recognizable by the public. Edibles can now contain no more than 100mg of THC and must be wrapped individually, or be split into clearly-defined portions with no more than one serving. Anecdotal lab tests have shown that THC content advertised in edibles has become more accurate 2015 over 2014 , with most experts agreeing that a 10-20% shortfall compared to advertised THC amount is acceptable, and we believe edibles manufacturers will continue to improve. We are impressed by these rapid legislative and commercial responses, and we believe they will only allow the continued growth in the edibles space to remain steady.

Colorado Edibles

The growth in the CO edible space has been remarkable. Please note that here, we are not analyzing non-edible products such as infused beverages. A total 4.8 million units of edibles were sold in 2014 in the retail and medical spaces combined. Moving forward to 2015, CO saw over 5 million units of edibles sold by August, and while we don’t yet have edibles sales data for the last quarter, we expect that close to 8 million units of edibles were sold during the entire year—that’s nearly a 70% increase year over year in the edible space’s volume handled.

This growth was made possible by the growth of the retail space. Given the less “invasive” nature of edibles where one simply eats a savory treat, as opposed to smoking which can be a bit more daunting to new users and can still cause a range of respiratory and other issues to those who are more experienced, we assumed a bit more growth would have been observed in the medical space. Nevertheless, that same aspect, as well as the fact that edibles normally produce a stronger and longer high, helped the impressive growth in the retail edible space.

A total 2.9 million retail edible units were sold during 2014. In 2015, that number was overcome by July, and we expect around between 5.5 and 6.0 million units to have been sold for the full year— the retail market volume doubled year over year! While we expect the medical space to remain moving around 190,000 units per month, we are excited to see what the retail space has in store for us during 2016. As more regulation and spectacular sales data continues to solidify the outlook of the Colorado edible space, we look forward to examining the development of the space across different states, and advise you to get a piece of the pie—or better said, cook it yourself— while you still can!

Colorado Retail & Medical Market Update

Over two years have passed since retail marijuana has been available for consumption in the state of Colorado, and the trends we see in the retail and medical markets are very interesting.

As shown in the above graph, within the CO commercial regulated system the volume of medical and retail sold marijuana has been increasing; since recreational cannabis became legal in January 2014 to the end of September 2015, over 116,000 pounds of retail cannabis have been sold, with the volume of flower sold increasing by over 900% from 1,000 pounds sold in January to 11,000 pounds sold in September.

While one could have guessed that the volume of flower sold in the recreational market would soon overtake that of the medical one, medical sales have also surged, increasing from 3,200 pounds in January 2014 to over 14,100 pounds in September 2015 and supplying a total of 220,000 pounds of flower. That’s more than the weight of 20 elephants! The gap between medical and retail sales has been narrowing: since the beginning of 2014, medical market marijuana volume was 6.0x that of retail volumes but during the first three quarters of 2015 medical market volumes was a more modest 1.4x that of retail. We believe this medical-to-retail ratio of flower sold will continue to decline slightly in 2016, but we don’t anticipate it to change significantly or fall lower than 1.0x – there are incentives that will keep medical volumes up because for those with registration cards, it’s often cheaper, one can obtain up to two ounces as opposed to one ounce in the recreational market, and registry cards can be obtained by people under 21.

While we believe the volume gap will continue to close slightly, the total growth in the overall volume of the market is evident, increasing 75% in 2015 over 2014. From a revenue perspective, total sales in 2015 were upwards of $1B, with $600MM coming from retail sales and $400MM from medical, over 40% more than 2014’s $700M in total sales. Although retail marijuana brings in higher revenues, do not forget that the majority of marijuana is still sold in the medical market, which will just as well continue to offer all sorts of opportunities to be exploited as it keeps on expanding (e.g. cannabis testing, security, delivery, glass piece manufacturing, etc).