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Massachusetts Dispensary Analysis

On January 31st, Massachusetts released its list of approved medical marijuana dispensaries. The top 20 qualifying companies made it through generally by involving some teams of “heavy hitters” and ample capital. For example, former Congressman Barney Frank and Boston philanthropist Howard Kessler are involved with dispensary New England Treatment Access, or NETA, according to its application.

And NETA is throwing around big money, in its own words a “substantial investment:” $4 million to build cultivation and dispensary sites and another $5 million to fund operating losses until the business breaks even (including $130k for a parking lot!). Heck, they are even working with the electric utility to upgrade the local power substation in order to deliver more electricity to NETA’s cultivation facility. Massachusetts’ selection committee of experts give points based on each applicant’s business experience, public health, security operations, and a host of other variables. Even then, NETA was only ranked #2 among the approved applicants. Top honors goes to a group called Medical Marijuana of Massachusetts (or “MMM,” scored 160/163 of possible points) backed by a group of ophthalmologists and an experienced grower from Cali.

The industry isn’t for the faint of heart. MMM, which got approval for 2 dispensaries, also has big bucks and expects to spend about $1.4 million building each dispensary and another $1.1 million to cover the first year of losses. Each MMM dispensary is expected to reach ~1500 patients, or 1/3 of marijuana buyers in the area, and book $3.5 million in revenue for the first year (mostly sales in the 3.5g and 7g sizes).

NETA, on the other hand, believes its dispensary can reach 2000 patients, or 50% of local marijuana buyers, in the first year and book $11.9 million of revenue profitably by end of 2015 (representing 2400 lbs). They expect revenues will ramp to a healthy $23 million by 2016 (4800 lbs). Price is such that they are assuming they will make on average $4800 per lb, reaching a peak patient population of 4000 in 2016. Monthly consumption assumes 1.6 ounces per patient per month (based on CO experience). What NETA has to its advantage, and it comes down to knowing the right people, is that they are bringing Rocky Mountain Remedies co-founder Kevin Fisher, who runs a 20,000 sq ft site in CO, to run their growing operations along with his team.

Of course, the top notch quality and first class service are not cheap, and NETA won’t be ill-equipped given it deep pocketed backer and experience.

One interesting contrast between these two top potential dispensaries is that MMM projects 2.3 patient visits per year while NETA assumes 2.5 patient visits PER MONTH. There are limitations on purchase amounts, but the 2.3 per year MMM is using sounds low while the 2.5 per month by NETA may be normal to slightly high. In any case, time will tell who is more correct, but nevertheless these assumptions are crucial to both companies’ finances and abilities to scale upwards. If the “patients” don’t come, no marijuana will be bought.

In the next few posts, we look forward to bringing you a more detailed coverage regarding the strengths seen in Massachusetts’ top-ranked applications, as well as aspects to avoid from those who failed to make the cut.

What Cannabis Commoditization Means

In the wise words of Wikipedia, commodities are a class of goods for which there is demand, but which is supplied without a qualitative differentiation across a market.  Apples, rice, oil, and wheat are all commodities— products that we consume, for which we can’t really justify different prices between them. Is marijuana a commodity? Maybe not fully, yet… but let’s analyze it further.

If I live in a country where apple growing is highly regulated, and I’m one of the few apple growers, I can charge a premium and make high profit margins. As regulations are scaled back, more people realize entering the industry is viable and more competitors sprout up. They start charging less for their product in order to remain competitive, and in return I have to as well.

Commoditization is occurring— everyone’s growing apples now, and my product isn’t differentiable. Unless I can grow an apple that no one else can grow, I cannot justify charging higher premiums. Sure, I can offer organic apples or even apple pie (think: edibles), but guess what? Anyone can offer those too. Low margins mean only one thing: marijuana will be a numbers game. Over the years, the truly successful businesses will be those that can sustainably service and retain a large clientele.

Studies show that if the U.S. completely legalized cannabis, marijuana could be grown for $10 dollars a pound—that’s 62 cents per ounce, or 2 cents per gram. Think mass production on the scale of Big Tobacco. Right now, high-end strains sell for $50-70 a quarter ounce, and experts estimate that with widespread legalization prices could drop to as little as $3 per ounce. Uruguay, the state sells the cannabis at only $1 per gram. While making $50-70 a quarter ounce might sound significant, you need to understand that roughly a third of that can go to taxes, another third to production costs, and what’s left of the other third would be your gross profit, as a few very successful dispensaries have been able to report.

In Colorado and Washington, many businesses have had low single-digit profit margins  (grocery stores on average have 20% margins) and many have even failed – an estimated 40% of cannabis businesses in Colorado founded in 2010 failed by 2013.  As time passes and more states begin legalizing marijuana, better prepared and equipped groups will start competing fiercely in the industry, and margins will only continue to decrease. Back in 2010, an eight in Colorado was $50, today it’s around $25.

Furthermore, growing is very expensive; mold, pest, and mildew can destroy entire crops. Good growers are in high demand and can leave you at any point to join a more profitable business. You may get drowned in legal fees if authorities decide to pick on you. All these cases can result in hefty one-time expenses/losses of income that, without the proper existing capitalization, a low-margin business might not be able to withstand.

We are not trying to dissuade you from entering the industry, we are just trying to give you a realistic view of what you should take under consideration before acting. If you are serious about becoming a cannabis businessman, you need to understand it will not be easy. To be successful, you need to ensure that you work with a group of competent people who, just like you, must thoroughly know the dynamics of the industry and of the growing process, while offering a product of consistent high-quality. Care and caution are in order, but you should not be afraid. As Andrew Carnegie said, “anything in life worth having is worth working for.”


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We aim to be the leading industry source of business analysis and research. We not only report on important and granular industry trends and the business of growing and selling—we’ll tell you what it means too.

The Cannabis Analyst has worked in private equity, investment banking,  engineering, and management consulting. We have a profound appreciation for business-building and possess in-depth industry acumen. We’ll help our readers become the pioneers of this exciting, emerging industry in a responsible, legal, and, importantly, profitable manner. We want to expose to you the critical components of the business and help you capitalizable on fast shifting industry opportunities. There are no secrets.

We look forward to sharing our insight with you.

-Cannabis Analysts