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CANNABIS ANALYSTS

The authority when it comes to analyzing the cannabis industry

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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