The authority when it comes to analyzing the cannabis industry

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.  

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.

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).

March 2016 Update

After a break from the blogosphere due to numerous long term projects (that are wrapping up), Cannabis Analysts is very pleased to announce that we are back to providing cutting edge analysis here, free and accessible to the public. After receiving feedback from our clients and readers, we will be providing up-to-date analysis as states, dispensaries, investors and other participants in the cannabis markets release data. Below are additional services we have rolled out, and please do not hesitate to contact us should there be anything you’d like to know or suggest. We welcome all inquiries:

  • Business plan review: more and more entrepreneurs are entering the cannabis space, from dispensaries to distributors to edible providers. Applications for permits are growing. If you would like us to take a look at a business plan or application you plan to submit, please reach out to us.
  • Addition of graphs and visuals: more and more data is made available by regulatory bodies and industry groups. We will seek to find meaningful and actionable data to present to help you.
  • Tips and insights: if you have an anonymous tip or insight you would like us to know, or anything you would like us to look into, please also reach out to us. We will keep all communication confidential.

We are excited about the plethora of activity and development on the cannabis front. Across the United States legalization is gaining acceptance, conferences have sprouted up in all major cities to involve the public and further connect stakeholders, and benefits from the industry are being felt throughout areas where it’s allowed; we could not be more thrilled, and we look forward to sharing our insights and services with you as you explore this field full of opportunities.

Denver Dispensary Visits – UPDATED

Cannabis Analysts recently visited a dozen Denver dispensaries to better understand the shifting competitive dynamics. We witnessed several dynamics at work: wait times, branding, service, discounts and quality. Many facilities offered roughly 10-15 strains on the recreational side and far more on the medical side. The most impressive facilities offered both.

It was highly surprising to us that closer partnerships between doctors and dispensaries did not exist. We believe the industry needs to invite doctors to legitimate “lunch-and-learn” sessions to help improve awareness and perhaps offer some incentives for sending patients along. The big dispensaries may have contacts with doctors but a more structured and targeted approach is needed. The business aspect of the industry is for the most part healthy.

Pricing is fairly consistent, about $40-$50 per eighth for the flower. On the recreational side, a dispensary can see several hundred people per day who buy anywhere from a joint to an ounce, repeat visits also widely range from once a week to once in several weeks. Some of the dispensaries said about 150-200 people visit on the recreational side per day. Most places offer the same recreational strains. On the medical side, a dispensary with 35-50 patients equates to doing well. These patients buy more and on a more consistent basis, and it’s no surprise the selection is better (sometimes 2-3x more strains to choose from compared to rec).

There remains a general secrecy among some marijuana users. One dispensary employee noted that most of her customers didn’t want it to be known that they visit dispensaries. As a result they don’t mention other stores they may have visited.

Cannabis Analysts was impressed by a number of very clean, well lit stores with young, hip and clear spoken employees. Coupons in papers can drive visits, but they might be used to drive traffic (for cheap varieties). There may be a stronger movement towards closer partnerships with doctors – several of the medical-only dispensaries lacked a clear marketing target towards prescribing physicians or had informal at best relationships with less than a handful. We see this as a major hurdle in states trying to implement medical dispensaries. Doctors are largely ignorant to the benefits of marijuana (and some may be vehemently opposed) and which strains are best prescribed for what ailments. There is a clear need to get the word out.

Several Denver dispensaries really wowed us with their quality and inviting atmosphere, that puts the visitor at ease immediately upon entering. These stores are not targeted towards generating the highest volumes but ensuring quality NEVER drops. Quality is first and foremost. Most people know which dispensaries these are.

Most of the competitive dynamics center around cannabis quality, service, location, discounts and to some extent branding. Most are thinly staffed with total of 1-2 employees including a receptionist. Opening times also vary, while closing time (7 PM mandated) is largely consistent. Some stores open at 8 AM and others are 10 AM.

Overall it is a simple business with a complex backdrop of legal and regulatory work, preparation, service understanding, and inventory management.

Elasticity of Marijuana Demand

The elasticity of a product gauges how likely people are to keep on buying as its price changes. If the price of soda increases by 10% but its demand decreases by less than 10%, it’s inelastic— the increase in price isn’t completely offset  by the loss in demand. Conversely, if demand decreases by more than 10%, demand is elastic.

Many studies have been carried out since the 70s, and for the most part, they find marijuana demand is inelastic. These studies make various assumptions and their results should be taken with a grain of salt, but as more marijuana is sold in approved dispensaries and reliable data becomes available, credence should be given to these relatively consistent results. One of the most recent studies claims that, with an elasticity demand between -0.3 and -0.6, “the demand for marijuana appears relatively insensitive to price changes.” This is equivalent to saying that with a 10% increase in general prices, demand would drop between 3% and 6%.

60% of the cannabis examined in the previous study was reported as being of high quality, 33% of medium quality, and 7% of low quality. What this implies is that quality matters extensively, and people are willing to pay a premium for high quality (or the perception of quality, given that classification may be fairly subjective). If the product you are selling is remarkable, market it as such and let people try it for themselves. After it an initial successful “try out” period, it might not be a bad idea to experiment with pricing increases— a single $1 increase on a $15 gram is a 7% revenue increase. Low and medium quality cannabis is more elastic than high quality one (low quality is a bit more inelastic than medium, interestingly), so raising their prices may bit more dangerous to your bottom line. It’s a better strategy to keep these varieties at “safer,” more stable prices and attempting to sell them in large quantities. For reference, Medicine Man charges 20% more for a gram of high quality cannabis than low quality ($17 vs $14; many dispensaries have 2 kinds of quality instead of 3 as the study.)

However, at the end of the day, you need to realize how closely these dynamics apply to your customer base. If your customers tend to be on the younger side, pricing might be more important to them as their income might be more restrictive, so you might want to focus on making special deals with low and medium quality cannabis. In CO you have dispensaries in the same geography charging significantly different prices, likely because they cater to different customers ($17/g  vs. $12/g). If your customers generally fall below poverty levels, perhaps offer them additional discounts. Several Massachusetts dispensaries have detailed “hardship” pricing programs in place especially if you have a medical condition. At the end of the day, medical dispensaries have to allow patients to affordably purchase medicine.

Knowing your customer base should always be a top priority, you are running a business to help them fulfill their needs, and knowing how to best cater to them will give you the necessary edge to bring back the clientele over and over.

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.”