The authority when it comes to analyzing the cannabis industry

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.

Competitor Facing Strategies: Understanding Where You Stand

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 (MMM in Massachusetts or this one in CT).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 let employees 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.

Revenue – Cost Analysis Part I

We have to thank the State of Massachusetts for making such a wealth of information available to us– we love analyzing it. Let’s take a look at revenues. Basically, the vast majority of MA dispensaries used Colorado’s and California’s historical data to help justify their revenue projections. These projections are required in the applications as part of the business plan.

We examined the top 20 dispensaries with the highest quality business applications that were successful in obtaining licenses. During the first year, they expect to have average revenues of $4.3M per dispensary (with a median of $3.7M). The highest revenue-earning dispensary is New England Treatment Access, of Norfolk county, with an outstanding first year revenue of $11.9M based on 2,000 patients visiting and purchasing an average of 1.6 oz per month. On average, first year expenses are $4.4M, resulting in an average expected net loss of $100k per dispensary. Roughly half of the dispensaries we examined expect net losses in the first year. However, the second operating year is accompanied by very significant revenue growth and lower cost growth, because most of the start-up expenses are incurred within the first year.

For the second year, dispensaries expect their revenues to increase on average ~100% from the first year– that’s right, they expect to double their revenues to $8.5M. The main rationale behind this increase is increasing market penetration: dispensaries expect to go from roughly 50% patient penetration in the first year to almost 100% penetration of the local addressable market (i.e. # patients in county). This also assumes that every patient who needs medical marijuana will eventually purchase it legally from a dispensary. This is true especially as consumption spreads and doctors become more comfortable prescribing cannabis treatment, a story and growth trajectory that has proven true in CO and CA.

On the other hand, costs in year two are only expected to increase by 60% to an average of $7.0M, resulting in an average profit of $1.5M or a profit margin of 18%. During the 3rd and last year of available projections, revenues per dispensary are expected to increase on average 24% to $10.5M, and costs increasing 14% to $8M. Earnings on average rises to $2.5M, a 23% profit margin.

What do you think? Are these growth rates too bullish? Not every state is like CA or CO, only time will tell and growth rates are heavily dependent on number of addressable patients, frequency of visits, and average purchase size. On the profit side, several adjacent industries are more profitable. Look at the e-cigarette business in Oklahoma, a mere $50K initial investment might result in $400K revenue for a single shop. Nevertheless, remember: dispensaries are nonprofit – at the end of the day, your goal is to help those who are ill in the best manner possible, so use those profits to reinvest in your business and beat the competition for the long-term! The most important thing to remember is you’re in it for the marathon, running the first mile may be tough, but there’s 25 more to go!

Ingredients for Approval

As we noted in the MA Dispensary Analysis post, the Massachusetts government has made getting into the industry a serious business process that requires deep pockets from in-state residents. Meticulous protocols and procedures are required (though for some, the steep barrier to get in has caused applicants to blatantly distort their applications). The MA application fee alone is $30K. Then, after approval, you have a $50K fee to register as a dispensary. There are several other requirements:

  • A Board of Directors
  • A believeable budget and three-year business plan
  • Be able to cater to medical needs first and foremost (e.g. offering discounts for patients in financial hardship)
  • Posses medical and business professionalism
  • Posses the clout and ability to work closely with the host communities
  • Posses Show a bank account with $500k cash in the name of the dispensary

The top ranked dispensary, Medical Marijuana of Massachusetts, which has not been accused of misrepresenting its application, is run by the Chief Operating Officer (COO) and the Chief Financial Officer (CFO) of the Ophthalmic Consultants of Boston . Rounding out the team is a former DEA agent, a 30-year veteran police officer, an ex-president of a substance abuse treatment center, and…well, you get the picture. They may not have experience growing, but they have been extensively “delivering the highest quality healthcare.” It looks great on paper, and the fawning authorities loved it.

Of course, a business in the industry requires a proper public relations plan: patient services, education, privacy— all are necessary. Also, working closely with existing medical service providers, like hospices and other patient support groups, demonstrates a dispensary’s ability to increase awareness. The professionalism should translate into proper office setting (e.g. no images of marijuana leaves on the wall), and in case things go wrong, MMM has liability insurance for $1MM of coverage (costing $165k per year).

It is also important to win approval from local authorities. MMM obtained letters of “non-opposition” from the City Council. In addition, it helps if you’ve been operating a medical practice for 30 years, as MMM’s principals have done. In fact, MMM was one of the few dispensary applicants that obtained a letter of support from town authorities (pg 23-24). We think there are three other important points to highlight:

A) Security: the application blacks out this portion but there is no doubt dispensaries should have armed guards, closed loop security cameras, limited visibility from the street, professional safes for cash storage, and collaboration with local police to ensure operational transparency. MMM’s dispensary will have bullet proof glass, too.

B) Well Compensated Staff: President, CFO and Chief Compliance Officer are paid $250k per year, Head of Cultivation coming in at $150k per year, Director of Security and Community Outreach Director paid $100k per year, etc. (page 34). Those are pretty high salaries!

C) Product Testing: MMM is using a top rated third-party marijuana testing service. This is important in ensuring proper quality. Because marijuana isn’t FDA approved (no inspectors will tour the growing facility), there is a significant business opportunity to provide an accepted seal of approval. Testing is a great recurring revenue business because every growing period, every batch needs to be certified.

Barriers are steep in MA, the steepest process out of any state going through marijuana legalization.  The costs (not the requirements) listed above are probably on the high end of what’s needed. Yet, other states that do not have a history of dispensaries may follow similar footsteps toward licensing. It’s not a bad idea to cover all your bases. And just like a pilot going through protocol prior to take-off, having a proper checklist will vastly improve your organization’s capability and probability towards approval.

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.

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.”


About Us

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