Marijuana is a multibillion dollar business in the U.S. alone. Every year, the industry rakes in tons of money from both recreational and medical sales. More importantly, the official sales numbers do not even reflect the black market. So why are so many companies struggling? Wasn’t legal marijuana supposed to be a commercial boom?
It was not that long ago when self-proclaimed experts were telling entrepreneurs to get into marijuana. After all, there were fortunes to be made. Some entrepreneurs who didn’t get in early have done quite well for themselves. And of course, cannabis companies with corporate backing are making money, too. But a lot of smaller, independent businesses that were not among the first to dive in are struggling to survive.
So what’s the deal? It isn’t just one thing, and conditions differ from state to state. So perhaps rather than trying to pinpoint one or two things, it is better to look at all the factors that impact marijuana and its success.
1. State Regulations
State regulations always impact business. The particular industry or sector doesn’t matter. In the marijuana industry, regulatory control has been pretty inconsistent. Take New York. The state legalized recreational marijuana before creating a regulatory framework to manage it. In between legalization and actual implementation, the black market was able to flood unlicensed dispensaries with cheap product. Legal stores have been unable to compete ever since.
Not all regulation is bad, by the way. Utah is extremely strict about the number of licenses it issues to medical cannabis dispensary. In fact, Pure Utah says there are only 15 licensed medical dispensaries in Utah. Those 15 serve nearly 70,000 patients. There is enough business to go around.
2. Market Saturation
Speaking of Utah’s limited pharmacy licenses, there is a measurable benefit to the limited license approach. It prevents market saturation. In Oklahoma, there are no limits on pharmacy and dispensary licenses. As such, there are thousands of operators across the state. Market saturation forces heavy price competition. In turn, this competition makes it tough for operators to meet their margins.
Similar situations exist in states where there are few limits on growing. Too many growers in a given market put downward pressure on prices. And when prices get too low, profits suffer.
3. Indoor Grows Are Expensive
Adding insult to injury are the growing methods cultivators choose. Cultivators focused on indoor grows over outdoor counterparts when marijuana was still considered a nascent industry. The thinking at the time was that indoor grows could produce a higher quality plant thanks to the tight control of everything. Few people dispute that. But indoor cultivation is extremely expensive.
Plants grown indoors can cost many times more than those grown outdoors. That is one reason black marketeers in California do so well. They can grow outdoors at a fraction of the cost. That means they can sell cheaply, too. Indoor cultivators just cannot compete.
4. Punitive Taxation
Speaking of California, cannabis entrepreneurs in the Golden State (and a few others) are dying under the weight of punitive taxation. California lawmakers have never met a tax they didn’t like. Marijuana taxes are so heavy that California producers cannot compete with the black market. They have been begging lawmakers for relief for years.
The fact that so many cannabis businesses are struggling should not be a surprise. It is par for the course whenever a new industry first explodes. Everything will level out over time, and the industry will self-correct eventually. This is no comfort to struggling businesses, but it is the nature of the beast.