Is the Legal Marijuana Industry Sustainable for Entrepreneurs? What You Need to Know
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Though it’s been a subject of ethical and political debate for decades in the United States, marijuana is facing a new kind of scrutiny. Consider that:
- More than 60 percent of Americans favor the full legalization of marijuana for adult consumption
- The majority of states allow at least some kind of marijuana use (including recreational use or the use of medical or low-THC varieties)
- 12 states plan to introduce new legislation this year to push for further legalization
The logical conclusion here is that marijuana has the potential to become a massive industry. And demand seems ample, since 52 percent of adults have smoked it at least once, according to surveys. So, it's no surprise that many investors and entrepreneurs believe that legal marijuana poses an enormously profitable business opportunity.
But are cannabis businesses also scalable and sustainable? Or is this industry a short-term fad with limited profit margins? If you're looking at entrepreneurial opportunities, here are some of basics of what you need to know:
First, it pays to know the "seed to sale" process required to take marijuana from its seedling start to the customer stage. This is a process that now requires businesses, in California at least, to use a trace-and-track database. Such a database documents the path a cannabis product takes from growth to sale and provides transparency for and safety to customers. For more detail, Green Bud Initiatives, an investment cooperative that focuses on the farming end of production, has detailed the high-level process.
Modern growers also often use a “microgrow” approach, starting seeds in waves of production so there’s a constant turnover of new product. It takes about 120 days for a budding plant to grow to smokable size; but thanks to this rotational approach, growers can harvest 70 pounds of cannabis every 10 days.
From there, nurseries keep track of “mother” plants -- genetic clones designed to keep product quality consistent -- and replant the clones in small, humid rooms for cultivation. Grow rooms, designed to give just the right temperature, lighting, humidity and nutrients, then take the plants through their early stages of growth.
Once they're mature, they’re dried, cured and trimmed by hand. Workers separate different components of the plant for different purposes, then box them up and send them to dispensaries and other companies.
Because the process is intensive and specialized, and because many of the stages are done by hand, scaling often means a proportionate increase in costs. Producing more plants means more space, more utility expenditures, more equipment and more employees to do the work. This makes it difficult to scale in a way that increases profit margins.
Speaking of profit margins, let’s explore how profitable a marijuana dispensary can be. According to Marijuana Business Daily’s 2016 Marijuana Factbook, the average marijuana dispensary or recreational store brings in about $974 in annual revenue per square foot, putting it on par with (of all places) a Whole Foods store. That makes it capable of generating far more revenue than a department store (at $180 per square foot), but far less than a luxury store (like an Apple store, at $4,799 per square foot). That’s a drop from the industry’s per square foot revenue projection, back in 2014, of $3,500 to $5,000.
The same factbook reported that 41 percent of dispensaries and stores surveyed considered themselves to be “modestly profitable,” with 18 percent claiming to be “very profitable,” 29 percent “breaking even” and 11 percent “losing some money.”
These numbers were also down from earlier projections; but wholesale cultivators have seen a brighter outcome: they've reported higher profits, with 29 percent reporting they have been “very profitable” and another 31 percent reporting that they have been “modestly profitable.”
Forecasts overall, meanwhile, remain optimistic. According to the fourth edition State of Legal Marijuana Markets Report (as reported by USA Today), legal marijuana sales are expected to hit more than $23 billion by 2020. Accordingly, entrepreneurs are expecting even more demand in the coming years.
Another important issue here is the possibility of shortages, which could make the industry much more complicated. Because the supply chain is new and limited (owing to its finite number of licenses and to other restrictions), California is expecting product shortages in the next few years.
For the short term, this could drive up both demand and profitability, but could also make it more difficult to enter the market. If prolonged, shortages could make it nearly impossible to introduce a new operation or grow an existing one unless you’re willing to experiment with a new approach.
The bottom line
So, is the marijuana industry a lucrative business opportunity? That depends on what you’re trying to do and how you’re doing it. Getting into the legal marijuana game isn’t a get-rich-quick scheme. Like any other business, legal marijuana entails many important fundamentals you have to learn before you can dive in.