Small Businesses Face 6 Challenges in the Weed Market
There are many opportunities in the legal weed market but challenges abound for small businesses.
Succeeding as a small business in the legal weed market is challenging. From government regulations to technological advancements, small businesses find themselves facing more competition and growing expenses.
Here’s a look at some of the hurdles facing cannabis entrepreneurs in a growing but fiercely competitive weed market.
1. The weed market is unsettled.
Weed has been popular a lot longer than it has been legal. The shift from black market to a regulated legal market only started a few years ago. Adult use weed is only legal in 10 states and medical cannabis is still illegal in 17. Each state writes its own laws independent of every other state. Cannabis containing THC is federally illegal but the feds aren't enforcing against state-legal businesses, but strictly speaking they could decide to start. Hemp with just a trace of THC was made federally legal last December but is subject to regulations that the Department of Agriculture hasn't written yet. The biggest cannabis derived product on the market right now is CBD, which is legal but subject to regulations the FDA has said might take years to write.
In other words, the legalization process is far from complete and the market is turbulent, which takes a toll when you’re trying to survive as a small business. Small growers and retailers are the most affected by market instability.
Growers suffer when states do not limit the number of grow licenses they give out. A severe example is Oregon, where growers have enough weed harvested to supply their market for six years. The glut has crashed prices and the obvious solution -- export to states where weed is in demand -- is illegal because of federal law. States planning to legalize cannabis should avoid Oregon's mistake when designing their weed market.
Conversely, retailers suffer when there isn’t enough production to meet demand. The weed shortage in first days of legalization in Nevada was so severe the governor declared an emergency. No one benefits when dispensary shelves are empty or products are priced too high.
2. Priced out of expensive technology needed to compete.
Weed production once meant growing a few plants under LED lights in a basement. Now it is an industry. Canada, and increasingly the U.S., have their fair share of large-scale producers, a growing number of which are public companies with multiple grow licenses and massive facilities. They enjoy a set of mutually reinforcing advantages compared to smaller business.
They have better access to the capital needed to buy expensive grow equipment, so they can grow higher quality herb faster and cheaper. Thanks to automation they have lower overhead, so they can sell consistently high-quality product for less.
If it's tough to compete growing flower, what about cannabis oil? It is a very hot product well positioned to grow steadily in the next few years as vaping popularity outpaces smoking flower. However, producing cannabis is even more capital intensive than growing flower. Small businesses could miss out on this popular cannabis product because they cannot afford that extra step in production.
Staying competitive in today's weed market requires more capital. The legal adult-use weed market allows the companies that can afford it to obtain patents on technology and strains, but not every small company can. The cost of cannabis patents are another burden on small businesses competing with the giants entering the weed industry.
For years in the black market, anyone could breed any cannabis strain but nobody could patent any of it because it was all illegal. Growers today, and especially big producers, are trying to control cannabis strains and technology through patents. By contrast, smaller businesses do not necessarily have the funds, time or organization to successfully file a cannabis patent.
3. Weed market regulations are tough to navigate.
Weed market regulations today are stringent and ever-evolving. Operating legally requires staying on top of regulations, a time consuming and often costly task.
For starters, regulations require that cannabis businesses track their products from seed to sale and follow specific packaging regulations. This generally requires paying for tracking software and painstaking documentation. It’s so challenging that supply chain manager is one of the most in-demand cannabis jobs. Organizational burdens aside, adhering to regulations requires infrastructure and another employee, which can be unaffordable for small businesses.
Getting a product on the shelves in the weed market requires third-party lab testing because the industry is so new, many places have a shortage of lab testing. The tests are expensive and the wait for results is often long and not always positive. Regulations are so stringent that many products are rejected. This is especially likely for smaller businesses that don’t have access to their own in-house lab testing, another advantage the big players have.
4. The industry is consolidating.
Ironically, the costs of transitioning to the legal market is driving out many black market weed growers who survived decades of prohibition. They are being replaced by legitimate businesses and, as the cannabis industry matures, these legitimate businesses are consolidating. With more purchasing power, chain dispensaries can buy the best products in bulk.
Additionally, growers can apply for multiple licenses in many places, thus creating large and growing conglomerates that can buy supplies for less and price their products lower.
5. Licensing is slow and expensive.
Though most states have legalized cannabis to some extent, barriers to entry remain significant for anyone starting a cannabis dispensary or any other weed business. Specifically, it entails the following costs:
Applying and maintaining a license.
Maintaining a business without turning a profit during long application wait times.
Bearing all the costs with no guarantee of ultimately receiving a license.
This translates to high startup costs, exacerbated by the fact that normal business considerations like getting a loan do not apply in the weed market.
6. Weed market competition is growing.
There is huge opportunity in the legal weed market, which naturally means that it’s attracting more investment and consolidation than ever before. This is the natural evolution of any market but how the cannabis markets are regulated add another layer of uncertainty for small businesses in legal weed.
The future of the weed market will largely come down to how many and what kinds of licenses companies can apply for simultaneously. This is up to state lawmakers who craft the legislation in the first place.
For instance, Mayor Bill De Blasio’s vision for legal cannabis in New York City makes a priority of fostering small businesses and keeping "Big Cannabis" at bay. New York Governor Andrew Cuomo’s proposed legislation echoed this desire by proposing licensing restrictions so businesses can’t vertically integrate to produce, transport and sell their own products.
But for now, the future of legal weed for small and big businesses alike has yet to be decided.