Summary: Prices for recreational marijuana have mostly stabilized since our last quarterly survey of retail cannabis dispensaries in Colorado. In June, we noted that retail prices had dropped from $50-$70 to $30-$45 for an eighth of an ounce, and $300-$400/ounce to the lower end of about $300/oz. In our most recent quarterly survey, conducted last week, sources reported no change to those June 2015 price levels. All contacts did cite “greater competition” as responsible for the pricing pressure this year as more retail marijuana dispensaries and grow facilities open. Even still, based on our own estimates of the latest available tax data from the Colorado Department of Revenue, we expect stores to gross upwards of $500 million this year collectively, a +60% comp to 2014. So where is the profit going? Mostly safes and containers in the form of cash, as most banks won’t serve marijuana related businesses because the drug is still illegal on the Federal level. As such, the CO marijuana business is a unique case study in how businesses adapt when traditional banking services are unavailable. Please read on for the details of our conversations with the owners/managers/employees of numerous retail dispensaries and our own industry analysis.
Note from Nick: How important is the banking industry to the growth of an economy? Common wisdom paints it as essential, and for many activities (payment systems, residential housing finance, and consumer credit, for example) it is. But what if I told you that one fast-growing American industry lives almost exclusively outside the domestic financial system and does just fine? That’s the current state of the legal marijuana business. Jessica has the details in today’s note, as well as her quarterly “Beige Book of Pot” analysis of price and volume trends for the Colorado market.
“Gas and Grass”. That’s the name of a new marijuana business set to open in two locations in Colorado as soon as next month. Smokers are used to getting cigarettes at gas stations across the U.S. along with a fill up, of course. This new type of gas station will follow a similar business model, but sell medical marijuana in its convenience store alongside other staples, such as lottery tickets and beverages.
This is the latest example of the many entrepreneurial opportunities taking shape around the burgeoning marijuana industry in the Centennial State. Gas and Grass seeks to provide patients with a one stop shopping experience, even offering loyalty discounts to those who fill both their tanks and prescription. Note that the gas station and medical marijuana dispensary will run independently, so patronizing both establishments is not required. But they will operate at the same location, affording customers the convenience of serving both needs.
While medical marijuana continues to act as an important product both homeopathically and economically in Colorado, the legalization of recreational cannabis has added a new dimension to the industry. Just like Gas and Grass will conduct itself like any other gas station/grocery store combo, recreational marijuana stores function akin to any other retail establishment. They supply a product that’s in demand, follow applicable laws and regulations, and pay taxes and business expenses. If this sounds hokey, we can assure you the legal retail cannabis industry in Colorado is legit and an important case study to track.
We know that from the store surveys we’ve conducted each quarter for over a year, asking standard business questions on price, units, and product mix. Our most recent survey showed even more progress among our contacts’ stores, and demonstrated the natural evolution of a maturing industry. Here are our findings from the interviews we conducted last week:
- After falling significantly over the past year, recreational marijuana prices have mostly stabilized. From June 2014 through our prior survey this past June, prices declined from an average of $50-$70 to $30-$45 for an eighth, and $300-$400 to the lower end of about $300 for an ounce. Some stores even sell an ounce for as low as $200. In our most recent survey, conducted last week, contacts reported no change to those June 2015 price levels.
- “Greater competition” topped our respondents’ list when we asked what factors caused this year’s declines in price. While demand remains high, supply continues to increase. There are a couple of factors at play here. First, only existing medical marijuana dispensaries were given licenses to sell retail cannabis when it was first legal to do so on January 1st, 2014. This was lifted after nine months, in which new entrants could open their own recreational marijuana stores.
To put this in perspective, there were 156 retail marijuana stores and 204 retail marijuana cultivation facilities at the beginning of 2014, according to the Colorado Marijuana Enforcement Division. At the end of December 2014, there were 322 retail stores and 397 retail cultivations respectively. The MED also reported growth of about 110% in issued retail licenses last year. The latest stats posted on the MED’s site show 385 retail stores and 496 retail cultivations as of August 3rd, 2015, or a jump of 20% and 25% respectively since the end of last year.
Second, the State’s vertical integration requirement, in which recreational stores must grow most of their own marijuana (70/30), was rescinded last October. This allows an individual to apply for a license to grow and sell wholesale marijuana to retail stores or marijuana infused product manufactures without owning a store. Consequently, additional licenses awarded to retail stores and grow operations have likely contributed to pricing pressure due to more supply.
One contact noted that since the last time we had spoken in June, three new stores opened near his shop. Therefore, our survey participants said retail stores have dropped prices to stay competitive and attract more customers. One contact said offering eighths at a discount of $35 rather than their typical $45 tier has proved very successful. Quality helps protect against cutting costs too low, but given the number of stores available especially in concentrated areas, such as Denver, consumers are willing to drive for the best prices. Additionally, another contact highlighted that wholesale prices are getting cheaper: “Who can get the best deal a pound?” Overall, answers for what’s driving prices lower are threefold: the opening of new retail dispensaries, the ability to produce more, and the advent of more wholesale companies.
- Customer flow increased. We’ve generally heard a range of 100 to 300 daily customers in previous surveys, but contacts reported an uptick to about 150 to 350. Many respondents reported gains in traffic over the past year with some noting the summer as responsible for the recent bump. Holidays and weekends also draw in customers. Most stores said that during regular weeks, their busiest days are when people get paid (just like other retail businesses) - typically the first Friday and 15th of every month, for example.
The average transaction size remains similar to our survey in June at about $50 to $60, although that’s down from $100 last year. These transactions typically include combinations of flower, such as an eighth or half eighth, joints, and edibles. Otherwise, some contacts highlighted large purchases of $300 to $500 worth of product when purchasing concentrates and stocking up on edibles. Yes, sour gummies are still the top choice edible among consumers. In terms of the most popular products, there was a wide consensus that vaping cartridges continue to grow in demand. They described them as the “new big thing”, or next wave of products evolving and coming out in different forms. It takes longer to feel the same effects as flower, for example, but it was characterized as odorless and easier to use.
- Our respondents were gearing up for September 16th, when an accounting error created an almost tax free day on retail cannabis. Colorado underestimated total state tax collections last year, which caused an automatic suspension of new taxes under the state constitution that was approved by voters in 2013. As a result, the state suspended both the 10% sales tax on retail marijuana purchases and a 15% excise tax on marijuana growers for one day; purchasers still had to pay the 2.9% sales tax and municipal taxes.
Our contacts planned to approach the 16th like a holiday and expected their stores to be especially busy. In preparation, they were stocking up on extra product, running sales throughout the week, advertising the day by sending out a blast about it to their weekly email lists, and offering discounts or highlighting their rewards program. One store expected over 400 customers, at least 100 more than their daily average. Another store expected sales to increase by at least 20%.
Despite these stores’ success, the recreational marijuana industry’s inaccessibility, in large part, to banking services remains its largest hurdle. Although the drug is legal in Colorado, it’s still illegal federally and most banks are unwilling to serve marijuana related businesses for fear of money laundering charges. Some marijuana dispensaries, including a couple of our contacts, have been able to develop a relationship with a bank or credit union, but this is rare.
That’s why the industry was looking forward to the Fourth Corner Credit Union to potentially serve Colorado’s marijuana industry. The credit union was granted a state license last year under the condition that it needed approval from the Federal Reserve. Colorado’s state government views the issue as a public safety concern – due to store break-ins, for example – and burdensome when trying to properly collect taxes. Thus, the credit union applied for a master account to the Fed last November, but was informed it was denied by the Kansas City Fed branch in July. At this point, resolving the issue will most likely require a change in Federal policy.
So how do cannabis related businesses prosper without banking services? The majority deal in only cash, and lots of it. Retail marijuana dispensaries hire guards, use armored vehicles, and buy safes as a means of protection. One contact described his store’s lack of banking services as “scary”. Some respondents noted using money orders to pay for a few costs, including rent and taxes. But securing money orders from banks, and enough of them since each can only represent up to $5,000, proves difficult. Another said an alternative option is getting money orders through the post office.
Otherwise, everything is received and paid for in cash. Many dispensaries even pay their taxes in all cash. With all this said, as much as a lot of money comes in, a lot of money goes out according to our respondents. Here’s a list of just some expenses they listed: products, security, advertising, rent, employees, energy bills, edibles, grow supplies, exit bags, and pipes, etc.
Overall, although new stores continue to open for business, one contact emphasized that it is not easy starting out: “People don’t realize the costs of operating a business within the industry”. It requires a significant amount of initial capital, including high licensing costs, for example. Nonetheless, if entrepreneurs can make it, there’s a tremendous opportunity to earn outsized returns on capital. Looking at the latest available tax data from the Colorado Department of revenue shows marijuana dispensaries could earn over $500 million in retail sales this year. For example, the state grossed $5.84 million in revenues from the 10% retail sales tax in July, which suggests stores earned $58.4 million in revenue. That’s a 97% rise from the prior year.
From January through July, stores grossed about $309.1 million in revenue from recreational marijuana sales, almost more than all of last year’s aggregate retail sales. The average revenue earned during the first seven months of this year was $44.2 million. If we take a conservative estimate of $40 million in earnings for every month during the balance of this year, stores could earn just over $500 million compared to $313 million in 2014. That represents impressive growth for such a new industry. While recreational marijuana remains illegal in most U.S. states, this is a novel and productive case study to follow as more states potentially legalize the drug in the future.
Just remember, if you come across a Gas and Grass next month on your travels in Colorado, don’t (smoke) and drive!
For the full PDF version of the Morning Markets Briefing go here. See Important Information.