By now everyone in the legal marijuana industry should have figured out that it’s been anything but an easy “green rush” to riches — and if you need more proof, be sure to check out Cary Falk’s guest column, which outlines the giant challenges of making money as a cannabis investor.
At Marijuana Venture, we’ve been one of the few publications willing to consistently state the obvious: The legal marijuana industry is not a cake walk, and those who think it is are in for a rude awakening.
We’ve also been uncompromising in our messaging, and we’ve taken heat for some of the comments we’ve made about questionable articles and advice in other publications. We don’t care. We’re not here to pander to the cannabis community. We’re here to put out the best business information available. And some of that information is a healthy serving of the unadulterated truth. Cannabis is the fastest growing business in America, but just like the Dot Com boom, there are going to be more failures than overnight millionaires.
One thing Washington and Oregon, in particular, have shown is that legalization is both a blessing and curse. It’s a blessing in that consumers get more choice, better weed, lower prices and immunity from arrest. It’s a curse in that 90% of the people who jump in on the grow side have little or no business experience and quickly discover it’s a difficult industry in which to profit. Many lose money rapidly and hundreds — if not thousands — of growers will lose their life savings.
The oversupply in the Pacific Northwest was to be expected. The bottom line is simple: Cannabis is an easy plant to grow (despite what you read in the do-it-yourself books); consumers mostly shop by price; everyone grows “the best weed”; and in both Washington and Oregon, growers outnumber retailers by a wide margin. These factors have resulted in rock-bottom wholesale prices and many producers unable to stay afloat.
The same thing will happen in California.
Why? Because we’re seeing the same conditions in California that we first saw in Washington and then in Oregon. In each of the Pacific Northwest states, growers outnumber retailers by a ratio of about 2:1. In California, that proportion is currently about 10:1, with fewer than 500 retail stores approved out of roughly 5,000 licenses granted. Get ready for WA 2.0.
The state of California has projected 5,000 retailers will be licensed in 2018, with thousands more expected in the next couple years, but the number of producers will also continue to grow exponentially.
Here are some simple words of advice for cannabis cultivators based on four-plus years of watching the markets in Washington, Colorado and Oregon.
Call this the cannabis version of Moore’s Law, in which Gordon Moore predicted that computers would double in power every 18 months. These are our version of Moore’s Law as they apply to success in commercial cannabis production:
– Learn from experienced farmers. The traditional models followed in the agriculture industry have existed for decades because they work. Farmers sell to wholesalers, who then sell to retailers. Farmers continually work to lower costs and increase production. They automate, increase scale and closely monitor their expenses and costs of goods sold.
– Embrace automation. You’d never hear a farmer touting “hand-shucked corn” or “hand-harvested wheat.” Why should cannabis be any different? While hand-trimmed buds might technically be “better,” the difference is marginal at best and machine trimmers get better every year. The argument boils down to some simple math: Can you afford to pay trimmers an hourly wage to finish one pound of cannabis every six hours? If it’s a choice between running a viable business and hand-trimming your flower, the decision shouldn’t be all that tough. And it’s not just trimming — there are dozens of automated solutions to reduce labor expenses and improve efficiency, including packaging, irrigation and climate-control systems.
– Hire outside the marijuana industry. Other than the plant itself, the legal, recreational cannabis industry has zero in common with the previously illegal business. Hiring people who have never paid taxes or used commercial banks is a recipe for disaster — just ask dozens of growers in Washington and Oregon. Success in cannabis is more about managing employees and improving margins than anything else.
The best hires for commercial cannabis grows are those with controlled environment agriculture degrees or experience in commercial farming. If you’re opening a retail store, hire people who have real merchandising and management experience. When Jeff Bezos started Amazon, he hired former buyers from Costco, Best Buy and Target because he knew the company would need people who understood vendor relations, merchandising and product categories, not just web developers and Internet sales specialists.
– Think “outside the industry.” Aside from hiring experts with experience in “traditional” businesses, it’s important to recognize that consumers are evolving. The cannabis industry tends to be highly insular. Not everybody who steps into a retail store is looking for the most potent product available. Not everybody wants to be asked, “indica or sativa?” And not everybody buys into the silly culture of strain names that are mostly perpetuated by cannabis growers and breeders. The sooner the industry realizes this, the faster it will be accepted by a larger percentage of the population.
– Do your homework. It’s amazing to see how many people are getting into the cannabis industry without thoroughly researching how things have played out in states like Washington, Colorado and Oregon. California — albeit larger than those three states combined — won’t be that much different than the longest running adult-use markets in the country. There are a multitude of websites and services to give better insight into the cannabis market, including 502 Data, Lemonhaze, Top Shelf Data, BDS Analytics, Headset, Cannabis Benchmarks and New Frontier Data. The challenges and complications other states have faced — including third-party lab testing, problems with traceability, local bans and moratoriums, high taxes, 280E and pesticide concerns, among others — will reemerge in the Golden State and other markets as legalization progresses. Anybody who’s read Marijuana Venture for the past couple years will know that these hurdles are not unique to Colorado and the Northwest.
– The sun is free; electricity is not. With very few exceptions (locations where there are lots of clouds or little sunshine, like Alaska, Western Washington or Northwestern Oregon) indoor growing is a ridiculous proposition. Between the capital expenses of a warehouse and all the equipment and the ongoing electricity cost, it’s impossible for an indoor grower to match the COGS of an outdoor or greenhouse grower. The sun is free, and cannabis has evolved for thousands of years to use it. If you’re unclear about this, reread your high school biology books.
– Greenhouses exist for a reason. For growers looking to produce cannabis in a controlled environment, commercial greenhouses provide all the benefits of an indoor operation at a significantly lower cost. Greenhouses are about 80% more efficient than indoor grows and, contrary to popular belief, can be customized to operate in any climate in the country.
– Winning a “cannabis cup” means nothing. It’s the marijuana equivalent of your Aunt Betty winning a blue ribbon at the county fair for best apple pie. It does not infer that she would have any clue how to run a commercial bakery.
– Go to horticulture trade shows with real experts. Cultivate ‘18 is the largest controlled environment agriculture business show in North America. It’s in Columbus, Ohio every July. You will learn more there in two days than you will in a year at cannabis shows.
– “We grow the best weed” is not a sales plan. As it turns out, hundreds and hundreds of growers all say they grow the best cannabis, but nobody brags about having the best sales staff.
– Consumers shop by price. Yes, there’s room for high-priced, artisan pot — just as there are markets for high-end beer, wine and cigars. However, just as 90% of wines are sold in the $10 to $15 price point, and most cigars are priced at $10 to $20, about 90% of marijuana consumers just want the best bud for $5 to $10 a gram. Washington has proven unambiguously that you can get great, 25% THC bud for $5 at retail. Most sales now reflect this. The problem with most people in the pot business is that 90% of growers want to compete for the 10% of the market that represents the high end. Simple math prevails here.
Finally, use some common sense. As stated above, the regulated legal marijuana business has almost nothing in common with old illegal business. Books by Ed Rosenthal or articles in High Times may have value to hobbyists but are useless when it comes to the skills needed to manage a commercial cannabis farm.
The old pot business was a cake walk with its high margins and lack of regulation and taxes. The new business is the opposite: It’s competitive, highly taxed and closely regulated. Pay attention and proceed carefully or you will end up as just another statistic.