The marijuana industry is a fascinating one. I recently watched the episode “Marijuana Millions” on the CNBC show The Profit (Season 4, Episode 20, obviously) and I think it provided a pretty good rundown of the rapidly growing sector. (1) While I’m not a user of marijuana myself, I do find the new industry to be immensely fascinating. After all, how many other businesses involve a product that is still considered illegal by the federal government?
Yet, since Colorado legalized recreational marijuana in 2014, one state after another has followed in their footsteps. According to the Governing.com,
“Thirty states and the District of Columbia currently have laws broadly legalizing marijuana in some form.
This episode focused on the budding marijuana industry (pun intended) in California. The show took place in 2017, just before the broad legalization of marijuana was set to go through. So pretty much each company that was documented expected substantial growth in the coming years.
In 2017, the marijuana industry grossed $9 billion in revenue nationwide and the show noted that the industry was expected to grow to $20 billion by 2021. (2) That is an extremely fast growth curve. That being said, there are a lot of things that make this industry very unique and somewhat risky.
The host asked every entrepreneur he talked to about the risks of federal action. Some were nervous about it, as the federal government could do to the marijuana industry what it did to the alcohol industry in 1929 with Prohibition. Most thought that it wouldn’t be a problem, though. One even described this perception as a competitive advantage because it kept some competition out. He also noted that many of the large private equity firms had avoided the industry because of vice clauses and things of that nature. Such restrictions in supply create an “inefficient market” that can have higher margins than they otherwise would. But the risks of the government coming in and shutting these operations down did loom over some of the entrepreneurs.
Ironically, the opposite problem loomed over one individual who was interviewed. He ran an illegal marijuana business that catered to recreational users. With recreational use being legalized in 2018, he feared that in all likelihood (unless taxes kept legal companies’ prices high), he would have to find an alternative source of income.
Despite some restrictions and the fear of federal action, it still appeared that marijuana had been de facto legalized in California already. In many ways, at least in states with more liberal or libertarian cultures, politics was well behind the culture. This was definitely the case with California. The host even interviewed one woman named Bretta Carter who noted she was “a lifelong Republican” but that she had changed her mind on marijuana and was now building a 30,000 square foot facility to grow marijuana. Republicans tend to favor the free market, so I would expect this change of perception to continue among conservatives.
The first company the show highlighted was called Canndescent. The firm opened in Desert Hot Springs, which is nearby the far better-known and more prosperous Palm Springs in southern California. For the better part of the 2000’s, the city has struggled. In 2001, the town went bankrupt. In 2014, it almost did again, when as CBS Los Angeles reported,
“Desert Hot Springs, a modest bedroom community known for its boutique spas and hotels, expects to take in nearly $14 million in revenue during this fiscal year while spending $20 million. The city has already slashed its non-sworn workforce by 66 percent in the past eight years but has been overspending for several years.” (3)
Having a $6 million, or 42.8 percent, deficit is an enormous hole to climb out of. But by 2017, the city had made a dramatic turnaround. And that turnaround was almost entirely due to the marijuana industry.
Desert Hot Springs became the first city in California to allow for industrial-scale, indoor pot farming. Mayor Scott Mattis put it up for a vote and 70 percent of the town’s population voted yes. He credits this decision with the town’s revival and notes that taxes on marijuana growers and sellers could bring in as much as $50 million. This shouldn’t be that surprising since the town has issued permits to 30 growers for 3 million square feet of warehouse construction.
Indoor growing has some significant advantages over outdoor growing. With outdoor growing, there can only be two harvests each year. There can be six with indoor growing. Obviously, this means you can produce a lot more marijuana with a lot less space.
The host met with the founder of Canndescent named Adrian Sedland, who happened to be a Harvard MBA. Their brand focuses on the “high-end, luxury market.” A layman might not think that such a market exists in marijuana, but there are a lot of stereotypes about marijuana users that don’t fit well with the facts.
Sedland believes they can sell each pound of marijuana for $3000. As a comparison, the seller noted above who works in the black market sells his marijuana for $2000 a pound. The goal of each facility is to produce 65 pounds of flour each harvest, which happens every 10 days. That would equate to $195,000 of product for each facility every 10 days.
The question, of course, is can Canndescent break into the high-end market that may or may not exist. I believe they can. As the market develops, many niches and subniches will develop with it. It’s much better to own a particular niche than to be just a plain, old commodity. And some marijuana users will want (and have the money to afford) high quality marijuana and don’t want to be associated with the “stoner culture” that many marijuana users have been stereotyped with.
In order to create this perception, Canndescent has dropped all the “stoner lingo” and has simply offered five products that are each named after a type of emotion that each brand of marijuana is supposed to enhance:
And if you are going to go after the high-end market, you have to provide a high-end product, as this exchange emphasizes:
Sedland: “Smell the nose [of the marijuana], you’ll recognize that our nose doesn’t have any chemical burn. You’d recognize the cure on our product is perfect. That when you break it, it has a perfect snap, which means it’s going to be a perfect smoke.”
It may cost more to provide a high-end product, but you can also sell it for more and there is usually a larger margin.
The show also detailed several other producers. One was a small startup named Treat Yourself that was started by two friends who made low-THC, vegan and gluten free edibles (food that contains marijuana). If this doesn’t show that the broader marijuana market is becoming very niched, than nothing will. The two friends were just getting started, but at the end, the show noted they had signed a deal with a major distributor which should drastically increase the size of their business.
Another company highlighted was Kiva Connections. Kiva Connections is the biggest manufacturer of edibles in the state and focuses primarily on chocolate edibles. The company employs 85 people and produces 1000 pounds of edibles each day.
Another company named Medmem were buying up stores, distributors and growing warehouses alike to vertically integrate their company and cut out the middleman. As can be seen, there were a lot of different business models being employed in this industry.
Overall, what’s fascinating about the marijuana industry is the ability to watch a new industry rise out of almost nothing at an extraordinary pace. The profit potential is certainly there, although competition is becoming more and more stiff each day. And the ever-present threat of federal regulation is also there. That being said, it would appear that this industry is here to stay and should remain profitable for a long time to come.
"Every day is a new life to the wise man."
The Righteous Mind
Star Slate Codex
Consulting by RPM