As the cannabis industry matures in different ways in different states, how does a cannabis store operator figure out what to do in the midst a dynamic customer-centric part of this industry? How do they work with the variables of what the customer wants, and what the customer is willing to pay, and how to make that work within the restrictions of operating expenses that a business owner has to work with under tight compliance regulations while making sure that there is enough product on the shelf?
In some small ways, operating a cannabis store is not unlike any other retail store experience. Find an ideal location, set up business, make sure you get product on a timely basis that a customer base wants to buy. Profitably is never guaranteed, but you take your best shot.
In cannabis, the profitability of cannabis retailers is quite attractive. According to figures from Marijuana Business, 97 percent of recreational and medical combination stores are profitable, generally within six months.
But there’s a huge missing component that other non-cannabis retail operations don’t have to worry about – in most states where cannabis is legal, there is little to no chance to advertise your retail cannabis business.
So how a cannabis business operates, and who owns and manages it, become key indicators to the success of the cannabis business. It’s more of a word-of-mouth experience. And none of the owners have more than a few years of experience in this complicated, and ever-changing, type of retail operation.
In a session at the Marijuana Business conference in Las Vegas in November, it became clear that working through the ups and downs of the retail market can be challenging even for the best minds behind it. “Meeting all of the regulatory mandates and requirements is difficult,” Pete Kadens, CEO, Green Thumb Industries, said during a session about retail trends and analysis. “It’s three times harder and three times more expensive than you can ever imagine.”
Marijuana Business figures showed that annual revenue for recreational stores is $1.8 million, with annual operating expenses at around $1.1 million, or about 66 percent of revenue. “But is this an average profile?” Kadens said. “That rings true relative to what we are seeing but it can vary wildly from market to market. Just winning licenses is tough.”
One of the biggest moving targets of the industry is the price of wholesale cannabis, which has gone from nearly $2,000 a pound in 2015 to around $1,600 according to Marijuana Business figures. Part of the reason is that there has been a flood of new entrants into the wholesale cultivation side of the industry. “Hundreds and hundreds of thousands of square feet of grow space have come on line, and flooded the market with product, and cut the price almost in half, all in the space of 12 months,” Bryan Hill, founder and director of Botanica Premium Cannabis said during the presentation. “That’s how dramatic this is.”
Another significant cost is real estate, because a retail shop needs to be located where there is reasonable access to good customer traffic. But here again, this is not the usual retail store experience. “Our position is that rent expense is not deductible because of 280E,” Chris Mitchem, CEO, Diem Cannabis said. “So when you figure that into the calculus, all of a sudden rent expense becomes even more burdensome. And then in every line of insurance in this space, including product liability, you are going to get gouged. You are going to pay higher premiums because the carriers are taking on more risk. There are also safety and security risks. And all of that adds overhead burden.”
Hill says that for any real estate that they are going to deal with in the future they are going to put in options to purchase that real estate up front.
Another risk that recreational and medical store owners take is trying to determine the size of the market in their area – often a guesstimate at best. “I think you have to have a lot of humility in this business,” Kadens says. “Don’t build the Taj Mahal. If I listened to every regulator who told me how many patients would be on the registry, and took that as fact, wow, I would be building the Taj Mahal and be out of business in six months. They would tell me I would get 100,00 patients three years ago and now there’s 27,300,” he says. “If you build to accommodate a 100,000 patient market, you would be overspending and in a difficult position. I think what you have to do is moderate your spending and grow and adapt to market conditions.”
And finally, the panel discussed expanding their offerings beyond more than just flower. Marijuana Business figures showed that the total number of infused product manufacturer licenses were up 101 percent in Colorado since December, 2014. Clearly there is demand. “We are looking for investing in processing because there are so many products in the market,” Mitchem said, adding that would be a hedge against the ups and downs of the wholesale flower market where prices and delivery times vary. “There is an intense internal discussion about getting into processing now.”
But not everyone wants to do that. “I believe that it can be very dangerous for a license holder to do kitchen work and cultivation, and do all of those things at best market capability,” Hill said. “Anybody in this room can produce perfectly average cannabis. Anybody in this room can make perfectly average brownies. I think you should focus on one thing and do it very well, because customers know what quality is.”