How Profitable Is Legal Pot?

Legal Sale Of Recreational Marijuana Begins In Colorado

It’s less lucrative that you might expect:

Generally speaking, investors are interested in checking out a company’s gross profit margin, which is the ratio of its revenue minus cost of goods to its overall revenue. A high gross profit margin suggests the company could be highly profitable as it scales up its production. Over a six-month period, Brandon’s dispensary had an average gross profit margin of 32 percent. That’s not terrible—most grocery stores have gross profit margins around 20 percent—but it’s not great either, and not at all the financial bonanza many people make the legal marijuana business out to be. Starbucks, another company that deals in mind-altering, plant-based substances, regularly has gross profit margins of 57 percent, nearly twice that of Brandon’s dispensary.

When we shared a redacted version of Brandon’s financials with Alexander Ooms, managing partner at ClearCreek Partners, a Denver financial advisory firm, he was circumspect, to say the least. “Since I help companies raise capital, my thought here is, ‘Wow, it’s going to be really hard for any marijuana business to raise institutional equity,’ ” he says. “Can retail marijuana be a solid business? Clearly, yes. Can it be highly profitable? Not sure.”

Meanwhile, Harrison Jacobs looks at how legal weed threatens Washington’s medical marijuana system:

Medical marijuana’s lack of oversight was a prime reason so many voters with no stake in the marijuana debate voted to legalize recreational weed. Under I-502, the Washington Liquor Control Board authorizes licenses for businesses, enforces regulations and collects 25% excise taxes at three separate points: when the producer sells to the processor, when the processor sells to the retailer, and when the retailer sells to the customer.

Tack on state sales taxes and you are looking at nearly a 40% tax rate for recreational marijuana. A regulated, heavily taxed system had voters, politicians, and even potential marijuana investors with dollar signs in their eyes. Medical marijuana, on the other hand, is subject to only the state’s regular sales tax rate, which is just 6.5%.

It’s now clear that it doesn’t make sense to maintain Washington’s loosely medical marijuana business alongside the new, highly taxed recreational system. If people can obtain legal high-quality marijuana at a far cheaper price, users will likely attempt to go to the medical marijuana stores. That could be a lot of lost revenue for Washington state and provide ammunition for legalization’s opponents to call the experiment a bust.

Sullum also covers the issue:

Last summer Mark Kleiman, the UCLA drug policy expert who has advised Washington state’s marijuana regulators, told me “the legal market is going to have a hard time competing with the illegal market, but a particularly hard time competing with the untaxed, unregulated sort-of-legal market.” He was referring to the hundreds of medical marijuana suppliers in Washington, which are not licensed by the state but operate under creative interpretations of a provision allowing patients to create “collective gardens.” Yesterday the state House of Representatives took up the question of how to deal with these competitors. The leading proposal, reflected in a bill considered by the House Health and Wellness Committee, is to ban them. …

What works for patients … does not necessarily work for the state, which wants to maximize tax revenue and head off federal intervention by creating a tightly regulated system aimed at preventing diversion to minors and other states. Although the backers of I-502, Washington’s legalization initiative, assured skeptics that the measure would not change the rules for medical marijuana, it was pretty much inevitable that legislators would once they absorbed the fiscal and political realities created by the new distribution system.

(Photo: Tyler Williams of Blanchester, Ohio selects marijuana strains to purchase at the 3-D Denver Discrete Dispensary in Denver, Colorado. By Theo Stroomer/Getty Images)