Cannabis came out of a shadow of illegality and became a lucrative industry that brings billions of dollars in profits. The state by state legalization and, consequently, the growing popularity of marijuana-related businesses attract young entrepreneurs with an opportunity to make easy money. But is this money really so "easy"? We have interviewed four experts who succeeded in the cannabis business about all hidden pitfalls on a way to the venture of one's own. Marijuana business representatives have shared with Infuzes their thoughts on winning startup ideas, named main difficulties novices may struggle and provided a piece of advice to beginning cannapreneurs.
What are the most profitable business models in the cannabis industry?
In my experience, the most profitable models are independent raw material manufacturing and final product manufacturing businesses.
What are the obstacles young marijuana business may face?
Compliance with regulations and permits (globally), particularly in the third world countries, and capital availability in this industry.
What piece of advice can you give to young cannapreneurs to stay afloat?
Manage a diverse portfolio starting with sales of related or unrelated goods and services which will financially bootstrap your cannabis aspirations.
There are several distinct business models that have attracted many ganjapreneurs to the modern version of the gold rush. The first is the business of cultivation. It was recently published that Vessel Logistics, a San Francisco-based cannabis distribution company, found that existing legal growers have the capacity to produce 9 million pounds of cannabis every year, but the permitted wholesale market can realistically support only 1.8 million to 2.2 million pounds. This means that there is already a mismatch between the supply and the demand of over 300%.
The second business model that deserves attention is running a dispensary. Today one may find dispensaries, where cannabis is sold to customers, with high-end providers catering to upscale markets. But costs associated with regulatory compliance, collecting taxes, hiring staff, and facility-based operational expenses make competing with illegal suppliers difficult.
One more way to build a profitable cannabis business is testing products for state compliance.
The benefits from the legalization of cannabis will only be delivered when the supply and demand come into balance and the manic nature of expectations comes face to face with the reality of managing abovementioned sustainable business models.
What are the obstacles young marijuana business may face?
We have a 6 to 1 imbalance between supply and demand. Commoditization of cannabis will drive the profits out of both the grow and dispensary business. A close second is the perpetual black market. Illegal dealers can sell for less than the legal dispensaries need to sell for just to break even.
Assess your capacity to stay in business at a wholesale price of $500 per pound (it is already under $1,000). If you can't put together a pro forma that produces a 50% gross margin, just stay out of the ownership business. If you don't have very deep pockets and the business knowledge equivalent to an MBA stay out. This is a business. It is no longer a political statement or a lifestyle demand to be in the cannabis sector. This is going to be tough and the illegal sellers are here to stay.
Typically, cultivation and processing are the most profitable and dispensaries are the least profitable. Cultivation and processing are usually made in one or two locations, not near populated areas. Therefore, it is easier to secure the locations and develop a great product. Dispensaries in the US have the highest overhead due to having a high tax rate (due to IRS code 280e), as well as high staffing costs and land/rent costs due to dispensaries needing multiple staff to assist customers and typically being in populated areas.
Lack of funding and lack of experience in business (in general) as well as lack of understanding of the state/country regulatory structure. For example, if you own a dispensary and the law in your area allows an unlimited number of dispensaries, then eventually prices of a product will decline dramatically due to the fierce competition. Lots of dispensaries will go out of business. Many operators do not have the foresight to see these business challenges.
Overestimate costs and underestimate revenues. Keep your costs low and don’t suck all your money out of the business by paying yourself and other owners tremendous salaries. The more you use to pay yourself, the less money you have to grow your business.
Generally, vertically-integrated cannabis businesses (i.e., cultivation, processing, and retailing) have the highest potential profits as well as sustainable growth. The reason for this is that vertically-integrated enterprises inherently have better control mechanisms related to cost containment and waste minimization in their production operations. On the retail side, these businesses are able to sell their products at lower price points than most non-vertically-integrated retailers can sustain due to necessary markup on external brands. Vertically-integrated businesses also inherently have more control over their overall supply chain, which is a major advantage in this industry. Any business model that allows the enterprise to maintain more control over the supply chain will have a significant competitive advantage.
The biggest obstacles for marijuana start-ups are the following elements of this industry:
The best piece of advice I can give to young cannapreneurs is to find your niche. Regardless of what kind of business you want to start in the cannabis industry, you need a solid strategy as a part of your overall plan for success. Don’t try to compete with multi-million dollar startups unless you have that amount of capital already. The strategy involves trading-off between the things you can do best over what everyone else is doing. Don’t try to be everything to everyone, because that is a recipe for failure. Specialize, and become the best at something.
As you can see, experts interpret the current market situation in different ways, but in main issues, their views are identical. Summarizing the foregoing one can conclude that the winning strategy for one's cannabis venture will be the vertically-integrated business. Such a business model may be realized in a form of cultivation, processing, and retailing for example. An undeniable advantage of such activities is the higher control level related to the cost containment and waste minimization as well as control over the total supply chain. Among the major difficulties of doing business, experts distinguish the lack of funding and lack of experience, compliance with laws and imbalance between supply and demand on the cannabis market. Despite all the obstacles, one can reach success in the cannabis industry if they offer a unique idea with a thoughtful business plan, manage their profits and costs cold-minded, and, of course, follow the experts' advice!