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Questions and Answers with an Original Licensee Holder

A discussion of growing pains, regulations, and current product investments

By Michael Harlow, CPA, Partner

CohnReznick Partner Michael Harlow:  Brian, you were one of the first operational dispensaries in Colorado. What is the single largest difference between the early days and now?

Brian Rogers: We started in 2009 with one of the first medical marijuana dispensaries. When Colorado legalized cannabis for retail sales (Jan. 2014), we were one of the first 25 adult- use dispensaries in the country. Looking back on it is amazing – what we did with so little.  Our original investment for that first dispensary was less than $30,000, all in. That includes the license application fees, legal startup costs, leasing the space, and securing product. We found suppliers, asked for net-30 on products from our vendors, bought some security cameras and a safe, leased space, and that was it. No employees, just me and my (now) wife.

Now, you can’t even get through the preliminary application process in most new states for less than $30,000. Colorado has done a great job of keeping the barrier to entry reasonably low.

MH: Being one of the first 25 dispensaries in the entire country, how has the market shaped up between January 1, 2014 to now? Is it what you expected?

BR: Things are developing largely as expected.  We all expected prices to come down, and that has happened. Retail prices are down maybe 40-50% from where they were after a bit of stabilization. They are probably down 60-70% at the wholesale level. Prices came down more than expected, but not that much more. It is my prediction that after development of largescale outdoor grows, retail prices could drop to where current wholesale prices are for midgrade quality material.

We also are beginning to see more professionalization of the industry. Accountants, attorneys, scientists, engineers and other professionals without prior cannabis experience are taking jobs within industry and adding a new level of professionalism. I think the social stigma related to cannabis is changing and more people are comfortable telling their friends and family they are working in the marijuana industry. Employers are paying a premium to attract top talent from outside of the industry to build out their operations.

MH: Do you have any prediction on federal legalization?

BR: It’s hard to define. In the next 5 to 10 years there will be significant change at the federal level. During the next election cycle, major party candidates across the country may have cannabis legalization in some form as part of their platforms. Legalization doesn’t seem to be a party issue; it seems to be an age issue. (Colorado U.S. Senator) Cory Gardner appears to be making inroads with the current administration, but we must wait and see what comes of that.

MH: Having been in the industry since 2009, is there anything you know now that you wish you knew then?

BR: The collective experience gained over the last 9 years would have been a great benefit to me back in the early days. Flower continues to be a major percentage of our sales, but we have seen concentrates and edibles increase significantly over the years, more so than anticipated.   Edibles and concentrates have been particularly popular for customers that are new to cannabis. The increased profit margins for processed products also have helped to offset the drop-in prices we have seen in Colorado. Producers who focused on processed products early on have done very well.

MH: What types of products are you investing in for the future?

BR:  In Colorado, most investment seems to be in improved efficiencies of current products, not development of new products. New products are still coming to market, but to maintain profit margins producers are focusing on efficiency and process improvement. Investments in new and better equipment to produce higher quality products at a lower cost has become a real focus. There may be only a 10% increase in potency, but a 25% increase in efficiencies are helping to offset reductions in wholesale prices. Given the price drop in Colorado, there will be lots of cannabis companies in the state that won’t make it another two years if they can’t improve their processes.

MH: Since Colorado is the most mature adult-use market in the country, are there any other states that you think are particularly positioned to do well?

BR: There is clearly a lot of opportunity in California. As one of the largest economies in the world, California has plenty of room for growth. Even if the prices are lower, there is the opportunity to make money based on the volume of sales projected. Getting involved in California is probably a smart play.  You can spin your wheels to get a license in any limited-license state, but California has the largest market, no question. States like Massachusetts and New York, with a very limited number of licenses and significant barrier to entry, are going to be goldmines for those lucky enough to get licenses. For better or worse they are not going to feel the same effect of competition in those states like you have seen in Colorado. States like Colorado, Oregon and Washington, where licenses aren’t as restrictive and the market is more mature will be oversaturated and thin out.

MH: Demand for CBD and hemp cultivation have been all over the news recently.  What do you make of this?

BR: We’re in a tourist market. We have people come in for CBD-only products and we do carry them, but doesn’t account for even 1% of sales.

MH: Do you see a demand for products marketed toward specific customer demographics, women, novice consumers, health-and-wellness-minded customers?

BR: We sell a variety of products including PMS symptom relief, sexual aid oils, topical creams and a variety of CBD vs THC hybrid products.  You could probably take all the “fringe categories” that are not used for what we would consider a traditional high and add them together and they would be less than 5% of total sales.

MH: Do you see a lot of customers coming in who are cannabis novices?

BR: Not in our market. The novelty has worn off.  Tee shirts, gifts, etc. have declined as a percentage of sales.   Sales of bongs, shirts, and pipes have gone down - things first timers would buy.  This indicates people are more familiar with products and the market is maturing.  We have had to take this into account when recently renovating our store.

MH: Do you see more female customers entering the market since the early days?

BR: I can’t answer that for everyone and our customer demographics may not be reflective of the country. We have noticed over the last nine years, more women using cannabis now that they’re more comfortable talking about it and being public about their consumption. From my perspective, yes there are more women and particularly more women over 30.

MH: Were there any unforeseen barriers to entry in the market place?

BR: In states like Massachusetts and Maryland, they have enormously high application fees, high financial commitments and financial verification requirements. Colorado never had those types of limitations. The Colorado application fees were just a few thousand dollars. These costs are not exactly unforeseen.  What most people did not anticipate is how difficult it is to secure real estate. Social attitudes related to cannabis may have changed dramatically over the last decade, but the attitudes prevalent in zoning boards, city councils and neighborhood associations have not changed at all. People may not want to send someone to jail for private consumption, but they still don’t want a cannabis business opening in their neighborhood.

MH: For someone new to the industry, what is one thing they absolutely must know?

BR: You must have access to cash, multiples of what you think you need, not just credit.  The bank isn’t going to be happy if you use your home equity line of credit to open a weed store.

Key takeaways:

  • There is opportunity to make a reasonable profit in California as well as the new heavily regulated east coast states, but with very different business models.
  • Sales of concentrates, edibles and other heavily processed products continue to increase and can help add to the bottom line, but flower still dominates.
  • Securing real estate in the right location and dealing with local zoning boards remains one of the biggest challenges to starting operations.
  • There is a clear trend toward professionalization as business look outside of the industry to improve their operations.
  • Lack of reliable banking continues to be a major problem. Cash is king.
  • The 2020 election cycle will be turning point as major party candidates are forced to take a position on cannabis.

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