Just about five years ago, state-legal pot was the biggest thing going. Anyone with a little money to invest in a startup was looking to get into the business. These days though, some of the most impressive names in the industry are on the verge of collapse. Legal pot apparently isn’t as lucrative a business as it once was. So what’s going on?
State-legal pot faces a myriad of problems that makes achieving success more difficult than ever before. The top four are:
- excessive debt
- falling prices
- high taxes
- black market competition.
A February 2023 article published on the Fortune magazine website mentions these same four problems in relation to MedMen, a company that was once an industry darling but is now on the verge of bankruptcy. Let us look into the four issues in more detail.
1. Excessive Debt
New cannabis startups are already behind the eight ball on their first day of business thanks to debt. Starting a marijuana-related business is expensive. There are licenses and insurance to pay for. If you are a grower or processor, you need to invest in specialized equipment, expensive supplies, and space.
If you are in the retail sector, you need retail space, regular marketing, and costly labor. And if you want to offer home delivery, you are looking at additional expense as well. Utah dispensary Beehive Farmacy says retail cannabis is a costly venture to get into. They ought to know. They operate two of just 15 licensed cannabis pharmacies in the entire state of Utah.
2. Falling Prices
With the legalized marijuana movement has come plenty of growers looking to get in on the action. Some of these growers are corporate entities with scale and size in their back pockets. The end result of so much growing is a glut of supply. And when supply outpaces demand, prices fall.
Excess supply is being further exacerbated by the black market. More on that in a minute. But even in the legal industry alone, so many players have gotten into the business that the market is reaching a point of saturation.
3. High Taxes
Leaders in every industry will tell you that taxes are a business killer. Taxation does not boost an economy. Paying taxes to local and state authorities doesn’t result in tangible goods and services that generate more wealth. Taxation is simply a way to fund government operations. And unfortunately, government leaders are never satisfied. They have an insatiable appetite for tax revenues.
Every state that has legalized either medical cannabis or recreational marijuana has burdened the industry with heavy taxes. They want their fair share, and they are fully prepared to take it. Unfortunately, taxation only adds to the cost of doing business.
4. The Black Market
There is one entity that benefits from all the problems caused by excessive debt, falling prices, and high taxation. That entity is the black market.
Black market operators have a decided advantage because they don’t have the high costs associated with following the law. That means they can sell their product for a lot less and still make money hand over fist. The black market is largely responsible for excess supply and falling prices. Yet black market operators don’t pay taxes. They do not have as many business expenses, either.
Big Pot, which is to say the corporate arm of the marijuana industry, will probably do alright in the long run. But smaller operations won’t. State-legal pot isn’t as lucrative a business as it once was. And as always, it is the little guy that suffers.