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Can Small Businesses Survive in Washington’s Marijuana Market?


washington cannabis marijuana
Is Washington doing enough for the little guy?

Lester Black has a good article up at FiveThirtyEight about the Washington marijuana market. Washington’s mandatory data transparency presents a fantastic opportunity for the kind of market analysis that is challenging in other industries that don’t have access to that type of data. In this context, the data reflects what a lot of Washington marijuana producers already know: The market out there is incredibly tough. Even though Washington’s window for marijuana licensing was only open for a month in late 2013, there is still enough product cultivated and sold in Washington that wholesale prices continue to drop, over four years later. This makes it hard for small businesses to compete.

Washington’s legislative and regulatory systems try to prop up small, local businesses a few different ways. The mandate that all business owners reside in Washington is a big one, of course. But we also have consolidation limits. An individual cannot have in ownership interest in more than three licensed producers and/or three licensed processors. On the retail side, no one is allowed to own more than five retail stores.

Those anti-trust pot market provisions have worked to some extent in providing initial market entry to a lot of different people. Entering a market and surviving a market, however, are very different. When the Washington market was first coming online, wholesale prices of more than $5.00 per gram were common. The average wholesale price in September was half that, at $2.53. Some amount of price decline was always expected, but small businesses that based their cost structure on that higher price point are struggling to make things work.

In any market with unexpected decreases in profits based decreased demand, increased competition, cost spikes, etc., well-financed business actors will be better able to survive than businesses that don’t have access to capital. Of course, if a business has so little money that it can’t pay its bills, it won’t survive. But access to capital provides additional advantages. You can get better financial planning advice from the outset so you know how best to plan for 280e. You are less likely to be swindled by consultants or other vendors with backloaded payment contracts. You have better access to credit. The list goes on.

The most eye-opening aspect of Black’s article may be the section on nationwide cannabis demand. According to Jonathan Caulkins of the Drug Policy Research Center at RAND, you can grow all of the THC consumed in the United States on 10,000 acres of farmland. That isn’t really that much, and it helps clarify why Washington producers continue to struggle. Even with its fixed number of production licensees, Washington likely has too much licensed production capacity for its in-state demand.

Where does that leave small Washington producers? They have a few different routes to success. One is to become large Washington producers, winning a race that so many others are losing. Another is to hope that marijuana demand trends upward — something that state regulators wary of DEA intervention hope does not happen. There is also the chance that marijuana goes legal nationally, opening up a much larger market without established players. Otherwise, no matter how much the state fights it, the industry will continue to trend toward consolidation with larger, better financed businesses surviving longer than small companies can hang in there.