Legal Marijuana Isn’t the Boon Small Businesses Thought It Would Be

https://fivethirtyeight.com/features/legal-weed-isnt-the-boon-small-businesses-thought-it-would-be/

by matt4077 • 9 years ago

94 78 9 years ago

Chardok• 9 years ago

This is interesting for the fact of watching a black market item go to retail and the expectations of "street" price versus actual market price might have been just too high.

There will certainly be a niche market for gourmet, organic, homegrown and cared for buds, but for the remainder of products: oils, waxes, edibles, infusions - you are not going to notice the difference between a small business and a larger growing operation except on price.

It seems rather obvious when you think about it though. I would compare cannabis to produce rather than beer/wine/spirits, in the sense that your small growers are going to have a tough time competing with giant farm operations, and will really have to differentiate themselves in specific ways to actually make it worth while.

walrus012• 9 years ago

I think it is pretty similar to the boutique small volume/high-cost products sold in Whole Foods. There are still a number of small artisanal handmade soap manufacturers, and they command premium prices for what is perceived as a premium product. People buy them. People also buy giant packs of soap at Walmart. Both markets exist simultaneously. The small places will almost certainly not be able to compete in a race to the bottom on pricing with corporate entities that have the capital to spend several million on a farming facility.

wils12452• 9 years ago

Two things of interest that the article doesn’t go into:

- Taxes on weed in CA are going to be very high, ~20%. This may drive black market sales.

- Online ordering through Eaze is popular, which might drive the familiar winner take all online commerce market dynamic. A lot of people don’t care for the dispensary experience.

At the end of the day, this is an agricultural product, and a commodity. It was optimistically compared with beer, but beer is made from a recipe, of which there are endless variations to try. Some heavy users care about certain strains and the like, but I have a feeling that for most people weed is weed. The new edible products are a development, but those too will be comoditized.

stevenwoo• 9 years ago

Those taxes on weed don't look bad compared to what I think is the current equivalent product with even higher taxes - cigarettes - how is the situation different in your view?

wils12452• 9 years ago

There’s a much more robust black market already in place for marijuana than for cigarettes. Washington has all the same products and is right next door, and taxes at 3% [1]. Also at least in CA municipalities are adding their own taxes, so the distance you need to travel to enable black market arbitrage might not be much.

1 - https://dor.wa.gov/sites/default/files/legacy/Docs/Reports/2...

mikestew2• 9 years ago

Taxes on weed in CA are going to be very high, ~20%. This may drive black market sales.

WA’s taxes are ungodly high for weed (EDIT: w/o looking it up, more than 20%, that’s for sure). Didn’t seem to slow down things much. A new store just opened closer to the house, and I don’t know of a single store that has closed. Personally, I’m more than willing to pay the “convenience fee” to just drive down the road any time I like and score some weed. That, and let’s do what we can to encourage the legal stuff, eh? We collectively get one shot at this, let’s not screw it up.

But if WA is any indication, give it a few years of high prices, then the prices will settle down. Pot was outrageously expensive in WA when it first legal, but it’s pretty reasonable now, I think.

As for online ordering, yeah, that’s going to be a thing. Because the experience of “here’s a menu, hurry and make a selection from 200 different items while you’re in line.” doesnt work for me, either. One local shop offers online ordering, and the only reason I don’t use them exclusively is that they’re out of the way.

But you’re right, pot isn’t beer, it’s corn. The only reason I don’t grow some next to the tomato plants is because WA says I can’t. So the only barrier from me taking production in-house is legal, which seems to be a pretty thin moat with which to protect your castle.

AndrewUnmuted4• 9 years ago

As for online ordering, yeah, that’s going to be a thing.

If the Darknet is any indication (and according to High Times[0], it is), you're right about this. Cannabis is the most popular product sold on the various illicit online drug marketplaces.

[0] https://hightimes.com/business/marijuana-is-the-most-popular...

egypturnash• 9 years ago

I don't have any data on WA's black market vs white market, but I do have some anecdata: the thriving community of illicit entrepreneurs hanging out by the U District Jack in the Box has completely vanished since legalization.

(And it is quite literally a black/white thing, too - the people selling weed in shops are pretty much uniformly white, whereas the illegal market was a lot more mixed-race.)

mynameisvlad• 9 years ago

Have a Heart? Their online ordering is the best, and they do essentially a constant 10% off discount if you sign up for their membership (every time you order you get a discount based on your purchase amount you can apply on your next order. I believe it's roughly equivalent to $1 for every $10 purchased.) I switched from Uncle Ike's and never looked back.

The only pro I see for the line is that the staff can help you pick out a nice strain depending on your needs and you don't have to do the research yourself. Personally, I'm in the same boat as you. I get stressed out looking at all the choices while in the store and almost exclusively use the online ordering system before I leave the house. By the time I reach the store (a few minutes away) the order is ready for pickup.

It's crazy to think of how far it's come in the few years since it got legalized. From the quasilegal delivery services or even worse going to Westlake Park or another sketch location at night to a clean, accessible system with some of the nicest people around.

40acres• 9 years ago

Have you tried Eaze? Could you describe the experience? There's a couple of online sites in Oregon (where I am based) but they don't reach my area and the local dispensary is 10 minutes away.

xocyabencl• 9 years ago

I've used Eaze. You pick an item from a menu in the website or app (although the Android app doesn't work for me), then someone drives up 20 minutes later and hands the item over. In my case I've gone outside to the driver's passenger window, they didn't come to my door. Think Uber, except the driver takes longer to arrive and gives you weed.

It's like any other delivery service, but I suspect the economics work better than food delivery because users make larger orders, you don't need to pick up from restaurants, and freshness is not as important (comparing to a central kitchen for food delivery).

rconti2• 9 years ago

The taxes won't be an issue. They'll easily be swamped by lowered costs, eventually.

One major issue is retail store licenses; few cities are deciding to license stores, and they're not happening on day 1 (for the most part).

Another issue is licenses for growers. Currently growing licenses only allow 1 acre under cultivation, and it sounds like production will be nowhere near high enough to meet demand, at least initially.

It sounds like CA's start into the legal market will be a lot rockier than most.

aphextron• 9 years ago

Online ordering through Eaze is popular, which might drive the familiar winner take all online commerce market dynamic. A lot of people don’t care for the dispensary experience.

Anecdotally, I've seen a ton of small delivery services popping up in the Bay Area recently and doing well. Turns out selling weed is profitable.

AndrewUnmuted4• 9 years ago

Some heavy users care about certain strains and the like, but I have a feeling that for most people weed is weed.

As recently as 5-6 years ago, I would have agreed with this sentiment. These days, however I think this mentality is no longer a responsible one to propagate.

Today's cannabis is, in general, much more potent than it used to be. And now there are ways to consume very large amounts of this extremely potent product in a very short amount of time (concentrates, oils, edibles, etc). No matter how it's consumed, today's average cannabis user is getting a lot more in their hit than prior generations. This means that the difference between a sativa and indica is no longer necessarily a nuanced one.

Today people need to be reasonably sure that what they're getting will meet their needs, because for some one hit may send them spiraling in the totally wrong direction. A user with anxiety issues may need to entirely steer clear of sativas because they are known to cause anxiety attacks. But someone who needs to be around other people may need to avoid indicas because they are known to cause delayed responses and decreased social acumen.

This risk is compounded when people use one of these new, super-powerful 'hybrid' strains because their effects on the individual user are harder to predict than pure indica or sativa strains.

Legalization will put new emphasis on educating users on safe practices, harm reduction, and other such things. In the US, public schools teach harm reduction strategies with alcohol in its various forms, and one day it will probably need to do the same for cannabis.

root_axis2• 9 years ago

Today people need to be reasonably sure that what they're getting will meet their needs, because for some one hit may send them spiraling in the totally wrong direction. A user with anxiety issues may need to entirely steer clear of sativas because they are known to cause anxiety attacks. But someone who needs to be around other people may need to avoid indicas because they are known to cause delayed responses and decreased social acumen.

What's the source for this, I'm genuinely interested? As far as I'm aware, this is more a marijuana folklore thing than an effect that science has verified.

yodsanklai2• 9 years ago

Today's cannabis is, in general, much more potent than it used to be.

I hear that a lot (especially from anti-legalization people), but I don't believe it makes any difference. What makes a difference to the consumer is the amount of cannabinoids consumed, not the concentration in a given amount of weed.

The typical weed consumption experience is to vaporize/smoke/eat some small amount, and reiterate until satisfaction. Once the sweet spot is reached the experience becomes less enjoyable. If your weed is twice as much potent, you'll iterate two times less...

One could imagine a scenario where a user is caught off-guard by a super strong weed, but I don't see this happening. Standard THC rates are 15-20%(?) you're not going to get much more than that amount and you will always notice at the first inhalation if the weed is more potent than what you're used to.

Edibles are different and need more caution. You can eat an arbitrary amount of cannabinoid and get sick. But this is not related to the weed potency.

I totally agree with you that schools should teach harm reduction strategies (don't smoke week but use vaporizers, be careful with edibles, don't drive, don't make it a habit). I also think that prevention should focus on the real risks of regular cannabis usage, which exist and are not benign (de-socialization, learning impairment...) instead of trying to scare people with things that are extremely unlikely to happen.

kyleblarson• 9 years ago

Couldn't agree more. It's like saying that Boone's farm and Screaming Eagle Cab are both 'just wine'.

pmoriarty• 9 years ago

"for most people weed is weed"

Never underestimate the power of marketing.

Everywhere I look in our world, marketing is king. It doesn't matter how crappy your product is, if it's marketed well, people will buy it.

sandworm101• 9 years ago

> if it's marketed well, people will buy it.

Budweiser. The people who like to talk about bear don't drink Bud. Nevertheless, by volume and market share, Bud is probably America's favorite beer. If you want to be the pot equivalent of a craft beer company then complain about the prices and taxation. But if you want to play in the big leagues, price and consistency are all that matters.

njarboe• 9 years ago

Cigarettes cost about $0.10 a pack to manufacture so maybe $0.50 price for highly marketed brands. Price these days, with the added tax and sudo-tax lawsuit settlement, $5-$10 a pack. About 10x so 1000% tax or so. 20% seems mild especially considering normal sales tax in CA is around 10%.

I don't see a fundamental reason the cost of weed won't be around the price of tobacco in a fully legalized and big-ag growing environment. 5-10 years?

GordonS2• 9 years ago

I think the reason for high tobacco taxes is because of the harm smoking tobacco causes. At least in the UK, where the taxpayer foots the nation's medical bills, the escalating taxes seem designed to slowly but surely make smoking a thing of the past. It seems to be working.

natecavanaugh• 9 years ago

Taxes on weed in CA are going to be very high, ~20%. This may drive black market sales.

The last I heard was that those with a prescription wouldn't have to pay the tax, and since it's so easy to get a prescription, at least ATM, I would imagine that would be the first avenue before the black market (heck, I would even say that getting it from friends who grow their own would be a gray market angle that would probably happen before getting it from the black market suppliers).

But I don't know if there have been any changes in the law during this past year regarding taxation for medical patients.

Stratoscope• 9 years ago

Taxes in Oakland are increasing from 14.25% to 34.25%, and in San Jose they are increasing from 19.25% to the same 34.25%. [1]

Medical users with a county Medical Marijuana Information Card (MMIC) are only exempt from a portion of this, the 8.5% sales and use tax. [2]

To get an MMIC you first need a doctor's recommendation (typically $40/year). The maximum cost of an MMIC from the county is $100/year, or $50/year for Medi-Cal patients.

So to save the 8.5% sales tax, you need to visit a cannabis doctor, wait in line, and pay $40, then visit the county public health department, wait in line again, and pay as much as another $100.

If you are a heavy user, this could save you some money, but I have a feeling that most people in California who are currently medical users will simply drop the medical recommendation and buy under the new adult-use rules.

[1] https://www.shopharborside.com/adult-use-regs.html (expand the "new taxes" item)

[2] https://www.thegreencross.org/newsletter

DrScump• 9 years ago

  This may drive black market sales.

Given that only about 9-11% of CA's cannabis production currently goes into the legal intrastate market, I'd say "black market" sales already drive production... including a lot of production on public lands (and at great environmental cost).

PhasmaFelis2• 9 years ago

It was optimistically compared with beer, but beer is made from a recipe, of which there are endless variations to try. Some heavy users care about certain strains and the like, but I have a feeling that for most people weed is weed.

Weed is weed when it's illegal--you take what the dealer's got or you get nothing. Same thing with booze, during Prohibition. When it's actually possible to comparison-shop, you see a lot more preferences developing.

freeflight2• 9 years ago

I have a feeling that for most people weed is weed.

That oversimplification works both ways: For many people, beer is just beer. And just like with beer, there are endless variations of cannabis strains, different ways or preparation and different ways of consuming. Just the way cannabis is cured can make a vast difference in taste and effect.

With alcohol, many places often have centuries-old traditions for consumption and brewing, cannabis just started going down that route, so imho it's just logical that there's a lot of catching up to happen because most of the knowledge we collected is stuck in the realm of "illegality" and spread thin between users, with no real way of consolidating it in a useful way.

It's gonna take a lot of time to lose the stigma which has been, purposely, build up around cannabis for decades.

twblalock• 9 years ago

I'm sure some black market activity will remain because of the tax rate, but I'm also sure most middle- and upper-class people would prefer to pay more for their weed at a legal venue than risk arrest by buying from a black market dealer.

There also exists a black market for cigarettes because of taxes, but the vast majority of smokers buy cigarettes legally because it is easier and safer and runs no risk of arrest.

topshelfdata2• 9 years ago

Excise taxes in Washington state on weed are 37%, much higher than the ~20% you suggest for CA.

https://lcb.wa.gov/mj2015/faqs-on-taxes

https://dor.wa.gov/find-taxes-rates/taxes-due-marijuana

gozur88• 9 years ago

Some heavy users care about certain strains and the like, but I have a feeling that for most people weed is weed.

I'd be surprised if that's the case, and even if it's the case in the beginning, I'd be surprised if it's still the case after a few years.

itomato• 9 years ago

Access to the banking services other small businesses enjoy would help.

I will pay tax on an 1/8th before I will subject myself to Criminal Prosection.

walrus012• 9 years ago

One of the things left out entirely is that WA state cannabis farmers are not yet allowed to grow outdoor under sunlight, so they're facing massive price pressure in wholesale $/gram sold to processors, but still have the huge operating costs of running indoor farms with electrical bills for lighting, lighting equipment, ventilation, climate control etc.

I honestly don't understand this, since it is a lot less expensive to build a highly secure double-perimeter razorwire fence around a farm than it is to pay $4500/month electrical bills.

Sunlight is free.

In Canada's recently announced system, which gives a lot of control to individual provinces, BC has announced that they will allow greenhouse based farms.

c256• 9 years ago

I think (speculation based on some light reading) the WA indoor/outdoor split is based on requiring a very high level of oversight and control on the growing operation — from what I understand, WA processes have per-plant requirements. Put roughly, it’s a lot harder to smuggle 5 plants out of a climate- and access-controlled building than it is to toss a bundle of foliage over a fence. I live in WA, and have since before the legalization efforts were passed. (I voted for it but do not partake, for various uninteresting reasons.) The approach here was based at least as much on trying to slowly open small, controlled ports in the dam as it was trying to create a viable business opportunity. The idea seems to be “there’s enough demand for a boom now either way, and we can open up later more easily than we can close down.” Honestly, bitcoin miners using super-cheap electricity might be a greater concern for the government, at the moment.

jayd16• 9 years ago

A fence only matters if you have a guard on patrol and that easily offsets the electricity cost.

pravda• 9 years ago

Holy guacamole those weed prices are off the scales!

$7.50 a gram? Weed should cost about the same amount as catnip.

I can buy 4 oz of catnip for $8 on eBay. That's over 100g, about 8 cents a gram.

Synaesthesia2• 9 years ago

It should maybe but it doesn’t.

mrob• 9 years ago

Catnip is sold as leaves and stems, but marijuana is usually sold as the flowers. The percentage waste is much higher. And catnip does not require careful segregation of male and female plants to avoid unwanted seed production.

teach• 9 years ago

Catnip and marijuana are different enough that I wouldn't expect them to cost the same.

However, I don't see why it wouldn't be similar to growing bittering hops like the ones used by beer homebrewers.

I can buy a pound of "Mosaic" hops -- 450 grams -- for $30 at my local homebrew supply store. That's less than 7 cents per gram....

sporkologist• 9 years ago

Weed "should" be mandatory for every citizen, supplied free from the Government.

GordonS2• 9 years ago

Black market prices in the UK are around $14/g for weed, so these prices seem great from the other side of the pond!

What's with the catnip comparison?

jchook• 9 years ago

If you ask me, this "slow roll-out" of legal cannabis in the United States has been planned and directed entirely by big business the entire time.

Animats• 9 years ago

Maybe it's a plot to make the lower classes more passive so they don't revolt. I've been amazed to see the GOP reverse course on this.

adventured• 9 years ago

The GOP largely reversed course because of the obvious reason: their voters have changed their minds about marijuana over the last two decades. Opinion polls among GOP voters from the early 1990s to now, tell that story.

It's the same reason the GOP is gradually shifting its mindset on how to deal with opioid addiction (incarceration vs treatment, decriminalization, lessened criminalization, etc). GOP voting districts are getting hammered by it. It has become personal. It's likely everyone living in a GOP-dominated area, knows someone who is dealing with or has dealt with opioid addiction. There are now millions of opioid addicts in GOP voting districts in a given five year time span.

mythrwy• 9 years ago

Plenty of Democrats have "reversed course" as well.

I think Hillary was against legalizing the herb wasn't she? Did she ever reverse position?

Politicians are just politicians for the most part. Whatever they think will get them in office.

StanislavPetrov• 9 years ago

That's because what we need is deregulation of cannabis, not "legalization". You need only look at the massive tome of over 200 pages that California has proposed to regulate recreational marijuana starting in 2018 to see what the issue is. Laws and regulations have their place in society to a certain degree. Our country has gone way, way overboard as far as laws and regulations are concerned. This massive over-litigation on every level acts as a massive drain on our resources, our economy, and our society as a whole. Any regulations "needed" for cannabis should be able to fit on a single sheet of paper - but we would be far better off if the government had no role at all. The burdensome, poorly-written, oft-conflicting tangle of regulations written by unintelligent politicians at the behest of their wealthy donors do far more harm than good in most cases, and certainly as it regards cannabis. It isn't some sort of an accident that startup costs for regulatory compliance are massive - that's the whole reason for their existence. We are $21 trillion dollars and debt on the federal level and saturated with even more debt on every level from state to county to village. Our bridges and roads are falling apart, our pensions are underfunded and every year more Americans slide into poverty. Not only is the nanny state a terrible idea, but its an idea that we no longer afford - especially when the nanny is a corrupt Wall Street crony.

shams93• 9 years ago

Well for growers you can get better quality on a smaller scale so the grow side of the business will always have a door open for people who can grow high quality medicines.

topshelfdata2• 9 years ago

Hi folks, I'm one of the founders of https://www.topshelfdata.com, the site that provided most of the data used in the article.

Let me know if you have any questions related to the data that I can answer (it may take a few hours since I am about to hit the sack).

Related: here's our Show HN post that was on the front page of HN earlier this year. https://news.ycombinator.com/item?id=13767772

skimaskninja87• 9 years ago

Easy answer.... Squares don't know how to sell weed. It's been so underground for so long, walking in a store or searching online comparing prices is both a foreign and weird process. These shops may need to recruit some real hustlers. No different than hiring a sales staff.

Legal Marijuana Isn’t the Boon Small Businesses Thought It Would Be

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