The marijuana industry is growing quickly, so it’s not surprising that many people and businesses want to get in on the action, including big businesses. However, the entrance of big businesses in the marijuana industry comes with positive and negatives. While big businesses can drive the price for marijuana down in the short term, that doesn’t mean prices will stay down after smaller businesses are pushed out of the industry.
The Start of Monopolies and Oligopolies
As Sean Williams of The Motley Fool explains, “The culprit for the substantial drop in marijuana prices appears to be big businesses infiltrating the industry and flooding the market with product. As with any industry, if big business can push the little guy out, they’ll have considerably more liberties down the road to raise their prices back up and capture a juicier margin, along with greater market share.”
It’s not surprising that investors have been scrambling to get into the marijuana industry during the past year, and truth be told, some consolidation in the currently fragmented industry isn’t necessarily a bad thing. However, the threat of monopolies or oligopolies developing is very real — not just in terms of big businesses naturally usurping smaller businesses but also in terms of state regulations that actually lead to the development of markets dominated by one or a few players.
For example, Williams cites a bill in Florida where medical marijuana regulations are currently being crafted. The bill would allow the seven existing companies that grow, process, transport, and dispense medical marijuana to be the only companies allowed to participate in those activities in the future. The number of marijuana cultivators would only grow if the population for medical marijuana grows. However, it fails to address whether or not those seven companies could even handle future growth. Other states, like Colorado, have ceased to award additional licenses to marijuana companies thereby creating oligopolies as a result.
A lack of competition is one of the five key factors that affect marijuana business growth as discussed in Cannabiz Media’s Marijuana Licensing Reference Guide: 2017 Edition. However, state regulations that create monopolies and oligopolies are just one part of the competition problem. The other part is related to states’ marijuana business licensing structures.
The Proliferation of Stacked Marijuana License Structures
Most states regulate how marijuana licenses can be structured. Cannabiz Media defines these structures as fully stacked (where a single business is required to handle all operations from seed to sale), partially stacked (where a single business can or is required to handle more than one operation but not all from seed to sale), and unstacked (where different businesses handle different operations across the supply chain from seed to sale).
Of the states that have defined their marijuana regulations, a total of 12 states require marijuana licenses to be fully stacked: Arizona, Delaware, Florida, Hawaii, Maine, Massachusetts, Minnesota, New Hampshire, New Jersey, New York, Rhode Island, and Vermont. Seven states require (or allow) licenses to be partially stacked: Connecticut, District of Columbia, Illinois, New Mexico, Oregon, Pennsylvania, and California. Eight states issue unstacked licenses: Alaska, Colorado, Maryland, Michigan, Missouri, Montana, Nevada, and Washington.
Bottom line, whenever every business who wants to be in an industry cannot enter the market, competition will not flourish. The result is the same whether businesses are shut out due to state regulations or because big businesses have deeper pockets and force smaller players to leave. Fewer players equals less competition which usually leads to higher prices and limited market growth. Only free competition ensures fair prices and market growth as well as innovation and product accessibility.
Considering that 27 states now allow medical marijuana and eight states allow recreational marijuana, there is no arguing that the market is large, growing, and highly attractive. However, there are factors at play that limit business growth in this industry, and unless competition can flourish, businesses will face challenges and consumers won’t be completely satisfied.