Signs of big businesses taking over the marijuana industry have been visible for quite a while with oligopoly conditions developing in states like Florida and Texas. Given the fact that the marijuana market is expected to grow to $50 billion in annual sales by 2026, it’s not surprising that big businesses want to get in and grow quickly. As with all markets, big businesses rely on their deep pockets to force small businesses out with creative pricing strategies.
Supply Outpaces Demand
The problem in many states is related to supply and demand. According to The Economist, the wholesale price for a pound of marijuana in Colorado dropped from a high of $2,000 in January 2015 to $1,300 today. The Economist attributes the drop in price to an increase in supply and competition in Colorado (the first state to legalize recreational marijuana) as well as seasonality with marijuana sales jumping during the ski season when tourism is at its peak.
In Colorado, the state issued a moratorium on the issuance of new marijuana licenses in May of 2016, which led big businesses to purchase most of the available licenses. Without restrictions on the number of plants cultivators can grow, Colorado marijuana cultivators with big budgets could grow more than enough pot to meet demand. This oversupply, led by an oligopoly of big businesses, increased supply and pushed prices down.
As a result, many small businesses simply can’t afford to compete in the state. Instead, many are looking at pursuing craft marijuana opportunities similar to how small businesses produce craft beer.
Big Businesses Undercut Competitors
In addition to supply outpacing demand, big businesses in the marijuana industry rely on their access to cash and capital to force small businesses out by slashing prices to the point that small businesses simply can’t afford to stay in.
This isn’t a tactic unique to the marijuana industry. As Sean Williams of The Motley Fool points out, this is Walmart’s modus operandi. Walmart cuts prices, which lowers the company’s margins to a point that smaller businesses can’t compete. While Walmart can absorb the lower margins thanks to its deep pockets, smaller competitors cannot.
Once those smaller competitors leave the market, the big business with the big market share can raise its prices. Since most of the competition is gone, consumers are forced to pay higher prices and the big business gets all of the profits.
Big businesses are using the same strategy to gain a stronghold in the marijuana industry. They’re flooding the marketplace with dried cannabis, which will keep prices down for consumers in the short term. However, those prices are unlikely to stay low in the long-term. Eventually, small businesses won’t be able to afford to stay in the market. When they leave, supply will no longer be artificially inflated, and prices will inevitably climb again.
The Future of the Marijuana Industry
The state of the marijuana industry today shows clear signs that big businesses will dominate the market in the near future. Until states open up licensing and create a marketplace that allows for equal competition, the industry is big business-friendly. Of course, expanded legalization and new laws could change things in the future, but the writing is on the wall. For people looking to invest in the marijuana industry, there are certainly opportunities if big businesses continue on the path they’re traveling right now.