July 17, 2018
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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 as early as mid-2017. 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. This includes big businesses in other industries such as tobacco and pharmaceuticals, which have already begun to stake their claims in the marijuana industry.
As with all markets, big businesses rely on their deep pockets to force small businesses out with creative strategies and pricing tactics that marijuana entrepreneurs can’t compete with. The result is less competition, fewer consumer choices, and higher prices in the long-term.
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 in December 2017. The Economist attributed 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 cannabis 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.
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 the market.
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.
Big businesses are very good at recognizing when a state’s marijuana rules can be leveraged in their favor if they dip into their deep pockets. This has been a hot topic in Nevada, California, and Massachusetts this year as it relates to marijuana distribution monopolies.
In addition, big businesses use their access to money that smaller business don’t have to acquire as many marijuana business licenses as possible. For example, the 3,245 active cultivation licenses in the state of California are held by 1,501 owners, but one company holds far more licenses than any other business in the state.
According to the Cannabiz Media License Database, Central Coast Farmer’s Market Management, LLC holds over 175 cultivation licenses. That means one company holds 5% of all marijuana cultivation licenses in California. Based on the state’s reported license fees, Central Coast Farmer’s Market Management, LLC would have to pay well over $1.3 million in application and license fees for its cultivation licenses. That’s an expense small and mid-size businesses can’t afford, and it’s a key way big businesses force small businesses out of the marijuana market.
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.
Originally published 12/11/17. Updated 7/17/18.
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