Is Big Marijuana Inevitable?

Big marijuana might be closer to becoming a reality than you think. Over the course of the past year, we’ve seen Constellation Brands (a leading wine, beer, and spirits company around the world) acquire a stake in Canopy Growth to develop marijuana-infused products. We’ve also seen Walmart, Home Depot, and Amazon partner with American Cannabis Company to offer ancillary marijuana products (potting mix and a root probiotic) for sale through their websites, and we’ve seen Sandoz Canada Inc. (part of the Novartis Group) sign an intent to work with Tilray, a Canadian medical marijuana company, to create a new marijuana-based medication that will be distributed by Sandoz to hospitals and pharmacies. In Canada, Tilray, Aphria, and MedReLeaf all have agreements in place with one of Canada’s largest pharmacies, Shoppers Drug Mart, to distribute their products.

According to Seeking Alpha, capital raises and mergers and acquisitions in the marijuana industry surpassed $1.2 billion in the first five weeks of 2018, which is equal to the total number of deals closed in 2016. Large companies are taking a closer look at the cannabis industry now that it’s reaching maturity. While the fact that marijuana is still illegal at the federal level in the United States keeps many of these companies from fully investing in the industry, they’re actively looking for ways to benefit from its potential sooner rather than later. Strategic partnerships, agreements, and acquisitions are the name of the game today.

As a result, small marijuana companies will likely find it harder to compete in the future. Already, many states have manufactured oligopolies by passing marijuana laws that favor big businesses. Barriers to entry for cultivators, processors, and dispensaries include limited numbers of available licenses, high application fees, exorbitant taxes, and security investment requirements that climb well into the millions. In an industry where bank loans and financial investors are hard to come by, small farmers and small businesses are at a very big disadvantage when it comes to entering and thriving in the marijuana market.

In fact, before California legalized recreational marijuana in 2016, many cannabis growers actually opposed it. They cited high environmental costs to operate marijuana farms, unnecessary inspections, a separate cultivation tax, and the upcoming Type 5 cultivation licenses for large businesses coming in 2023 as the four primary reasons for opposing legalization of recreational marijuana in the state.

In Colorado, big businesses are establishing a stronghold in the marijuana market in a different way. In May 2016, the state extended a moratorium on the issuance of new cannabis licenses. As a result, big marijuana businesses were able to purchase most of the available licenses. In addition, Colorado doesn’t limit the number of plants marijuana cultivators can grow in each facility. That means big businesses with deep pockets could produce more than enough marijuana to meet demand.

Sean Williams of Motley Fool explained the situation in Colorado saying, “An oligopoly-driven oversupply is pushing prices down. While this could be good news for the consumer for the time being, in the long term, it could keep smaller marijuana players out of the market by keeping margins low, ensuring that just a few large players remain.” In other words, the stage is set for big marijuana in Colorado.

In states like Florida, New Jersey, New York, Minnesota, Illinois, and Pennsylvania, regulations that restrict licensing create oligopolies that push smaller farmers and businesses out of the industry. As a result, many people fear that mass market marijuana and the Walmarting of the industry will happen in the short-term.

When big businesses gain dominance – that rely on quantity over quality, on profit margins over innovation, and speed through automation over a passion for caring for the marijuana plant – consumers and patients lose. Prices will drop in the short term, which pushes small businesses out of the market, but eventually, the dominant players in the industry will raise prices again to optimize their returns and make shareholders happy. What happens when double-digit year-over-year growth is a requirement? We’ve seen it happen in other industries, and when it comes to marijuana, it’s a future that is likely to help the black market.

Craft Marijuana Cultivators Could be the Future of Small Marijuana

While most small businesses and local farmers struggle to find the money to overcome the barriers to getting in and staying in the marijuana industry within their states, farmers in Massachusetts looked for ways to circumvent big businesses. Massachusetts Senator Julian Cyr introduced an amendment that became law last year as part of a comprehensive cannabis bill which allows craft cooperatives. These craft cooperatives give smaller farmers the ability to come together in order to split the costs and profits associated with growing marijuana.

The cooperative model has been compared to craft breweries in the beer industry where smaller “craft” cannabis cultivators might grow high-quality, specialty marijuana that could be sold at a higher price point than mass-produced marijuana grown by big businesses with big farming operations.

Craft cooperatives are intended to make the marijuana industry in Massachusetts more open. Since recreational marijuana was legalized in the state in 2016, the market is expected to grow significantly in the future, and more farmers of all sizes want to get into it. Craft cooperatives don’t solve all of the problems small growers face when trying to enter the marijuana market, but they could help.

The Future of Big and Small Marijuana

It seems inevitable that big business will play a major role in the marijuana industry’s short-term and long-term growth. With the way marijuana laws are written, it’s simply too cost-prohibitive for many smaller businesses and farmers to compete.

However, as the farmers in Massachusetts have proven by speaking out about laws that made it impossible for them to participate in the industry, it is possible for smaller players to create opportunities and carve a niche. Until laws change in more states, this might be the best small businesses and growers can hope for. In the meantime, they should be focused on creating innovative products that differentiate their companies, products, and services from their competitors and work to develop a brand that people recognize and trust.

How do you feel about big marijuana? Leave a comment and share your thoughts.