Why would-be marijuana moguls have their work cut out for them, By Tim Fernholz @timfernholz 2 hours ago, art, drawn by Belinda Baardsen, Artist, Wind Drinker, Artist for Animal Rescue
Republished for educational purposes
When you think economic opportunity, do you think of a heavily regulated, highly-competitive consumer goods sector where prices are set to drop? No? Maybe we should dial back the excitement around the potential of the US marijuana industry.
With the legalization of recreational marijuana in the American states of Colorado and Washington last year, along with growing support for legalization among the public and in 18 states, there’s a sense that it may be time for businesses and investors to enter a market dominated by criminal and semi-legal operations. (Not for the first time, however: recreational drug sales were common in the 19th and early 20th century).
The potential for a legal marijuana market has manifested itself in dot-com comparisons: A Microsoft employee turned pot entrepreneur is “the Bill Gates of Weed,” while a Colorado businessman mused aloud, ”do I want to be the next Google or Facebook of marijuana?”
These comparisons are premature.
Consider the former Microsoft employee, Jamen Shively, who wants to create an international marijuana brand named after his hemp-growing great-grandfather, Diego Pellicer, by acquiring legally operating dispensaries in Washington and Colorado, and opening more in California. His ambitions are to do for pot what Starbucks did for coffee, all while importing marijuana to the US from Mexico. Shively aims to seize 40% of the $142 billion worldwide market—once he raises a cool $10 million from investors.
Credit his boldness. Every industry going from grey markets to white ones needs firms committed to succeeding within the law, and newly opened markets could be the opportunity for someone to make a fortune. It just might be Shively, but it will be very hard for Diego Pellicer to succeed.
The biggest problem with this plan is that the US federal government still prohibits the sale and use of marijuana. Where states have allowed medical use, a grey market has evolved with federal law enforcement officials tolerating small operations but cracking down on large operations and efforts to regulate them. There’s no suggestion yet that it will be any different in Colorado or Washington. Shively could consolidate a network of dispensaries in those two states, but he’ll really have no recourse if the Drug Enforcement Administration decides to shut down his operation and seize all of his assets. And since the main criteria the DEA has for those seizures is size and national ambition, it’s hard to imagine he won’t attract its attention.
Still, there’s a sense that opinions on the issue are changing. And what if five years from now—a generous timeline—the national government sees the benefits of legalization and re-classifies marijuana as a controlled substance like tobacco or alcohol, not heroin and cocaine? Won’t the pot entrepreneurs of today be in a great position to make millions on legalization? There are still some obstacles. One is that the price of marijuana will likely drop precipitously if it is truly legalized, which will be a boon for consumers but not the producers. While Shively is emphasizing quality, creating a luxury brand that can charge premium prices isn’t easy.
Another obstacle is that this isn’t an industry ripe for disruption: Distributing a plant-based drug is something that existing pharmacies, among other companies, have down to a science. If the regulatory environment really opens up for the private sector, the competition is going to be fierce. You can imagine an analogous ecosystem to the microbreweries that exist precariously next to the near-monopoly imposed by global beer makers, but it could be hard for even the largest pre-existing dispensary chains to beat global corporations if they get involved.
The final problem, however, is that legalization for marijuana might not look like legalization for tobacco or alcohol. Mark Kleiman, the public policy professor who is helping create Washington’s marijuana regulations, notes that we still don’t know enough about how legal pot will work to understand what legalization really means for people and businesses. As the experiment there and in Colorado continues, lawmakers may decide that marijuana should be more strictly controlled than other recreational drugs, or not for recreational use at all. That won’t mean an end to marijuana’s (legal) profit potential, but it does imply the road ahead for pot entrepreneurs isn’t likely to be easy.