Dime Store<\/a> by Sam Kamin and Joel Warner in Slate.<\/p>\nThe Text:<\/strong> On Jan. 1, Colorado\u2019s recreational marijuana shops opened for business. It was quite the party. As politicians and marijuana activists jockeyed for the attention of the horde of reporters on the scene, the world\u2019s first legal pot shops opened for business. Most soon had lines stretching around the block. People had come from all over the country, all over the world, and they happily waited hours in the wintry morning chill just to set foot in a store. Everyone wanted to be part of history, and for that they were willing to pay a premium: Recreational pot prices, including hefty new state and local marijuana taxes that in Denver equal nearly a nearly 29 percent tax rate on all pot sales, are currently going for $50 to $60 an eighth, nearly double the price for medical pot in Colorado. When business ended that first day, the 37 pot shops open statewide had reportedly racked up $1 million in sales.<\/p>\nIt seems like a perfect situation for someone to make a lot of money. But is the legal weed market really as lucrative as it appears?<\/p>\n
<\/p>\n
The people most likely to benefit are those who have previously been selling licensed medical marijuana in Colorado, since for the first nine months of 2014, they\u2019re the only businesses allowed to enter the recreational market. The arrangement makes sense; it allows state policymakers to build on an existing, stable regulatory system and allows them to work with operators who have proven their capacity to comply with Colorado\u2019s strict marijuana regulations. But for medical marijuana dispensary owners, it amounts to a highly favorable state-sanctioned monopoly. With no new competition, product already in hand (dispensaries getting into the recreational market are allowed to use some or all of their medical crop for recreational sales), and the staggering demand created by marijuana still being illegal everywhere else, Colorado dispensary owners appear to be sitting on a gold mine.<\/p>\n
But that may not actually be the case. We took a look at the existing financial situation for Colorado dispensaries by convincing one of them to show us its books. \u201cThey all think we\u2019re making money hand over fist,\u201d says Brandon, the 29-year-old-proprietor of a midsize Denver operation, which has been in business since 2009. (We\u2019re not revealing his real name or that of his dispensary; although he\u2019s in compliance with state law, he didn\u2019t want his competition knowing the ins and outs of his business.) In truth, business is going well for him. Located in a stylish downtown building filled with loft-like workspaces, his dispensary sees about 50 customers a day from its stable of 300 or so regular medical marijuana patients, and up to about 80 sales a day on Fridays and Saturdays. With each of his customers spending about $65 per visit, lately he\u2019s been bringing in upward of $100,000 in revenue per month. In 2013, he brought in $1 million in sales for the first time, and he could stand to gain significantly from recreational pot sales.<\/p>\n
But looking at Brandon\u2019s books, it becomes clear that, so far at least, nearly all the money coming in the door is going right back out in expenses. Like many Colorado dispensary operators, he\u2019s faced major, expensive problems with his grow facilities. He\u2019s gone through five grow managers in four years, as top-notch growers who don\u2019t already have lucrative, stable jobs are hard to come by. He\u2019s had to destroy an entire poorly produced crop yield that had been devastated by mold, mildew, and pests. Brandon has also faced sky-high regulatory costs; between applying for his recreational marijuana sales license so he can sell retail pot this spring and upgrading his existing medical marijuana sales license to accommodate the growing number of patients registered with his dispensary, he estimates he\u2019s been shelling out $15,000 to $20,000 over each of the past four months on city and state applications, licensing, inspection, and permit fees. There are other new costs associated with recreational sales, such as purchasing opaque, childproof shopping bags to accommodate the state\u2019s new marijuana packaging rules. Brandon has also been hemorrhaging money in the form of legal and accounting fees to comply with an aggressive, multiyear federal audit of his business, one of the first of many Internal Revenue Service actions he predicts will soon be plaguing Colorado\u2019s marijuana industry. \u201cEveryone is going to be audited,\u201d he says. After all, the more the IRS knows about the nascent marijuana industry, the better it can figure out how to tax it.<\/p>\n
Then, says Brandon, there are the business costs of operating in what remains a legal limbo. For example, he suspects his landlord is charging him a higher rent than the other businesses in his building and is making him shoulder a disproportionate share of building improvement costs, because of the taboo nature of his business.<\/p>\n
There\u2019s another reason Brandon doesn\u2019t seem to be making much money: the little-known tax-law wrinkle that creates enormous incentives for marijuana companies to sink as much revenue as possible back into their businesses. Under Section 280E of the Internal Revenue Code, those violating the Controlled Substances Act\u2014whether they\u2019re common street dealers or vertically integrated, state-regulated marijuana businesses\u2014are required to pay taxes on the proceeds of all their transactions, but without the benefit of deducting most normal business expenses. Unlike other illegal businesses\u2014prostitution, gambling, or even murder for hire\u2014only drug dealers are singled out for this special tax treatment. (Whereas a hit man who gets busted and forced to pay taxes on his blood money can deduct the cost of his sniper rifle, travel expense to and from the crime scene, etc.) The only break marijuana businesses get under 280E is that they can deduct their cost of obtaining their illegal goods.<\/p>\n
The more a marijuana business can spend on growing its inventory (i.e., more marijuana), therefore, the more it can write off as the cost of goods, and the less it will have to pay in taxes. Anything Brandon had pocketed of the $1 million in revenue he made in 2013\u2014or invested in, say, new retail space\u2014would have been taxable. Instead, like many savvy marijuana entrepreneurs, he\u2019s reinvesting his revenue in his grow operation, expanding and upgrading his 5,000-square-foot facility in advance of getting into the retail marijuana market.<\/p>\n
It\u2019s a smart business move, but on top all his other business costs, it means Brandon\u2019s business doesn\u2019t look all that impressive on paper. Generally speaking, investors are interested in checking out a company\u2019s gross profit margin, which is the ratio of its revenue minus cost of goods to its overall revenue. A high gross profit margin suggests the company could be highly profitable as it scales up its production. Over a six-month period, Brandon\u2019s dispensary had an average gross profit margin of 32 percent. That\u2019s not terrible\u2014most grocery stores have gross profit margins around 20 percent\u2014but it\u2019s not great either, and not at all the financial bonanza many people make the legal marijuana business out to be. Starbucks, another company that deals in mind-altering, plant-based substances, regularly has gross profit margins of 57 percent, nearly twice that of Brandon\u2019s dispensary.<\/p>\n
When we shared a redacted version of Brandon\u2019s financials with Alexander Ooms, managing partner at ClearCreek Partners, a Denver financial advisory firm, he was circumspect, to say the least. \u201cSince I help companies raise capital, my thought here is, \u2018Wow, it\u2019s going to be really hard for any marijuana business to raise institutional equity,\u2019 \u201d he says. \u201cCan retail marijuana be a solid business? Clearly, yes. Can it be highly profitable? Not sure.\u201d<\/p>\n
Maybe that\u2019s why Brandon, like the majority of Colorado dispensary owners, didn\u2019t open his doors to the recreational market on Jan. 1, despite the head start he has over other potential marijuana entrepreneurs in the state. Only 136 of the 517 dispensaries currently operating in Colorado applied for a Colorado recreational sales license when it was first offered last fall. Brandon was among those who applied for a license, but like many others, he\u2019s waiting a few months to see how the retail market pans out before making use of it. The cost of opening a legal marijuana shop is just too high, and the margins too thin, to jump in without careful planning. Besides, he\u2019s able to sell all of the 50 or so pounds of marijuana he produces each month to his existing medical customers; if he didn\u2019t have enough pot for them, those loyal customers might look elsewhere.<\/p>\n
Colorado\u2019s medical marijuana market, in other words, isn\u2019t going to be killed off by the recreational market anytime soon. In fact, when recreational marijuana shoppers notice the significantly cheaper shelf prices for those carrying a $15 Colorado medical marijuana card, they might consider making an appointment with their doctor. In this way, the opening of the legal market could lead to an increase, not a decrease, in the number of medical marijuana patients. In addition to lower prices, medical patients will be able to purchase more pot (2 ounces versus 1 ounce), pay lower taxes, and purchase at age 18 rather than 21.<\/p>\n
Nor will recreational marijuana be killing off Colorado\u2019s other marijuana market\u2014the black market\u2014anytime soon. We spoke with \u201cCT,\u201d a Denver-based street dealer who\u2019s been making a good living over the past five years servicing a client base of 30 to 40 people with a personal, illicit marijuana crop of 80 to 200 plants. One benefit he offers is a good price; unlike Brandon, CT does not have to pay licensing fees, taxes, or other regulatory expenses. Over the past few years he\u2019s dropped his rate for an eighth from around $50 to $30 to meet or beat the going price at Colorado dispensaries, which means he\u2019s now significantly cheaper than the new retail outlets. But more important, he says, he offers quality, convenience, and a personal touch retail outlets can\u2019t match. He makes house calls, and, as he puts it, \u201cA lot of people would rather go to their drug dealers\u2019 house and buy a bag and sit down and smoke a bowl with them than go to a store.\u201d<\/p>\n
With a social drug like marijuana, that personal connection goes a long way. Since he grows and sells his own product, CT is like an illicit version of the local-foods movement. \u201cYou go to a big supermarket, and you don\u2019t know where the produce is coming from. If you go to a farmers market, you are probably buying your food from the person who grew it and knows all about it,\u201d he says. \u201cThere are a lot of things that go down at these dispensaries and grow facilities that nobody really knows about. My clients know where my product is coming from. They can ask me anything about it.\u201d<\/p>\n
Yes, some of his clients stood in line at the new pot shops on Jan. 1 to be a part of marijuana history, but then a couple of these same people stopped by CT\u2019s house on the way home, bought some more marijuana from him, and laughed about the whole thing. As CT puts it, \u201cWho wants to wait 30 minutes in line to score a bag?\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"
The Article: Dime Store by Sam Kamin and Joel Warner in Slate. The Text: On Jan. 1, Colorado\u2019s recreational marijuana shops opened for business. It was quite the party. As politicians and marijuana activists jockeyed for the attention of the horde of reporters on the scene, the world\u2019s first legal pot shops opened for business. […]<\/p>\n","protected":false},"author":49,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[259],"tags":[],"yoast_head":"\n
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![\"Weed](\"http:\/\/www.prosebeforehos.com\/wordpress\/wp-content\/uploads\/2014\/01\/weed-sales.jpg\")
<\/p>\n