As recreational marijuana hits two and a half years of legalization in Colorado, there is plenty to celebrate, but given that the current price is at an all-time low, there are certainly reasons for concern. Marijuana sales came in at a massive $996 million, with more than $135 million in marijuana taxes and fees in 2015, yet commercial size grow facilities are finding it harder to expand their existing businesses. As the price of marijuana continues to fall, savvy businesses are vertically integrating, and consumers are shifting towards the use of concentrates. This trend has worried wholesalers and retailers while being beneficial to consumers. With the marijuana market changing, it is difficult to determine if the price of marijuana will come back to what is was a year ago or if we will continue to see record low prices.
With more then 950 dispensaries throughout the Denver area, the marijuana market is saturated. Just a year ago, an 1/8th of marijuana retailed for $40-$65. Today, one will be able to purchase the same amount for $25-$40, a roughly 40% decrease. Last year, a pound of top tier marijuana was selling for $2,500, which now sells for $1,300, a nearly 50% drop in price. As the supply of marijuana increases, and the demand remains the same, there will be a surplus, and thus the price per gram goes down. While the decline in prices has been beneficial for customers, it has caused problems for wholesalers and dispensaries. Some dispensaries are taking the initiative and vertically integrating to cut costs and maximize profits.
Vertical integration is a strategy where a dispensary expands its business operations into different steps on the same production line, such as when a dispensary owns its own grow facility or oil production. This helps dispensaries reduce costs and improve efficiencies. As a result, vertically integrated dispensaries have forced competitors to lower prices in order to keep their current customers satisfied and acquire new ones. A dispensary might opt for acquisition of a grow, as a means of cutting it’s supply costs. A grow may consider acquiring a dispensary, in order to maximize its per gram sale price. An additional step may be to incorporate a MIP. Inserting a MIP into the integration process will allow excess flower to be extracted, in order to deplete excess inventory. Moreover, with a retail location, the vertically integrated company can now supply itself with all the flower and concentrate it needs for its retail location, maximizing its profits via that avenue, and still supplying the wholesale market, again with both flower and/or concentrate. While larger dispensaries have the capital to implement this strategy, smaller “mom and pop” stores buy their marijuana from wholesalers at a discounted price. Vertically integrated companies have an opportunity to capture some of what they are currently losing on the flower side, by extracting their own concentrates, and retailing them through their existing channels.
Additionally, the rise in concentrate popularity has made it difficult for large scale grow facilities to sell their marijuana for top dollar. Concentrates have increased in popularity over the last couple of years for several reasons. Customers are looking for healthier ways to consume marijuana, and dabbing concentrates can provide that healthier alternative. Furthermore, concentrates have a higher THC level, which is appealing to frequent marijuana smokers. Ultimately, as the market shifts away from marijuana and into concentrates, large scale producers/distributors will have to adjust their business strategies accordingly.
With the marijuana market constantly changing, it is difficult to determine where we will be next year. Currently, the price of marijuana is down, and this is unlikely to change anytime soon. More commercial growers will get into oil production to maximize their overstocked inventory, and that in turn will lead to a drop in price for concentrates. However, this would seem to have a balancing effect; stabilizing the price of marijuana flower by reducing the glut, while decreasing the current price of concentrates as more production comes online, although it is hard to tell at exactly what price that may occur. The marijuana market is young but evolving rapidly. While some companies are expanding through efficiencies, others are finding it harder to stay afloat.
Next Big Crop offers hands-on experience and proven techniques for every phase of the cultivation, processing and sale of cannabis. Services include business planning and application writing to operations optimizations, management and expansion. For more information or to set up a consultation contact Doug@nextbigcrop.com