Friday, January 16, 2015

WA.Gov And Inexperienced Small Businesses Will Give Rise To Big Pot

A couple years ago when the voters of Washington state were presented with the choice to legalize marijuana or not via Initiative 502, I joined a majority of active voters that November in approving the measure. I'm not much of a fan of the stuff myself, so I was voting in accordance with my morals and ethics, primarily in this case it being a matter of forbidding the state from assaulting people who engage in peaceful, consensual behavior. 

The measure basically called for running marijuana production, distribution, and sales in tandem with liquor control here. The existing liquor control board was tasked with setting up licensing and various other regulations on this newly legalized industry within our state. 

Put these guys at the helm - what could go wrong?
What do we have now? Basically, an expensive, inefficient infant industry that is being smothered to death in its crib by regulation and insanely high taxation on one side, with the help of a bunch of wanna-be business owners on the other that don't have the capital to weather the predictable storms and who should have known better. Here are select portions of the article I've linked to that spell out what has happened and where this is likely to end up going:

 "SEATTLE (AP) — Washington's legal marijuana market opened last summer to a dearth of weed. Some stores periodically closed because they didn't have pot to sell. Prices were through the roof.
Six months later, the equation has flipped, bringing serious growing pains to the new industry.
A big harvest of sun-grown marijuana from eastern Washington last fall flooded the market. Prices are starting to come down in the state's licensed pot shops, but due to the glut, growers are — surprisingly — struggling to sell their marijuana. Some are already worried about going belly-up, finding it tougher than expected to make a living in legal weed...
...State data show that licensed growers had harvested 31,000 pounds of bud as of Thursday, but Washington's relatively few legal pot shops have sold less than one-fifth of that. Many of the state's marijuana users have stuck with the untaxed or much-lesser-taxed pot they get from black market dealers or unregulated medical dispensaries — limiting how quickly product moves off the shelves of legal stores...
...So far, there are about 270 licensed growers in Washington — but only about 85 open stores for them to sell to. That's partly due to a slow, difficult licensing process; retail applicants who haven't been ready to open; and pot business bans in many cities and counties...
...In Washington, many growers have unrealistic expectations about how quickly they should be able to recoup their initial investments, Simmons said. And some of the growers complaining about the low prices they're getting now also gouged the new stores amid shortages last summer.
Those include Seitz, who sold his first crop — 22 pounds — for just under $21 per gram: nearly $230,000 before his hefty $57,000 tax bill. He's about to harvest his second crop, but this time he expects to get just $4 per gram, when he has big bills to pay.
"We're running out of money," he said. "We need to make sales this month to stay operational, and we're going to be selling at losses."
Because of the high taxes on Washington's legal pot, Seitz says stores can never compete with the black market while paying growers sustainable prices...
..."I got retailers beating me down to sell for black-market prices," said Fitz Couhig, owner of Pioneer Production and Processing in Arlington.
But two of the top-selling stores in Seattle — Uncle Ike's and Cannabis City — insist that because of their tax obligations and low demand for high-priced pot, they're not making any money either, despite each having sales of more than $600,000 per month." -- Gene Johnson
Basically, what you have are a bunch of people who dove head-first into producing marijuana for the newly legalized Washington state market, without first taking into account two hugely important things:

1) The state was authorized by I-502 to limit the number of retail outlets that could exist (counties and municipalities were authorized to restrict them, also, and many have), creating a bottleneck between their farms and the market;

2) The tax to be placed on legalized marijuana sales, a 25% excise on wholesale and retail sale, also spelled out in I-502, would set a price floor under the legal marijuana crop which was high enough for the black market to potentially undermine (and it sounds like they have).

The rest of it pretty much sounds to me like basic business myopia, where the operators failed to look further down the road and notice that there might be lean times ahead and set aside money accordingly. Most of them probably disregarded the added costs .gov was putting on them (not to mention the costs of a brick and mortar business: rent, insurance, utilities, maintenance, payroll, etc.) and assumed that all the consumers here would come out of the shadows and shop in the relative safety of the licensed market, leaving the licensed producers rolling in cash like the black market producers do now. They probably started living it up thinking the inflow of money would never end. Nope.

Banks are still worried about the Feds and are cool to getting involved with these licensed operators here and in Colorado, so most if not all of the financing to get these operations started had to have come out of the pockets of the owners. Since it sounds like a lot of them are crashing on the rocks now, they'll probably cease to exist or sell their operations. Because of the aforementioned Federal/banking hurdles, it's going to take buyers with cash hordes large enough to handle the ups and downs of these severely hobbled markets. Who might that be?

Probably the biggest players in an industry that have been dealing in combustible consumables for a very long time, at least one of whom has been operating for nearly two-hundred years.

When the day comes that a multi-national starts scooping up grow operations and filling the limited market in this state with a stable, quality supply of marijuana, which will begin to lock out small operators due to economies of scale, I expect the wailing to be deafening. What could keep that at bay would be some simple forethought and discipline on the part of the now-existing producers. I'm guessing that they won't figure that out in time, however, and when they find themselves sidelined by a major player, they'll have no one to blame but themselves. 

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