Investment Opportunities In The Marijuana Business

Hundreds of millions of dollars are pouring into the legal (or at least semi-legal) marijuana industry. Is it too much investment for the market potential? Here are the critical issues to consider.

Current Marijuana Users Already Have Their Suppliers

Let’s say that you smoke or otherwise consume marijuana with some regularity, at least once a month. You have a source. It’s always a challenge to get a buyer of any product to change to a new seller. Very few current users will be eager to switch just because the old supplier is not legal.

Lower prices could induce some switching, but legality does not always mean cheapness. In Washington state, the taxes pile on at 25 percent of every sale, all through the supply chain. Think about what would happen if your bread were taxed the same way. The farmer sells wheat to a grain silo and a 25 percent tax is paid. The silo sells to a miller and another 25 percent goes to the government. The miller sells to a baker and another tax is collected. The baker sells to a grocery store and the tax is paid again. Finally the store sells to a consumer and a final tax is paid. That’s 25 percent compounded five times, which amounts to a 205 percent tax (1.25 raised to the fifth power, minus one). It’s no wonder that early reports found that in Washington, legal marijuana cost twice as much as illegal pot.

Other tax structures would not be so onerous. Oregon’s new law is likely to bring prices down by 20 percent, according to estimates from a good report on the subject by Robert Whelan of ECONorthwest, “Oregon Cannabis Tax Revenue Estimate.” This estimate is more a ballpark figure than a finely tuned projection, but it validates the concept that there’s room to bring down prices while the state collects taxes. (Whelan’s report does such a good job of outlining the issues that it should be studied by people outside of Oregon considering entering the business.)

Cannabis

A significant price drop will move users from old suppliers to new ones. If the new suppliers are also more convenient, the switch will be faster. That’s likely to be the case, Whelan notes, in larger cities, but less likely in rural areas or suburbs which prevent marijuana stores from locating.

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