Emerging Markets

From left to right: Pakalolo Supply in Alaska; Frequent Vibrationz in Oregon; Bud and Bloom in California.New markets mean new opportunities for those looking to cash in on the fastest growing industry in America. They also mean new regulations, giving both entrepreneurs and state regulators a chance to learn more about the complexities of legal marijuana.

While some states implemented recreational cannabis programs gracefully, others have sent longtime gray-market operators retreating into the darkness as over-regulation, slow licensing processes and unique hurdles in each state test prospective licensees’ patience and persistence.

As marijuana retail businesses in Oregon and Alaska embark upon the rocky first months of sales, businessmen from both states spoke with Marijuana Venture about the challenges they’ve faced, while a California attorney and cannabis entrepreneur addresses the future of marijuana in the Golden State.

Frequent Vibrationz

Oregon was applauded for swinging the doors of recreational marijuana wide open in October 2015 when the state allowed medical dispensaries to sell flower to adults. Many activists and entrepreneurs initially hailed Oregon’s legal cannabis framework as the best model in the country.

“Oregon took what it believed was the best from Washington and Colorado’s rules and kind of picked apart what they liked and what they didn’t like,” says Jack Peterson, co-owner of Frequent Vibrationz in Eugene, Oregon.

However, much of that applause stopped recently when the Oregon Liquor Control Commission began enforcing new testing and packaging regulations, which caught many producers and retailers off-guard.

“With all of the regulations and headaches that are going on right now with the OLCC and the testing,” Peterson says, “it’s creating a bottleneck that is keeping shelves bare and making it so employers are laying off people.”

With only a small handful of licensed testing labs, growers and manufacturers have been plagued by slow turnaround times and inflated prices, while retailers are experiencing a drought of quality product for customers and patients. Growers that have been able to move their product through the testing process are raising their prices, forcing retailers to decide whether to pass those higher rates on to customers.

Peterson says Frequent Vibrationz decided to swallow the additional cost in order to maintain a steady supply of product and to keep customers happy.

Prior to starting their own venture, Peterson and Frequent Vibrationz co-owner Branden Roberts worked behind the counter of a Spokane, Washington marijuana retailer, making a little more than minimum wage in one of the nation’s first recreational markets.

Because they were both familiar with Washington’s regulations, Peterson says the transition to Oregon’s infrastructure was mostly painless.

“It was more about trying to see what changed and what stayed the same,” he says. “There were a lot of nights spent reading about the differences.”

One of the biggest challenges Peterson faced was finding a home for Frequent Vibrationz. It wasn’t until the two entrepreneurs had scoured the Pacific Northwest that they finally settled in Eugene. They heard “no” about 1,300 times from property owners, Peterson jokes.

“We spent four months going motel to motel, because we had already called everybody, searched all of Craigslist,” he says. Finally, they decided to hit the streets in search of “For Rent” signs with phone numbers to call.

Several times, they had high hopes dashed due to zoning laws — one spot was nullified by a medical dispensary; another was too close to a school zone; a third location was snatched up by a medical dispensary because the Oregon Health Authority was able to process paperwork faster than the OLCC.

Ultimately, a landlord with a retail space available less than a mile from the University of Oregon campus contacted Peterson directly. Peterson and Roberts took the seven-hour trip from Spokane to sign the lease that same day.

By the end of 2016, Frequent Vibrationz was one of eight adult-use stores located in Eugene. While Peterson believes new companies will avoid the area due to the state’s legislative bottlenecks, a lot of the competition may already be operating under the Oregon Medical Marijuana Program — there were 21 state-licensed medical marijuana dispensaries in Eugene and there were nearly 70,000 cardholding patients in the state as of the most recent count.

Pakalolo Supply Co.

In Alaska, Pakalolo Supply Co. co-owner Keenan Hollister had the good fortune of being able to help write the rules and regulations that shaped the way cannabis can be sold.

“We’ve been leading the charge from the very beginning,” Hollister says about a core group of more than a dozen businesses in Alaska that started advocating recreational marijuana legalization prior to the 2014 election.

Pakalolo Supply was one of the first companies in the state to receive licenses for both cultivation and retail; the business made a ceremonial sale to mark the first legal transaction in Alaska on Oct. 28, 2016, one day before Valdez-based Herbal Outfitters opened its doors.

So far, meeting the demand from the public has been a far bigger challenge than any of the state regulations for retailers. In so many ways, Alaska’s market mirrors that of Washington in mid-2014, when about a dozen licensed retailers would be open one day, then closed for the next several as the demand significantly outstripped supply.

Hollister admits that a high demand isn’t the worst problem a new retailer could face. Pakalolo Supply has an advantage in that it produces its own cannabis and fills in the gaps with other vendors.

Fairbanks has a population of about 30,000, but the surrounding area has more than 100,000 residents. There are two other marijuana retail stores in Fairbanks, but Hollister says Pakalolo Supply is only one that’s vertically integrated, giving it a steadier supply of product.

“Having our own cultivation has allowed us to remain open, even with the really high demand,” Hollister says.

Other factors that make operations in Alaska difficult are the climate, geography and excessively high electricity rates, which, Hollister says, really forces growers to consider energy-efficiency when they’re setting up their operation.

“With our energy expenses here in Alaska, it is definitely worthwhile to go the LED route,” Hollister says, pointing out that even with the smaller yields he’s seen compared to high-intensity discharge bulbs, the overall benefit of smaller electricity bills outweighs the lost production value.

“We pay 30 cents a kilowatt-hour compared to other places that pay 9 cents a kilowatt-hour,” he says. “When we were out in Colorado, we were just drooling over the amount of lights that they can fit into a room and be running an electric bill that was a quarter of what ours is.”

According to the latest report from the U.S. Energy Information Administration, which collects and analyzes independent and impartial energy data, Alaska averaged the second-highest electricity rates in the entire country.

At an average of 18.71 cents per kilowatt-hour for Alaska, only Hawaii had more expensive electricity at 24 cents per kilowatt-hour. Meanwhile, the other states with legal marijuana programs all have relatively cheap rates; Washington has the cheapest electricity in the nation, averaging 7.75 cents a kilowatt-hour, while Oregon (9.02 cents) and Colorado (9.79 cents) are considerably more affordable than Alaska.

While steep electricity bills and indoor growing typically go hand in hand, Pakalolo Supply saves some money by using Alaska’s climate to its advantage, cooling the grow rooms with outside air, rather than needing extensive air-conditioning systems.

The Future of California

For the foreseeable future, California is the elephant in the room in any conversation about the legal cannabis industry.

While many of the regulations of the recreational market still need to be finalized, it’s clear that the upcoming implementation of the Adult Use of Marijuana Act and the long-awaited state regulation of the medical market will aim to alleviate the pain points and gray areas of California’s existing laws.

Aaron Herzberg, a partner at CalCann Holdings, estimates about a dozen cities in California have allowed select dispensaries to be licensed and operate under municipality-specific guidelines, but they only account for a fraction of the marijuana businesses operating in the state — Los Angeles being a prime example of that dichotomy.

Herzberg guesses there are more than 1,500 illegal dispensaries in Los Angeles, all of which compete directly with the 135 dispensary owners who have been granted limited immunity under Prop D.

At this point, it’s too early to say what will happen to any of those dispensaries under the new medical and recreational rules.

“There is some possibility that those Prop D stores will be treated somewhat preferentially,” Herzberg says. “But there is also going to be a huge opportunity for new stores in Los Angeles.”

Herzberg, an attorney who has helped to raise more than $20 million for California-based cannabis businesses and has served on the city of Long Beach’s Medical Marijuana Task Force, says “it’s time for things to be cleaned up in California.”

CalCann focuses on real estate developments within California’s cannabis industry. Herzberg says the company is looking for experienced industry partners to lease the buildings as cultivation centers or retail storefronts, rather than operating the facilities themselves. One of CalCann’s latest projects was raising investment capital for Bud and Bloom, a dispensary in Santa Ana.

The industry in California, as Herzberg sees it, should be divided into commercial cultivators and smaller, boutique heirloom growers — the latter of which, he says, isn’t a sphere that he is familiar with. But commercial grow centers, such as the 46,000-square-foot facility he helped to open in Lynwood, California, is a little more his speed.

“I don’t know who the hell in their right mind could build out any kind of decent cultivation facility without $2 million to $3 million or more,” he says.

But regardless of whether the market is filled with large-scale businesses or mom-and-pops, Herzberg looks forward to the industry taking an important step toward legitimacy.

“I am hopeful with the regulation that is being rolled out, that we’re going to see folks who are going to want to pay their taxes and want to be part of the system,” he says. “It’s impossible to have regulated dispensaries and then have thousands more that are not willing to pay state sales tax and local municipality tax. The only way California is going to be successful is by shutting down all of the illegals … but, I don’t see that happening in full.”

 

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