I just read an article published by The Oregonian about the terrible state of Oregon’s cannabis industry, which has had a chronic problem with oversupply and shrinking demand for several years.
Operators are losing money, licenses are next to worthless, big players like Curaleaf are leaving the state for greener pastures, and home-grown chains Chalice and La Mota look like they’re in trouble. However, the big question remains, are there any “greener pastures” in this business?
The problem facing all states when they consider legalizing cannabis is simple: Limit licenses, in an effort to increase the likelihood of success, or allow a free-for-all that offers as many people as possible the opportunity to enter the new business? There are merits and downsides to both scenarios.
With limited licenses, like we’ve seen in Arizona, Florida and Missouri, competition is reduced, prices will be artificially higher than they should be and the likelihood of well-financed players owning the market is increased. Mom-and-pop outfits will have a hard time competing in limited licenses states.
On the other side of the table is the unlimited license scenario. Oklahoma and Oregon went that route. Both states have relatively small populations, thousands of licenses and an equally large number of businesses that are struggling and likely to fail. In industries with relatively few barriers to entry — pot shops, burger joints, corner stores — the market can only handle so many outlets before it reaches saturation. Once saturation is reached, competition ensures margins will be low. That’s just how capitalism works.
Personally, while I can see the merits of limited licenses, in the end I believe in the market. After all, could you imagine a city or state in the U.S. telling McDonald’s or Burger King that they’re going to limit the number of fast-food restaurants to ensure profitability? That would amount to socialism and state support — something Americans are supposed to be against. The free market can be brutal, but it usually works. In a state like Oregon, it’s likely that a lot of businesses will continue to struggle to survive. However, at some point the efficient, well-run and well-positioned companies will emerge as viable, stable, profitable businesses. It might be 300, 400, 500 cannabis retail businesses, but it will definitely not be more than 800 (the current number in Oregon).
In Washington, retail licenses were initially limited to about 400, but grow licenses were not. The net result nearly 10 years later is that a large number of cultivators went bust, but most of the retail stores have survived.
So the message becomes clear: Be very careful when considering a jump into this business. Do your homework. Study the state laws, rules and regs. Visit the states that have been at it for a while — Alaska, Colorado, Oregon and Washington for starters — and be careful. Shop stores in Seattle, Portland and Denver and then ask questions. Hard questions. And whatever you do, don’t hire your cousin, the “master grower” who’s been growing weed for decades in his garage or backyard!