By Chris Crew
Over the last few months I have had a flurry of calls and meetings with friends and clients wondering if the recreational marijuana market is “crashing” and if they should “get out now.” It is likely too early to tell how the market will end up in the long run, but I am confident that the current price fluctuations are a sign that the market is primed for a massive expansion.
I have read and heard a variety of estimates about what percentage of the overall marijuana market is being fulfilled by the recreational market versus the medical or black market. Those estimates tend to range from as little as 2% to as much as 25%. Although these estimates vary pretty considerably, what is not in dispute is that the high prices dominating the recreational market have stopped it from successfully competing with the medical and black markets.
At the outset of the recreational market, there was a tremendous buzz and very little supply as producers and processors were just starting to come online. Many of my clients’ processor-to-retail prices were in the $8-12 per gram range. Retail stores were selling recreational marijuana to the public for around $20-30 per gram. Of course these high prices were not terribly enticing to customers with options in the medical or black market where prices range around $8-16 per gram.
Since the licensing process began, producers have come online at a steady pace. These new businesses coming online combined with the October/November 2014 outdoor harvest, created a glut of supply in the market. This glut forced processors to dramatically reduce industry pricing. Most of my processor clients report their prices to retail stores have been cut in half. Many processors are now selling their smokable marijuana to retail stores for around $4-6 per gram.
This price reduction by processors led a handful of retail stores to follow suit and reduce their prices accordingly. Some recreational retail stores are now selling marijuana for as little as $10 per gram and those stores have reported massive increases in sales. After one of my retail store clients dropped his pricing, his store became nearly five times as busy and his monthly revenues went from around $100,000 to around $250,000. Even though he made less profit on each sale, his revenues skyrocketed because he made so many more sales. The average store is currently making around $90,000 per month in revenues. Most of the recreational stores have not reduced their prices to pass cost reductions along to the customer, but they are behind the curve. They will most likely figure that out in the next few months or get trounced by their competition.
Despite the uncertainty that failing prices have brought, there are good reasons to be optimistic about the current downturn in prices. Oftentimes, a downturn in a market can cause an industry to restructure and come out of the downturn stronger than before. That is very likely the case here.
As the recreational marijuana prices find parity with the rest of the marijuana market, there will be a tremendous opportunity for the recreational market to grow in size and strength, maybe even tenfold or more. This will likely usher in a new level of market stability and strength that will benefit all licensed marijuana businesses by creating far more reliable customers than ever before. In addition, competitive prices are necessary for the goals of marijuana legalization to be fully realized.
Let us not forget that one of the main arguments that led to the successful passage both legalization measures in Washington, Colorado, Oregon and Alaska was that legal cannabis is going to put the illegal market out of business. In order for the legal market to put the illegal market out of business, the legal market must be priced competitively. I predict that it will not be long before the recreational market will do just that — it will grow to become the only major market in the state by gobbling up the medical and the black markets alike. This is not going to be because of legislative changes, outlawing medical or law enforcement more heavily cracking down on the black market. Rather, this change will come just as legalization advocates have predicted for decades — people will choose the safe and secure legal store over the black market if they offer similar prices. I believe this is finally materializing.
Chris Crew is the owner and senior attorney of THC Law Firm, which represents around 60 marijuana businesses in Washington. He is the owner and lead speaker for Marijuana Workshops and is the counsel for the Marijuana League.