The $50 Ounce

Consumers in Washington and Oregon can buy ounces for $50 or less, but low process are proving to be a challenge for both growers and retailers

Walking into Diego Pellicer in Seattle is like entering the lobby of a high-end hotel: just past the perfectly manicured hedges and Victorian iron gates, shoppers are welcomed by crystal chandeliers, exquisite tile work, Roman-style columns and friendly staff.

Inside the cannabis shop’s back-lit glass and brushed-steel display cases is a curated selection of hand-crafted edibles, artisan flower, top-shelf concentrates and exceptional blown-glass accessories.

And full ounces of cannabis for $50.

Diego Pellicer, a shop made famous for its high-end look and classy atmosphere, is far from the cheapest place in town. But the bargain-priced Mylar bags of Chemdawg sitting across from the prestigious $336 Gold Leaf cannabis cigars provides an apt metaphor for what has happened in the Washington and Oregon retail markets: State-licensed marijuana retailers have been locked in a price war as oversupply and intense competition have essentially created a binary market in which cannabis is either top-shelf or budget. Consumers seemingly want either the best or the cheapest.

“We’ve gone into the middle shelf at some of our stores and just died,” says Patrick Wlaznak, the co-founder and president of Soulshine Cannabis, a “top-shelf” producer/processor in Washington. “Sales just stopped. It’s a real thing. We stay off the middle shelf for that reason.”

Phone calls to dozens of Seattle and Portland shops showed about one-third carry an ounce of bud at $50 or cheaper. In Seattle, the average price of budget cannabis was $82, with a range of $35 on the low end up to $140. In Portland, the average price of budget cannabis was $72, with a low of $35 and a high of $154.

While budget-conscious consumers enjoy the ultra-low prices, many in the industry worry the price at retail is not sustainable. Some fear the “race to the bottom” will reward bad business practices and lead to product diversion, black market sales and more businesses closing over the coming years. Others see it as the inevitable result of free-market competition that will force growers to become even more efficient. And with sub-$50 ounces at retail already commonplace, everybody wonders how low the prices can fall.

A $50 retail ounce purchased in Seattle. While it might not be considered the “best of the best,” even budget-priced cannabis is typically better quality than most people realize. Photo by Greg James.

Lower Prices, Higher Volume

In Oregon, Aaron Mitchell is on the front line of Oregon’s price wars.

“It has gotten so bad that we have $2 grams and we have $28 ounces for sale,” he says. “It’s not very good but people in Oregon don’t care. People want cheap prices. … It doesn’t hurt as much when you’re growing it. If you’re doing outdoor production, the cost is pretty low.”

Mitchell is the owner of La Mota, a vertically integrated chain of 10 retail stores and three farms in Oregon. Being vertical has certainly helped La Mota compete. Mitchell likes being able to offer consumers such a low price, but the profit margins on his budget flower leave something to be desired.

“You’re not making much money there,” he says. “You’re just scraping by. The money we make has stayed the same, but sales have increased.”

Mitchell says the “best of the best” typically runs about $125 an ounce.

Competition in Oregon has been driven by the state’s free-market approach to licensing, essentially allowing as many cultivators and retailers as zoning restrictions and the market would allow.

Herbal Access is in one of Washington’s most competitive counties with seven retailers for about 30,000 residents. Photo courtesy Herbal Access.

Meanwhile, retailers in Washington are facing a similar pricing dilemma without the aid of vertical integration. However, stricter licensing guidelines have created an uneven competitive landscape across the Evergreen State.

In coastal Jefferson County, seven cannabis stores, including Herbal Access in Port Townsend, compete to serve just over 30,000 residents. Because the county has the most cannabis retailers per capita in Washington, pricing must be competitive, says Peter Brian, a manager for Herbal Access.

“If you think about it, if everything is 10% cheaper, you’re going to have to sell 10% more product to make that same level (of revenue),” he says. “People want inexpensive product, but it’s the mid-grade stuff that is really hurting. It has to either be really, really good or really inexpensive.”

But Brian says it wasn’t demand from the consumer side that led to the price drop; it was oversupply on the production side.

In other parts of the state, local bans, moratoriums and population-based licensing restrictions have minimized retail competition.

At Green2Go, one of the top-selling cannabis shops in Washington, the cheapest ounce is roughly $90. Co-owner Steve Lee calls budget ounces “the decay of the entire industry.”

Located in the Tri-Cities area of Eastern Washington, Green2Go is an island, isolated from competition, and a refuge for the limited number of producers Lee can stock.

Lee is vigilant about protecting his prices and vendors. He says his buying decisions have to reflect what is best for the industry, even when a grower is willing to offer extremely reduced wholesale prices. If he’s willing to buy marijuana at rock-bottom prices, “it undermines every other vendor I have a relationship with and have been working with for years and who probably budgets on my store’s bandwidth,” he says. “The industry has to have integrity in mind.”

 

Supply and Demand

Undoubtedly, the oversupply in both Washington and Oregon has driven wholesale costs down, keeping much of the industry trapped in the spiral.

“I don’t know why anybody is doing it,” Mitchell says. “I don’t know why people are trying to race to the bottom as far as we possibly can … $50 ounces aren’t even a good deal anymore.”

But for some outdoor producers, $50 is enough.

Over the past year, Okanogan Natural Farms chief operating officer Adam Osbourne has realigned the company’s Weed Bush Lovers brand for the $50 ounce at retail. During 2017, the company competed with myriad producers who were going out of business and selling hundreds of pounds at clearance prices. While Okanogan Natural Farms was trying to sell ounces wholesale for $25, some competitors were settling for roughly half that. After making some adjustments to increase efficiency, Okanogan Natural Farms was comfortably producing cannabis at roughly $2.15 an ounce (not including testing, processing and packaging expenses) and selling wholesale for $16.65 an ounce.

Many producers in Washington, like Chad TerWisscha, have split their focus to go after both the top and bottom shelves. TerWisscha owns two farms in Washington: Treedom, a fully automated, high-tech indoor operation with LED lights, and Koala, an outdoor farm with considerably lower overhead that TerWisscha describes as “a little bit wild.”

“You go to a lot of stores and the top shelf is only so big,” TerWisscha says. “There’s relationships built with certain retailers who just can’t take on another top-shelf vendor at the time. So instead of just walking away from that store, we have another option.”

New Frontier Data vice president and senior economist Beau Whitney says low costs and competitive pricing have benefits for the industry, just not immediate ones for the thousand-plus growers in Washington and Oregon. Low prices provide economic relief for the consumer and invite black market customers to join the legal industry, which over time, should dry up the illicit market, he says.

Okanogan Natural Farms in Eastern Washington has increased its efficiency to better serve budget-conscious consumers. Photo by Gary Delp.

Ripple Effect

The industry is also seeing a ripple effect as companies adapt to lower prices and attempt to remain profitable — or afloat, in some cases.

Osbourne says even with a low cost of production, he can’t afford the price to dip any lower. He’s hoping many of his competitors will opt for extraction rather than flower sales in 2019.

“If you don’t trim it and go straight to extraction, you can visualize how much you’re saving,” Osbourne says. “If you’re getting 25 cents a gram for full extraction, or you’re getting 70 cents a gram for trimmed and tested, all the overhead makes people go, ‘You know what, I’m going to sell it all for extraction and take the next six months off.’”

Diversion could be another hidden cost of budget-priced ounces. Faced with the prospect of going bankrupt or selling cannabis outside the legal market, some farms will inevitably take the illicit path.

There’s also a higher potential for customers buying cannabis legally, then selling it on the black market, typically in a state with strict marijuana laws and thus, higher prices. In 2018, Sweet Leaf in Colorado was stripped of 24 licenses and at least two former executives have been sentenced to jail time for allowing customers to purchase the maximum amount allowed at retail several times a day, a practice known as “looping.”

Lee believes it is now happening in Washington, just not in the excessive amounts that led police to crack down on Sweet Leaf.

“If you have a $40 ounce and you see Jimmy in there six days a week getting his $40 ounce, then Jimmy is selling to 13-year-olds,” Lee says. “The new diversion game is: buy low inside the system, sell high outside the system.”

When underage kids by pot nowadays, Lee believes some are just buying repackaged products from Washington’s name brand producers.

“Businesses can only bear so much weight for the value without breaking the system,” he adds. “When we start getting into these super-bargain basement prices, at what cost is the question.”

Publisher’s Note

I suspect that a lot of cannabis retailers are “leaving money on the table” when they don’t correctly evaluate the competition. In the world of big retail, stores like Costco, Best Buy and Safeway spend a lot of time figuring out their retail pricing based on how competitive the local market is. For example, if a Safeway location has a competing grocer across the street, they will price products much more aggressively in that location than one in a non-competitive market.

The same is true for most major retailers. Retail pricing is based on careful analysis of the market, customer demographics and competition. In cannabis retail, I often hear of dispensaries that have cheap ounces even if there isn’t a close local competitor. That’s a classic example of leaving money on the table. The big question for retailers is this: Is your market elastic or non-elastic?

Greg James

Marijuana Venture publisher

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