The Cold, Hard Truth

So you want to get rich in cannabis? Pay attention to the lessons of a business owner who lost millions of dollars growing cannabis

When Washington state decided to go into the cannabis business, from an outsider’s view, I believe the state did not want any single entity dominating the marijuana industry. Washington created a business structure so that no one individual or entity had too much control.

First, the state limited the number of licensed retailers that would be allowed to sell marijuana. It created a lottery, and the few lucky people that won the lottery were allowed to open retail stores.

Second, on the growing and/or processing side of marijuana, the state allowed every Tom, Dick and Harry to get into the business. For $250, you could apply for a license to grow and/or process marijuana.

The term “process” is defined as “extraction, making edibles, vape cartridges, candy, baked goods, other.” Processing means anything other than growing or retailing marijuana or marijuana products.

It was noble for the state to let everyone have a shot at growing or processing marijuana. The $250 application fee didn’t stop anyone from applying for a license. The state sold about 8,000 applications for licenses at $250 each.

What the state probably knew, and I realized before I entered the business, is that the number of people/entities that applied for licenses and ultimately received them would produce far more weed than what the legal market could sell.

When I purchased my license, second hand, for $17,500, I projected that the total number of Tier 3 farms needed to supply 100% of the state’s legal marijuana sales would be about 20 farms. This supposed that all of these farms would be indoor growers and would be producing about 300 pounds of cannabis flower every week.

Even top-shelf, hydroponic cannabis is selling for wholesale prices way below what most growers estimated. Photos by Greg James.

I was told by my team in the planning stages that we would easily grow 1,200 pounds of cannabis flower to sell per month — 1,200 pounds of baggable marijuana flower, not including the trim. Using the projected sales of marijuana in Washington, 20 farms producing 1,200 pounds of marijuana could easily provide 100% of the demand for legally sold cannabis in Washington state.

By the time we got started in 2016 — two-and-a-half years after I bought my license — there were about 800 active people or entities with licenses to grow or process marijuana in Washington. Today — 18 months later — there are close to 1,500 active registered grower/processors in marijuana. Suffice it to say, that’s more than 1,000 more growers, at a minimum, than the market can use.

For many reasons, we have never got close to growing 300 pounds of cannabis flower per week. The design of our grow operation, which took up more than 20,000 feet in our building, only had 7,000 feet of grow canopy when done. This was our first error. Then we had significant problems with our heating and humidity; both were inadequate for the need. Thankfully, we resolved those problems, but even with all problems corrected, we have never come close to growing the volume we anticipated. Because we grow on a seven-week grow cycle, our plants have a much lower yield than a plant on a six-month, outdoor grow cycle.

We had expectations about the prices of our flower and extracts. We thought that indoor-grown cannabis flower would demand $2,000-plus per pound due to the quality. What we didn’t anticipate is that the buyers/customers would be as price sensitive as they are. Stoners, who purchase the bulk of all legally sold cannabis, don’t have a lot of money. Stoners, people that use marijuana every day, care more about the price of what they buy than they care about the quality of what they purchase.

I am convinced that stoners purchase about 80% of all weed sold in Washington. If a stoner has $20 in their pocket, they want the biggest bang for their buck, whatever product that is. Many stoners buy weed more than one time every day. Ask any budtender.

Today, we are selling top-shelf, indoor, hydroponic-grown flower for $1,000 a pound, an average of $2.25 per gram. At these prices, we sell a lot of flower. Six months ago, we were selling flower for $4 a gram, and we sold very little. Even at $3 per gram, sales were sluggish. Stoners don’t want to pay more than $10 per gram retail, and to get our product into their hands, with more than a 300% mark-up, we have to sell grams to the retailer for about $3 per gram. In larger quantities, half ounces or full ounces, to sell in any volume, you must sell your weed far below $3 per gram.

The investment made on our indoor grow equipment and tenant improvements was more than $3 million. When I started on this project, I mentally set my limit at $1 million. Clearly, that number passed quickly. In addition to the $3 million-plus spent on equipment and tenant improvements, another $4 million was spent buying and reconditioning a building. Add another $1.8 million in operational losses in the first 18 months of doing business and here we are today. We have a very beautiful facility producing some great weed, and on our best day, we break even in operating costs alone. I have never received a penny for the rent of my own building.

Most indoor growers in Washington are struggling to break even, let alone generate a profit for an investor.

This is what I would do differently given what I know today:

  1. If I didn’t have a lot of money to start my business, I would only grow outdoors. The startup costs will be very low compared to setting up any indoor grow. A good outdoor farmer, selling weed for a very low price — 50 cents per gram, $225 a pound — can make a nice living. That precludes that the weed they grow is all pesticide-free and not contaminated with other products. A lot of outdoor farmers have contaminated weed that has very little value for any purpose. Everything grown must pass all of the state’s minimum testing requirements or it can’t be sold.
  2. If I did start an indoor grow, I would do an open room grow, not the small grow rooms as we now have. I would maximize the space I leased by growing openly in a large area. There are a hundred logistical problems in doing this. It might sound simple but believe me, it’s not. Growing marijuana indoors will require a lot of money to set up properly, but an open room grow would be far more efficient than using small grow rooms and much less expensive to start up.
  3. You must have low rent if you plan to grow indoors. I have no rent, because I own the building, and we are still not profitable. If I had to pay rent, we would have lost far more than $1.8 million. You can’t pay $1 per foot per month or more to lease a space for an indoor grow and expect to make money. It just doesn’t pencil.
  4. If you plan to grow or process weed, you better know how to sell. This can’t be understated. So much of what is being sold to retailers is exclusively about relationships. In my opinion, branding is not too important in cannabis. It doesn’t hurt, but it is not the end-all. Just because a store sells a name brand does not mean that it sells a lot of that brand, especially if the price for any brand name product is high compared to other similar products. The products that sell are the ones that either the retailer decides it wants to push, or products that offer a great price/value.
  5. If you can’t sell, don’t get into the cannabis business. Relationships with the owners/buyers in the retailer stores is critical, and those relationships are created and kept alive by salespeople. To get into any store, you must be calling on retailers over and over. If the retailer likes you, eventually, they might let your products in their store. Even when you get in, it’s a lot of work to service a retail store. You have to call on them constantly and make certain they are happy with everything you are doing.
  6. Lastly and most important to me, I am convinced that there is no money in cannabis for investors. When I started into this, I never intended to work in this business. It was an investment, or so I thought. Just recently, I became active in the business due to my losses and my attempt to save my $8 million-plus investment. When you invest more than $8 million and things are not going well, you are all but forced to jump in.

I am convinced that all investors in cannabis will lose most — if not all — of their money. I believe that only owner/operators, working in their businesses every day, have any chance of making any money growing or processing cannabis in Washington. I also believe that no one will ever get rich in marijuana. I could give you 100 reasons why I believe that no one will ever get rich in cannabis, but here a few: cannabis is just too easy to grow and there are too many people that want to be in the marijuana business, which has created a glut of product. Plus, as a producer/processor, you are competing with people that will work for wages and sell their products for low prices. There is little or nothing left for an investor after all the salaries and bills are paid.

Cannabis growing or processing is not for investors. Anyone that tells you they will make you money growing or processing cannabis won’t be a friend of yours in the not-so-distant future, when all your investment money disappears.

By now, you must be asking yourself, what is my end game? What is my action plan, now that I know what I know about cannabis? This is what I am doing:

  1. I hope to sell my business to someone that wants to work it every day. We have done a lot of things right, and an owner/operator of my business can make a nice living.
  2. Lease or sell the building to the new owner of my cannabis business or sell the building to someone for another use. Thankfully, the building has appreciated by 300% in the four years since I purchased it. If I sell the building, I will recoup the majority of my investment/losses.

Growing and processing cannabis is not for wimps. There are more variables in agriculture than anyone who has not experienced it firsthand can possibly imagine. When you stack those variables up against the limitless other business problems in cannabis, the odds of success are slim.

Only the toughest growers and processors will survive, and they won’t be getting rich. At best, a good marijuana farmer or processor will make a good living, perhaps a very good living. But, they will have to work their butt off every day to make it happen.

 

Cary Falk is the owner of THC Farms in Tacoma, Washington.

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