Dispatch #3: Billion-dollar biz marches on in Colorado
It’s Sunday, a new week here in Colorado, as I continue to gather intel on how legal sales of recreational marijuana are changing this place, a year before they are expected to start in Massachusetts.
I’ll be heading south today to interview people in Colorado Springs, which said no to recreational weed sales. Are people still happy with that decision? Do they regret losing the economic boost this industry is providing?
After that I’ll continue south to Pueblo, which went the other way and embraced cannabis cultivation and sales. But even there, some have questioned the wisdom of recreational weed. A vote failed last November to repeal sales.
Those decisions in Colorado Springs and Pueblo figure in, at least marginally, to newly released figures on cannabis sales statewide in May.
That month, $127.7 million worth of cannabis was sold. As the Denver Post reported Friday, the May figures, though less than the $131.7 million of marijuana, concentrates and edibles sold in March, set a milestone of a sort.
For 12 months in a row, sales topped the $100 million mark.
While a lot of money is changing hands, it isn’t easy to prosper in this young industry. For one, retail shops face rules that result in effective tax rates of 70 percent. That’s because of Section 280E of the IRS code, which bars businesses that sell cannabis from deducting expenses. The rule is designed to punish “traffickers” of Schedule I and II drugs. Marijuana is a Schedule I substance.
By comparison, non-cannabis businesses face a tax bite in the 30-percent range, according to an analysis by the National Cannabis Industry Association. The rule dates back to the Reagan administration and applies even in states where cannabis sales are legal.
“It should get better over time,” Chris Walsh, editorial director of Marijuana Business Daily, said of the overall business climate. “The people getting in now are the pioneers.”
The unusual tax and accounting rules can stun some entrepreneurs who jump in without understanding this industry’s important differences.
“And they fall flat on their face and never know why,” Walsh said.
While the tax rule tightens retail margins, successful operators are finding a way through smart management.
Over time, the business climate is likely to spur consolidation of retail stores. Already, the market is split between a cannabis version of the “mom and pop” store and chain stores like Native Roots.
Walsh’s company produces an industry factbook, selling it for a hefty $249. That volume offers a state-by-state forecast on the value of cannabis businesses.
The factbook predicts annual retail sales in Massachusetts of $650 million to $750 million in three to five years after the first recreational shop opens.
That’s worded carefully, because it remains uncertain whether the state will hit a target of allowing such sales to begin next July 1.
I’m hearing a lot of reasons from experienced cultivators why the state will miss that target date.
But the estimate for Massachusetts is still a bit eye-opening. The money churning through a start-up cannabis industry in the Bay State will have secondary effects. “You can imagine how that trickles through the economy,” Walsh told me.
The wholesale side has its regulatory mazes as well.
The trade operates on an “intra-state” model, which limits the scale on which businesses can operate.
In Colorado, wholesale growers can only produce as much as the state will consume. They use statistics published by the state as a guidelines.
“We don’t cultivate in a vacuum,” Norton Arbelaez, co-owner of River Rock Cannabis, told me during a tour Friday. A commodity market would be simpler, but it’s not here. “It’s not pig bellies and it’s not soybeans, yet,” he said. “Yet.”
The recreational cannabis industry is still young in Colorado. But like all big-money endeavors, it is attracting a constellation of support companies.
For instance, I met a woman Saturday who works for the Colorado Cannabis Chamber of Commerce. She moved to Colorado from New Jersey to get into the industry, but after years of work in sales she didn’t want to start as a bud tender.
Law schools are adding classes on the cannabis trade. Some law firms, like Hoban Law Group, have styled themselves to serve clients in this field.
From there, the angles entrepreneurs pursue spiral out in all directions.
One of the fastest-growing is the infused products market, an alternative way of ingesting cannabis that led to the creation of companies like Canna Creations, Canyon Cultivation, Cannabliss, Dabble Extracts, Incredibles, Medically Correct and Mountain High Suckers, to name just a few.
The industry seems to be making inroads into the mainstream. More than a dozen of the biggest cannabis businesses are sponsors of the Cannabis Charity Open, a golf event in Denver July 27.
Well, not totally mainstream. I found an ad for the event with this cannabist-friendly copy: “If you’ve never tried golfing while toasted, let’s just say it’s a real performance-enhancing drug.”
Also on the sporting front, next Saturday athletes will gather in Denver for the 420 Games, a 4.2-mile race. The event started in San Francisco in 2014. Organizers say they want to fight a stereotype that links cannabis with sloth.
The July issue of The Hemp Connoisseur, a glossy magazine, is devoted to fitness. It profiles both a Facebook personality, “Fit Cannabis Girl,” and a former MMA fighter and now personal trainer who uses cannabis both to ease injuries and improve his workout.
Walking around downtown Denver yesterday, I passed plenty of bars, and quite a few cannabis outlets, from the somewhat seedy Cannabis Station to the high-end Euflora Recreational Dispensary, on the upscale 16th Street Mall.
That one looks a bit like an Apple store. Time will tell, I think it fair to say, whether it can handle the higher rents.
Have a question about what’s up with the cannabis business in Colorado? Email Larry Parnass at firstname.lastname@example.org. And watch this space for regular reports from the road.
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