Time to Think Outside the Box

It's time to think outside-the-box on these cannabis licenses.

On September 18, 2022, I wrote an article about the math behind dispensary operations. https://www.dhirubhai.net/pulse/math-cannabis-dispensaries-sorry-buzz-kill-paula-collins/

In it, I outlined the burn of $100,000 for purchase of product, testing (even if paid by the distributor, the cost would likely be floated downstream to the dispensary), paying taxes, wages, branding/marketing, packaging (again, passed along to the dispensary or assumed directly), rent, utilities, security (the cost of which will vary greatly, depending on location), leaving roughly $65,000 after sales. I did not include the annual reckoning that the business will face with IRC 280e, which will take roughly 33%, or $21,450 leaving the owner with $43,550 from the original $100,000. That doesn’t factor in payback of loans and interest.

It also doesn’t leave enough money to replenish the shelves to start another round of sales.

Where do we go from here?

A search online for “how many retail dispensary licenses are there in the U.S.” turns up a number somewhere between 7,490[1] and 8,555[2]. Those sources are neither governmental nor academic, so it is hard to say how accurate they are (curiously the smaller number post-dates the larger number). They also don’t take into account the conditional licenses that have been issued in the northeast in recent months, such as in New Jersey and Vermont.

For the sake of discussion, let’s double the figures, and imagine an environment in which there were 16,000 adult-use retail cannabis dispensary license holders.

Well, gosh. I guesstimate that there are 16,000 smoke shops, convenience stores, delivery services, and straight-up pot dealers in New York City who are actively selling unlicensed marijuana on any given day.

My point is that in the current manner of doing things, the government (city, state, or federal) would be hard-pressed to license everyone who has knowledge, capacity, and motivation to participate in the cannabis industry.

I believe it is time to think outside the box.

Why not license just about everyone who wants to participate? Why not lower the barriers to entry such that we essentially snuff out the unregulated market altogether by exponentially increasing the number of licensed retail vendors?

The recent model for upending a regulated market in New York City is outdoor dining. In June, 2020, as the second part of reopening after COVID restrictions, the city published guidelines by which restaurants were to obtain permits.[3] Some seating (such as backyard, rooftop, or parking lot seating) required no permit at all! That would have seemed outrageous in any other era: you mean a restaurant can set up tables and chairs on a rooftop and serve customers, and we are going to consider that safe? We did! Within a matter of days, the entire city came alive, liquor laws were revised to permit outdoor consumption, and a collection of sheds and party lights revitalized a quickly-fading economy. A few months later, we tolerated ginormous flame-spewing heaters, which were subsequently reconsidered. We remained flexible. Arguably, the outdoor dining program is on the brink of a tremendous re-write, but at the time, through quick thinking and nimble regulation, we got through a seemingly impossible moment.

The city was experiencing an emergency. Easy access to outdoor dining permits got us moving. It wasn't perfect. It is still a work in progress. But it worked.

A stroll around Manhattan on a typical day leads me to believe that we are at a crisis point similar to what we faced during Covid. Unlicensed sales of marijuana are increasing daily. Prosecutors are not going to take weed cases. The state regulators have indicated that there will be no opportunity to apply for a retail license before mid 2023. By then, the folks who will have struggled to get their tax docs and operating agreements filed, and spent thousands on lawyers and accountants, and possibly millions on real estate and build out will be hard-pressed to compete with the unleashed and unlicensed cannabis dealers who have had since March of 2021 to establish their foothold in the market.

Anecdotally, I estimate that the average consumer will try the licensed dispensaries once or twice for the novelty of it, but after paying almost double what they are accustomed to paying to get high, will go back to their slick little weed delivery app, or the corner smoke shop with the shelves and shelves of shiny bongs. Or they might just text their "guy" to see what he has in.

Let’s go back to our numbers. Suppose I am right, and there are 16,000 weed dealers scattered across the five boroughs of New York City. Let’s assume they aren’t out there for grins; they are making a profit of $200 per day (bear with me and think conservatively). These aren’t cartel operators; they are small, mom-and-pop or single “dudes”, hustling their goods in small shops or under scaffolding. At $200 a day, at a rate of 12% cannabis tax, that’s $24 a day that could be going to the state per license, times 16,000 newly-licensed points of sale, for a tax revenue of $384,000 per day, or $11,520,000 per month. It adds up rather quickly.

You think I'm kidding, right? Geez -- what could New York State do with an extra $11,520,000 per month in tax revenue? It was estimated in 2018 that MTA could use a $60 billion overhaul.[4] With our 16,000 permitted dealers making a mere $200 in profit (not sales – profit) each day, we could start to chip away at that astronomical sum without touching any other reserves (and maybe get to where we are going without train delays!)

I think you will agree that my estimation of $200 a day in profits is woefully low. These business owners would not be so keenly motivated if that was the net yield of an average day. ?

The naysayers will gasp. “What about testing? What about safety?”

Well, let’s look at how many marijuana deaths there have been in the past year, versus traffic fatalities, medical errors, FDA-approved foods, and unvaccinated Covid patients! There will be risks. But we saw just this week in Holyoke, Massachusetts that a highly-regulated indoor cultivation facility caused a death that wouldn’t have happened had it been legal to simply grow cannabis in an unsheltered environment.[5] And then there are the armed robberies of dispensaries, caused largely due to the wild-west banking regulations in cannabis.[6] The risks run both ways.

My point is this: we aren’t getting this industry anywhere close to right. The cannabis industry has ceased to be the funky, artisanal speakeasy that it once was and has transformed into VC-backed corporations.[7]

Big Pharma is generally now considered Bad Karma, but Big Canna is edging right up there to take its place. The scaling that is necessary for cannabis companies to stay afloat requires behemoth-sized corporate structures, backed by billionaires.

Social Equity. An End to the War on Drugs. Opportunities for Those Who Were Over-Policed. "Fugget-about-it", as they say in Brooklyn.

We haven’t really legalized; we have merely changed the rules. But the inequities still abound. On the other side of legalization of corporate cannabis is...more arrests of the dudes making the $200 a day profit? And then what will we have accomplished?

We can fix the cannabis industry, but to do so we have to think outside the box. Let’s completely re-think who gets licenses and how they get them. Now -- before it’s too late!

[1] See https://www.othersideresource.com/how-many-dispensaries-are-there-in-the-us

[2] See https://www.canix.com/blog-posts/how-many-dispensary-licenses-are-in-the-us

[3] See https://www1.nyc.gov/assets/buildings/pdf/guidance_for_outdoor_dining.pdf

[4] https://www.nytimes.com/2018/12/18/nyregion/mta-report-congestion-pricing.html#:~:text=The%20Metropolitan%20Transportation%20Authority%20could%20need%20as%20much,tasked%20with%20finding%20ways%20to%20improve%20the%20agency.

[5] See https://mjbizdaily.com/trulieve-employee-died-from-hazards-of-ground-cannabis-dust-osha-report-says/#:~:text=A%20worker%20at%20multistate%20operator%20Trulieve%20Cannabis%E2%80%99%20cultivation,Occupational%20Health%20and%20Safety%20Administration%20%28OSHA%29%20inspection%20report.

[6] See https://americanmarijuana.org/cannabis-dispensaries-are-reporting-frequent-robberies-what-can-be-done-to-stop-them/

[7] See article at https://www.dhirubhai.net/feed/update/urn:li:activity:6981671348481781760/