By Eli McVey
Washington state cannabis stores continue to face pricing pressures long after the introduction of a new tax structure sent markups plunging, reflecting an increasingly competitive business environment.
According to information provided by the analytics company Top Shelf Data, the average markup per gram of flower sold at the retail level has been declining since summer 2015, when the state shifted to a single 37% excise tax paid by consumers at the point of sale.
Under the previous structure – when the state assessed a 25% tax on producers, processors and retailers – average prices per gram of flower at cannabis stores clocked in at about three times the wholesale rate.
Markups fell to 2.4 times wholesale prices the first month after the new tax method took effect, and they’re currently hovering around 2.1 times the wholesale rate.
All data is pretax and has been aggregated across package sizes to compute the average price per gram. For example, an eighth of marijuana (3.5 grams) sold for $35 before tax would equate to an average retail price of $10 per gram.
Dr. James MacRae – owner of Straight Line Analytics, a marijuana-focused business intelligence firm – said retailers took the margin loss because the growers couldn’t, as they were already being paid significantly less than they were used to.
Wholesale pricing data from the state supports this notion, as wholesale prices fell from an average of $8.10 per gram in October 2014 to $3.82 by June 2015, a 53% decline.
Furthermore, retail customers would have been put off by abrupt increases in price, which could have stifled the market.
“Retailers did not want their customers to see a change in pricing, so they immediately ate the difference. That was overnight,” MacRae said. “They’re protecting their customers from a sudden price shift.”
The increasingly competitive retail environment is, in large part, also responsible for the gradual decline in retail markups.
“People are within reasonable traveling distance from multiple stores, so the competitive market is in play now and that’s something you’re going to expect as the primary thing impacting the margins as we go forward,” MacRae said.
While there are stores that can command higher markups, especially those on the edge of areas where local municipalities have enacted bans or moratoriums, they are becoming increasingly rare.
Looking forward, MacRae believes the competitive retail environment – combined with increases in production volume on the part of growers – will continue to push retail markups down, but not as dramatically.
“I see the deceleration of markup,” he said. “It’s not going to decline as much as it has in the past. It’s going to level out, but it’s going to continue going down.”
Eli McVey can be reached at [email protected]