May 7, 2012

Dhar Mann: How to Identify a Promising Medical Marijuana Dispensary Opportunity

dhar mann
By Dhar Mann

This is the second column in a three-part series.

Once you have carefully considered the unique challenges involved in opening a medical marijuana dispensary and the various ways to mitigate risk, the next step is to identify the right opportunity.

If you’re looking to capitalize on the “Green Rush” in a state that allows medical marijuana dispensaries, you likely have three choices: 1) invest in (or buy) an existing dispensary; 2) apply for a dispensary permit during an open registration process; or 3) launch a dispensary in a jurisdiction where no moratorium is in place.

Whichever approach applies to your situation, it’s prudent to assess the market opportunity before you start to invest a lot of money. In the second part of this series, I’d like to examine the important factors to consider when assessing the financial opportunity of owning a dispensary.

Before I dive into the details, I’d like to make one point of clarification. I will use the term “financial opportunities” frequently. With the exception of Colorado, each medical marijuana state requires you to be a not-for-profit entity. So the term financial opportunities refers to sales potential, not profit potential.

Artificial Scarcity

Why were dispensaries in Los Angeles, the second most populous city in the U.S., closing doors while a dispensary in Oakland reported tens of millions of dollars in sales? A large contributing factor is scarcity (or, in economic terms, artificial scarcity).

In cities and states where medical marijuana distribution centers are heavily regulated, there’s usually a larger financial opportunity.

Oakland, for instance, placed a moratorium on medical marijuana dispensaries to limit the number to four (although it recently increased this number to eight), effectively legislating an oligopoly. Los Angeles, on the other hand, did not cap the number of dispensaries. As a result, medical marijuana centers sprouted up in L.A. at a rapid pace, and in some cases two or three opened within one city block.

Which city offers the better opportunity? Oakland.

The same principle is at work when taxi medallions in major metropolitan cities sell for hundreds of thousands of dollars: Restricting the number of licenses limits the competition, resulting in a larger economic opportunity.

Estimating the Eligible Patient Population

Sizing up a medical marijuana dispensary opportunity is more complicated than just comparing the number of dispensaries to the populations they serve. It is necessary to determine the number of eligible medical cannabis patients within the marketplace.

With that in mind, several factors go into determining the eligible medical cannabis patient population:

#1. Qualifying Conditions – More liberal qualifying conditions increase the eligible patient population. If a state allows for chronic pain as a qualifying condition, you will see the number of eligible patients spike.

In Arizona, 87.9% of applicants reported chronic pain as their medical condition. The next-highest conditions – muscle spasms and nausea – account for 14.2% and 11.6%, respectively.

Unlike less restrictive laws on the West Coast, states on the East Coast tend to be more limited in the qualifying conditions for prospective medical marijuana patients. In New Jersey, for example, only residents meeting certain specific medical criteria may qualify to receive a medical marijuana card. The list of qualifying conditions has a large impact on eligible patient population, and it is important to note that the conditions may change over time.

#2. Process to Become a Patient – Higher barriers to entry adversely affect the eligible patient population. The process of becoming a medical marijuana patient has a large impact on the eligible patient population. Questions to consider:

– Is there a state licensing or approval process for cannabis patients? In California, if a physician recommends a patient for medical cannabis, there is no secondary state review or approval process. In Arizona, after a patient has received a recommendation from a physician, an application must be filed by the patient and approved by the Arizona Department of Health Services (although the percentage of applications approved by the AZDHS is 99.20% as of Feb. 28, 2012). In Hawaii, patients must register with the Narcotics Enforcement Division. These additional requirements discourage patient participation.

– Are there any restrictions as to which doctors can recommend cannabis? In New Jersey, a physician must register with the New Jersey Department of Health and Senior Services to participate in the program, and the physician has to have an ongoing responsibility for your care. Additional restrictions and requirements on physicians discourage physician participation, diminishing patient participation.

– Do patients have to be a resident? In Oregon, a state with the highest relative percentage of cannabis patients, you do not have to be a state resident to receive a medical marijuana recommendation.

– Other questions to consider include: how much paperwork is required to substantiate a patient’s medical conditions? Is the patient registry public information? How much does it cost to become a patient? Are dispensaries relatively accessible to patients?

When the barriers to entry are too high for physicians and patients, cannabis users are discouraged from participating in the medical cannabis program and incentivized to utilize the black market.

#3. Patient Demographics – In Arizona, 74.3% of patient applicants are male and 25.7% are female. The largest group of applicants is 18-30 years old, comprising 25.10% of applicants, followed by 31-40 years old, or 20.90% of applicants. Finding a location matching this demographic profile can improve the financial performance of your dispensary.

Competition and the Black Market

Unlike other traditional industries, the biggest competition your dispensary will face is from the black market. A study done by See Change Strategy LLC in 2011, called The State of the Medical Marijuana Markets, estimated the national market for medical marijuana to be $1.7 billion in 2011. Estimates by other industry observers indicate that the national market for marijuana in 2011 was anywhere from $10 billion to $100 billion (the large range alone suggests marijuana’s reliance on black market sales).

Even in states that have legalized marijuana for medical uses, there is a large discrepancy in estimated marijuana sales versus medical marijuana sales. In California, See Change estimated that the medical marijuana market amounts to $1.3 billion, whereas many experts peg the market at $14 billion.

Contributing to the rise of unreported sales is the proliferation of delivery services. Many individuals frustrated with the process of obtaining a medical marijuana dispensary license or wanting to avoid stricter oversight and regulations resort to opening a delivery service. Websites likeWeedMaps allow delivery services to gain instant recognition and a customer base simply by creating an online listing.

There are a lot of considerations to think about in choosing the right medical marijuana opportunity. However, with the not-for-profit structure of a dispensary, it should not matter how much your dispensary is selling – at least in theory – as long as you can cover expenses.

So how do you actually make money from owning a dispensary? In my next column, we will look at ways of monetizing your medical marijuana investment given the complex financial and legal structure of the industry.

Dhar Mann is a business owner, entrepreneur and CEO of weGrow Store, a full-service retail franchise selling supplies for the cultivation of medical marijuana.


4 Comments:

  1. Quote: “If you’re looking to capitalize on the “Green Rush””

    Another way to get in on the Green Rush opportunities without large cash outlay or legal uncertainties is to invest in MMJ stocks. The sector seems to be heating up.

  2. True, but there are plenty of risks involved as well. Most of the publicly traded companies are penny stocks, which are usually quite volatile.

  3. where do i find the next column

  4. Dhar’s next column will run in a few weeks on our homepage and then in the expert opinion section of the site. Hope that helps.
    Chris

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