By Fred Dreier
Cannabis advocates are still celebrating Minnesota’s recent decision to legalize medical marijuana.
But business consultants and industry experts are trying to wrap their heads around the unique market that will arise under the state’s strict new law.
Minnesota’s program bans the sale and consumption of marijuana flowers, allowing just pills, oils and vapor forms of cannabis. This unusual stipulation – coupled with a restrictive list of qualifying medical conditions and a limited number of cultivation and dispensary licenses – will create a cannabis market unlike any other in the United States.
The industry essentially is entering uncharted waters, making it difficult for entrepreneurs to get a grasp on the level of business opportunities, the challenges they’ll face and the market’s potential size.
“It’s definitely a weird new frontier,” said Joseph Mattson, a licensing consultant with The MedMen, a California-based MMJ consulting group. “It’s really challenging to attach a monetary value to [the market].”
Shallow Patient Pool
The restrictions on the type of marijuana that can be sold will alter many dynamics of the market and create a host of new challenges for businesses.
One of the biggest impacts will be on the market’s size.
Marijuana Business Daily estimates the market could be in the $10 million to $20 million range annually once all dispensaries are open – though it’s still unclear how the industry will develop, and the numbers could certainly be lower.
The patient pool will be shallow given the relatively short list of medical conditions that qualify for the program. Lawmakers struck down a more expansive bill that included chronic pain and instead passed a restrictive version. That decision shrunk the potential patient base from around 38,000 to just 5,000, based on estimates from advocacy groups.
Some observers estimate that only 2,500 patients will actually sign up for the program in its early stages.
But even that could be a stretch.
Several cannabis experts said that by outlawing the smoking and sale of flowers, Minnesota will push many patients away from the state’s MMJ program.
“It could drastically reduce the attractiveness of the program to the traditional consumer,” said Scott Hawkins, principal at the consultancy Grun Strategic.
Already, some patients have told local media that they will continue to purchase their cannabis from the black market because of the ban on cannabis flowers. These patients said that topicals, pills and oils are not their preferred way to ingest cannabis.
Marijuana flowers often make up the bulk of the industry’s sales in other markets, accounting for as much as 70%-80% of overall revenues at some dispensaries. While infused products are gaining traction in many states – particularly those that have mature medical marijuana markets – it often takes several years for that to happen.
A fair share of patients in Minnesota therefore may initially prefer the actual plant, even if it means getting it from underground sources.
Higher Upfront Costs
From a financial perspective, the market could be challenging for entrepreneurs from the get-go.
Since marijuana cultivators will be required to process the plants into oil, business owners will have to invest in an expensive infrastructure, such as closed-loop extraction systems and an industrial kitchen. Also, businesses will need to train employees to create concentrates and oils.
Consulting group American Cannabis Company recently provided some estimates for the Minnesota market, using data and trends in other states. According to the firm’s estimates – based on an overall projected patient count of 2,500 – cannabis companies could spend $2 million just to get started, including $1.2 million in flowering build costs and nearly $1 million in initial operating expenses.
Making concentrates can be more costly than simply growing and selling marijuana. And that leads to another issue: With such a small patient base, dispensary owners will likely compensate by raising the price of cannabis.
While a gram of concentrates sells for $35 to $50 in most markets, this price could rise substantially above $50 in Minnesota, said Steven Cooksey, director of licensing for Med Men. That’s yet another deterrent for patients to join the program.
“My biggest concern is that people will be priced out of the market,” Cooksey said. “There is the potential for that.”
Lower Ongoing Expenses
There’s some financial upside to market’s structure, however: Once the upfront costs are paid, the operations could find ways to pinch pennies in the growing process. Since most of the plant will be ground down to use in an extraction process, cultivators will not need to worry about the plant’s overall quality.
In other markets, patients and growers often focus on the appearance of the buds and the plant’s aroma, and these qualities will be of little to no importance in Minnesota.
Mattson said the operation would not need to employ trimmers or a plant manicurist, which could cut down on staffing costs.
“You don’t have to present the flower at the banquet ball,” Mattson said.
This operation could be less labor-intensive than grow facilities in other states. Cooksey said that both of the state’s cultivation centers could conceivably operate with fewer than 10 employees each.
Consultants say the two licensed growers and eight dispensaries allowed under the law won’t rack up huge profits at first, and it could take them much longer to climb into the black than similar businesses in other markets.
“You won’t have any of the big 25,000 square-foot grows, instead it will have less overhead,” Cooksey said. “It’s not going to be the type of operation that makes money from the outset.”
According to the American Cannabis Company’s report, the industry could lose lots of money during the first six months of sales due to high operating expenses and limited revenues.
The picture then brightenss, with the industry expected to make a profit in the first full calendar year of sales.
The poor potential for a fast profit, however, will scare away some investors, Cooksey said. Instead, the industry there might be funded by advocacy-driven entrepreneurs, or by investors who are looking for a long-term play. The fast-cash entrepreneurs, he said, won’t bother.
But some investors will enter the market with hopes that lawmakers could eventually add more ailments, such as chronic pain, to the law. If that happens, then early investors could see their profits surge.
“There is the value of being at the forefront of a market,” Cooksey said. “You just don’t want to put in too much money.”
Photo copyright: Doug Kerr via Flickr