Week in Review: Retailers, Growers at Odds Amid Supply Shortage in Washington State

, Week in Review: Retailers, Growers at Odds Amid Supply Shortage in Washington State

 By Chris Walsh

After a rocky start to recreational marijuana in Washington State, many entrepreneurs on the front lines of the industry assumed the market would settle down fairly quickly.

Unfortunately that’s not the case.

Supply remains extraordinarily tight – many licensed cultivators are still awaiting their first harvest – while demand continues to rise as new recreational shops open.

That’s causing friction between two groups that must work together for the industry to succeed: store owners and growers.

The situation is quickly reaching a boiling point.

As we reported earlier this week, several retail shops are banding together to fight what they say is price gouging by some licensed cultivation facilities. The stores claim that growers are taking advantage of the supply shortage, charging much more than is reasonable and forcing overall prices for consumers into the stratosphere.

Their solution: form a “retail association” that will give preference to growers who deal with the stores fairly, while putting those that charge exorbitant prices last in line for shelf space.

It’s a controversial response to the problem, but it does have support from some growers.

“The retailers forming a cooperative is a good idea,” Brian Stroh, owner of the state-licensed grower CannaMan Farms, told Marijuana Business Daily. “The main retailer (behind the idea of the association) is my main customer. I have very good relations with them and understand the troubles they’re experiencing.”

Stroh said he has gone out of his way to implement fair and consistent pricing – unlike some of his peers.

“I believe that I was one of the first companies to publicly disclose both my pricing and my rationale behind it,” Stroh said. “I am a tier-one producer providing hand-trimmed, connoisseur-grade cannabis. I will always have higher prices as I have positioned my company as a premium brand. But my open price, my current price and my foreseeable future price are all the same at $8.83 a gram.”

The plan by retail shops to fight back against certain growers, however, could lead to unintended consequences with federal authorities and put them on the wrong side of price-fixing and antitrust regulations.

The Federal Trade Commission defines price fixing as “an agreement (written, verbal, or inferred from conduct) among competitors that raises, lowers, or stabilizes prices or competitive terms.”

, Week in Review: Retailers, Growers at Odds Amid Supply Shortage in Washington StateThe retailer consortium could cross over into that territory if it’s not careful, especially if the stores all agree to place products from some growers in the back of their stores.

“An individual retailer may place product as they choose – assuming it doesn’t violate a contract provision with the processor that controls product placement,” said Ryan Agnew, an attorney in Seattle who works with cannabis companies. He added, however, that “a group effort to punish processors would run afoul” of antitrust regulations.

In terms of the retailers’ complaints against growers, Agnew said the standard forces of supply and demand are at work, and eventually prices will come down when more cultivation sites come online. But he said retailers seem to have unrealistic expectations of how the market should work under the current circumstances.

“The thing that bugs me is that some retailers have taken to believing that market stabilization was magically going to occur in the first quarter of a new system built from scratch,” Agnew said. “I’m especially troubled because they are the same folks tasked with selling product and helping the industry thrive.

Regardless, the current situation is creating bad blood and fraying business relationships in a market that needs cohesion and unity as it finds its feet.

12 comments on “Week in Review: Retailers, Growers at Odds Amid Supply Shortage in Washington State
  1. tony on

    My name is Tony Reynolds. I am a tier three P/P in Wa. state. I would like for my peers to realize that our competition is the black mkt. Not each other. I refuse to price gouge. I am able to sell my products equal to the black mkt and still make a handsome profit. Triple T Farms

  2. James on

    If the premium wholesale price is in the neighborhood of $9/g why is the retail price in the $30 range? The costs of production are much higher, riskier and take more time than the costs to retail it over the counter. So is it reasonable to charge double what you pay for product, especially when the amount being sold exceeds the amount being produced? If the retailer is able to make 100% profit on sales that are turned over almost instantaneously. What were once illegal drug deals are now just commodities, why should retailers still try to get drug deal pricing? Apparently retailers are making so much money they don’t know where to hide it? Where is the gouging taking place?

  3. John on

    So at a price of $8.83/gram what are the retailers selling the product for? Are producers who have MUCH higher overhead and upfront investment supposed to have their selling prices dictated by people with low overhead and are essentially middle men. Producers have had huge upfront costs in equipment and supplies not to mention leases which were carried for months before getting licenses, and then come power bills, insurance etc. The retail shops I have seen (admittedly few) look like pretty low overhead and operating cost establishments. Any time I see people talk about price fixing and black balling people I smell greed. Currently I have seen prices of $25 to $30 per gram. That comes out around 12k per lb (using $27 which is what I paid last time at the shop). That would be a 100% mark up ($6000/lb is the word on the street). What exactly do the retailers want? I haven’t seen any business names associated with these stores that are banding together, but I certainly won’t be doing business with them as a consumer or a processor. The market will fix itself, the shortage was created by government not producers and processors. If you don’t like prices now wait until they come down and they will.

  4. Joshua on

    I am also a retailer in the State of Washington, and I believe I can answer where you are getting the 30 dollar a gram price out the door from 11 dollar a gram weed, first the only deduction for our federal tax is the cost of goods sold, 11.00, then we have the 25% excise tax which is not tax deductible with the feds, so that is treated as income. Next you have 40% income tax because of that excise being treated as income it puts you in a higher income bracket. so when you take 11 add enough to stay open, and then deduct the taxes that leaves you with 3 dollars a gram total profit, of which you have to take out about 2 dollars for overhead expenses, which leaves you about 1 dollar a gram to disperse between investors partners etc. That is at 27.50 a gram shelf price and 29.83 out the door after the added retail sales tax, so all of that money you say we are making is not how much money we are making. The processors overhead is higher but they are working with a higher profit margin than the retailers even only selling at 10 or 11 dollars, bearing in mind that 25% is included in that wholesale price.

    I hope that explains some of this: Why is it more than 100% markup question; if it was only marked up 100% we would be in the negative before we even paid any overhead expenses. Savvy?

  5. Green Matter on

    The argument that retailers are taxed more than producers or processors, and therefore deserve to make more in profit, is fallacious; while we *may* qualify for more tax deductions, we producers and processors still pay exceedingly high taxes, as well as taking all of the risks. There are no crop failures to contend with in retail, they don’t have to wait three months between each sale, retailers can sell many things other than marijuana and get the full tax break (unlike producers or processors), and retailers certainly don’t need to pay for all of the extras like testing/packaging/transportation, etc. I have never seen a medical marijuana shop with nearly as much overhead as the retailers are claiming, and honestly I’m getting fed up with Producers and Processors being blamed by retailers for the high priced products. If anything, taxes and inexperienced business owners are the primary culprits. Price gouging for a luxury intoxicant, give me a break! Go whine to Patron about how they are “price gouging” for their decent but far overpriced liquor. Some retailers like Freedom Market and Sativa Sisters have been respectful, and they will continue to have some of the highest quality product in the State as a result, but this completely illegal attempt by a number of retailers to fix wholesale prices at whatever they want to pay is absolutely going to backfire, especially once their names are made public. Retailers have a right to refuse to buy product, but “price gouging” makes it sound like they are somehow compelled to buy product they don’t want to sell. I say, cut out the middlemen and let us sell direct like in Colorado if the retailers are so desperate to see low priced product on recreational shelves.

    Green Matter

  6. Todd Bratton on

    Thanks for the kudos to the Freedom Markets! We will work all this out. This is not the black market and the prices may never get there. We will get close but this market has a value. We need more product and plenty of it, with our second location opening Friday in downtown Longview. Thanks to all who have helped get this market up and running.

    Todd Bratton
    Longview Freedom Market

  7. Johny Potseed on

    Why’s everybody always pickin on me? Sounds like a song from the 60s. I live and grow in Colorado, and have under a medical marijuana license for 5 years. I also “freely give” it away and charge for the novelty container. Arguing about supply and demand is a waste of time. Especially if you are a consumer. While both sides are trying to figure out, how they are going to make out, after their government stuck it to them for their payoff, check out http://www.johnypotseed.com A place where you can get a 45 to 60 seed that grows an ounce per plant, only 9 inches tall. Grow in a window or even a closet, with these hybrid strains, and let the government, the grower, and the retailer realize they just lost you:)

  8. matt on

    In 5 years will be producers complaining about prices , and not until more stores open will retailers have to comPete. So many unprepared for irs wave, when they tax the 25% excise tax as income. Gram sale to producer for 6, 4.5 after excise, cog 2, non cog overhead .25-.5 nets 2-2.25 Here’s the magic, 40% irs tax on 3.5-3.75 adding
    back excise being income is 1.4-1.55 to feds. That’s net profit of 60 cents to 70 cents a gram. Even worse I imagine for retail only deducting cogs

    Did anyone consider only 10% of sales is net profit ? And prices are to go down? Is that worth the risk ?

  9. bongstar420 on

    I think they lack skill and don’t deserve to be growers. Too bad the black market growers are ideologically apposed to taxation and regulation. There are growers pulling huge amounts that could effectively manage top shelf production by thousands of pounds. At that guys price, I’ve seen reports that would translate to $2,000 per month per 1000w light. Their warehouses typically operate 10-20 lights which I don’t find to be all that much because it is ran similarly to a farm- most of the actual work is done by dirt cheap labor.

    Sounds like they are trying to exploit the psychology of “taxation” and “regulation.”

  10. Jahpharmer on

    Hey…I live and legally grow MMJ in the Santa Cruz Mountains of California. I supply a major legal manufacturer of edibles with high potency, organically grown & lab tested, hand trimmed, connoisseur quality, strains…see my Google posting “End of Bloom week 7”. How I would love to see the per-gram prices everyone commenting here talk about getting…ha! At asking $4.38/gram my buyers make me feel like I’ve raked them over the coals. Still, I am looking for a financial partner with land where I can expand what I do, anyone interested please see my “Master Gardener & MMJ grower seeks partner with land” ad in the SF Bay Area, LA, Santa Barbara, Sacramento, Gold Country, and Siskiyou County editions of Craigslist, in the Small Biz section.
    And, maybe only in California’s climate can I do this, but I have what I call a conveyor-belt style growing process that allows me to continuously provide my retail customers with fresh product with all its cannabinoid profile undegraded and its terpene array still intact all year long…no waiting on harvests months away. This is a scalable process suitable for supplying any sized retail, or multiple retail outlets…if only I could find my financial angel. If I could even see $7.00/gram I’d feel like I’d died ‘n gone to pot growers’ heaven.

  11. Daniel Solaro on

    If the feds try to tax the 25% excise paid by producers, processors or retailers as ordinary income , they will be defying logic. It was never your income if you had to pay it out – you are just acting as a tax collector on behalf of the state.

    I don’t care what 280E states – if it defies logic and the intent of the income tax statutes it is arbitrary and unenforceable.

    Cite me a tax court case where this arbitrary assignment of phantom income is held taxable.

    Everybody needs to band together to fight this in court.

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