The "New" marijuana market - a customer's view

The new marijuana market - a customer view

The legal marijuana market opened on April Fool's Day.  How is it going as far as the customer is concerned?

Comparisons of the average price for legal and illegal marijuana provided by StatsCan and cited by the Globe are not useful.  I wanted to determine the comparative price for the weed I usually smoke.  I bought the best pot in a Queen St. store ($60 plus tax for 3.5 gm) so that we could make a quality assessment evaluated by sophisticated consumers (old hippies).  The legal pot was indeed very good - comparable to the "BC Quad" (pot's Glenlivet) that I usually smoke.

However, after tax, it cost three times what I am used to paying.  

The store is carrying marketing and regulatory overhead unheard of in the traditional marijuana business.  Rent on at least 2,000 sq. ft. on Queen St.  More than a dozen staff in matching t-shirts carrying iPads (who told me that they couldn't afford to buy the pot they were selling me - but they had other options).

Regulations wrap three and a half grams of marijuana in forty grams of single use plastic.  Given the current government pronouncements on the importance of lowering the amount of plastic waste, why are regulators mandating this gross over packaging?  How about a deposit - return system?  They weren't sure if regulations would allow me in without proof of age ID.  I'm seventy, so they bent the rules (with some fanfare).

There are Reefer Madness warnings from Health Canada.  Why the folks that approved Oxycontin and Thalidomide think they have any credibility here escapes me.  The closest thing to a marijuana health issue is adolescent excess but that is hardly pot specific.  At some point, they will have to admit that the original law was a pointless, nitwit mistake in the first place.

As for keeping profits out of the pockets of criminals - the law has changed marijuana from a blue collar drug crime to a white collar financial crime.  Cannabis CEOs are dropping like targets in an arcade for questionable financial practices.


The established market has much lower overhead
I have never bought from or sold to, anybody who was not a friend.  You visit a buddy's home, spark a doobie, chew the fat, and transact.  No commercial rent or staffing costs.  This has been industry standard practice for years. 

Marketing costs.  What for?  The incumbent multi-billion dollar industry sells 700 tons per year in baggies while hiding from the police.  Pot stores have had lineups months after legalization despite the prices.  This tells us that demand does not need to be promoted.  Brand differentiation interests investors, not consumers.

On the cultivation side, there is very little economy of scale in marijuana growing.  After you get to 100 plants, costs are down to $1/gm.  That does not change for 10,000 plants.  Marijuana is a fussy crop vulnerable to mold, mildew, and insect pests.  It's hard to grow at large scale.  Production benefits much more from the skill and craft of the growers than from access to large scale capital.


The outcome is inevitable
The law is not creating a new industry.  It is attempting a hostile take-over of an existing industry.  A 2004 Fraser Institute report suggests BC marijuana (excluding Ontario and Quebec) may be as big as softwood lumber.   BC marijuana dwarfs the combined economic impact of BC wine and fruit (https://www.fraserinstitute.org/sites/default/files/MarijuanaGrowthinBC.pdf). 

Stoners are lazy.  If we could get good pot conveniently and had to pay a 10% premium for the service, that might be viable.  200% is ridiculous.  What is a free market going to do to a wildly over priced commodity when established, competing sources are easily available?

Why do investors in legal pot think the existing industry, with its substantial cost, quality, distribution infrastructure, and customer relations advantages, will not be a factor in the market going forward?  Given the abject failure of the old law to have the slightest impact on the market (beyond inflating prices) maybe they think the tooth fairy can do what the police could not.

Despite the old law, the Canadian pot market has long worked to the considerable satisfaction of both customers and growers.   Canada has been growing world class weed for decades.  There is no current shortage of good, affordable, accessible pot.  All aspects of marijuana cultivation and distribution have been done more efficiently and competitively by small businesses than either big business or organized crime since the eighties.

The government cannot fix price or control the production of marijuana because it cannot restrict new entrants.  A 100 plant grow-op producing world class pot can be set up in a big suburban basement in less than a month for $25,000.  The cost of entry to the market is so low that marijuana can’t be a regulated oligopoly.

According to the hippies at Fraser, a 100 plant grow-op can produce three, twenty-five kilo harvests per year.  At $2,500 / kilo (forty percent of today’s prices), a competent ‘bro ‘n’ ‘lady shop will still net more than $110,000 (more as LED grow lights slash electricity bills).   That’s a viable small business.

If the licensed producers cut price (bye-bye margins and stock values) there will be a price war with the incumbent industry that the LPs can’t hope to win while covering their regulatory and marketing costs.  Existing unlicensed growers can cut prices well below what LPs can match and use the established, unregulated distribution system to serve the largest part of the market, the young, who have no reason to start obeying a law teens have been ignoring since the sixties.  

The LPs will not be able to compete with the established industry which has no reason to surrender market share in a massive, lucrative business even if margins shrink a bit.  Someday business schools will point to pot as an example of destroying an industry through regulation.

Investors in the "new" marijuana business are going to get skinned and it couldn't happen to a more deserving gang of parasites.