What’s next for weed?

State’s marijuana industry takes stock two years after legalization

By Andy Matarrese, Columbian Breaking News Reporter

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More than two years since legal recreational marijuana sales started, Washington pot businesses have seen more than $1.48 billion in total sales, raising more than $350 million in excise taxes, according to the state.

But while sales have almost only increased, questions about the future of the market linger.

Beyond the industry-unique issues of regulation and the fact that marijuana is still illegal federally, it’s not yet clear when the market, which saw volatile prices and supply issues during its early days, will start to balance out in terms of supply and demand.

“We’re two years into a very fledgling industry, so to some extent, the sort of unpredictable nature of this industry is to be expected,” Washington CannaBusiness Association Executive Director Vicki Christophersen said.

No gold mine yet

Although jumpy prices and supplies have calmed down, the retail side of the industry remains highly competitive, especially in Vancouver, said Jim Mullen, a co-owner at The Herbery, a group of three marijuana shops in Vancouver.

They opened their first location late enough to skip a lot of the early months’ price volatility, but banking restrictions mean his business is almost entirely cash-only, and insurance is expensive and limited. Furthermore, he gets almost no typical business write-offs.

Still, said Mullen’s business partner, Rick Zahler, the state offered some relief when it modified the tax structure.

As first passed, the law allowing recreational marijuana sales attached a 25 percent excise tax at every step of the production and sales process, from grower to wholesaler to shop. In July 2015, the Legislature shifted the tax to a 37 percent fee at the retail point of sale.

For many businesses, especially wholesalers, there would have been no profits at all under the old structure, Zahler said. “We were able to lower prices where we could probably beat the black market in most instances.”

The 37 percent excise tax and sales tax is still tough. Mullen said about $4.57 of a $10 joint goes to taxes, leaving the rest to overhead, marketing and other costs, much of which, again, are not tax-exempt. But there’s still money to be made, and he said he hasn’t heard of peers closing up shop in droves.

“Listen,” Zahler said, “his car’s a 2002, mine’s a ’98, OK? We don’t have Maseratis by any stretch of the imagination. … But then again, we did manage to put together three stores.”

Perhaps not surprisingly, the top five counties in retail marijuana sales include the state’s most populated: King, Spokane, Pierce, Snohomish and Clark. Those five counties account for 70 percent of all retail sales in the state, with Clark County raking in more than $89.5 million in sales since businesses opened.

At Vancouver’s New Vansterdam, the state’s No. 3 recreational marijuana shop by sales, business seems to be going well, said Cooper Boss, the store’s general manager.

“Compared to any other business I’ve been with, it’s one of the easiest hardest jobs I’ve ever had,” he said. “Selling weed, it almost sells itself.”

The store opened in July 2014 and has 22 employees, including Boss. Most of the challenges his shop faces aren’t much different than other retail businesses, he said.

They are trying to provide a good product and customer service, coordinating with suppliers and wrangling with inventory; the business has gone through several software programs to keep track of products, he said.

“I think you would probably run into the same problems we have in any other retail environment,” he said.

One thing that has left an impression, though, is the rate at which other states have loosened their marijuana laws, something he attributes to a reduced stigma around the drug.

Boss said Nov. 21 he had just finished helping out a woman old enough to be his grandmother.

“Grandma and grandpa come in here often,” he said.

Who’s buying, and where

There’s just over one shop per 100,000 residents in Clark County, and a bit less than two per 100,000 people statewide. In October, Washington shoppers spent $315 per capita at retail shops, although many buyers may have been visitors. The total spent at retail stores is $954 million, according to the state.

Jefferson County, while it ranks 20th with about $6 million in total retail sales, has had the highest density of stores in 2016, according to sales data from the Washington State Liquor and Cannabis Board. State records show the peninsular county had four retail shops doing business in 2016, for about 13 shops per 100,000 people.

Kittitas County in Central Washington, with a population of about 44,000 and four retailers, comes in second for shop density in 2016 at about nine per 100,000 people.

Not long after sales started in July 2014, prices on the retail end spiked as buyers burned through the initial crop of legal weed, and growers couldn’t meet retailers’ demands.

Christophersen, with the marijuana trade group, said another thing that’s unclear is how things will shake out between indoor growers, who can provide a more constant flow of product, and outdoor growers, who have a seasonal schedule but often lower overhead costs.

According to sales data from the liquor and cannabis board, roughly two-thirds of the more than $56 million made in growing marijuana since 2014 was made on the east side of the Cascades, which is, broadly, somewhat better suited to outdoor growing.

Overall, the top five growing counties have been Spokane, Okanogan, Chelan, Thurston and Mason counties, which all account for about 47 percent of total sales recorded at the grower end.

While many businesses coupled their state growing licenses with processing licenses, most cannabis processing — where the product is packaged or otherwise readied for retail sale — seems to be happening in more populated areas.

Spokane, King, Thurston, Snohomish and Whatcom counties have seen nearly 60 percent of the business on the processing side, which has done nearly $473 million in sales.

What might be next

The Herbery’s Mullen said he doesn’t expect there will be a substantial price decrease without a significant regulatory change, namely in the tax structure. To him, there’s no telling when the industry’s growth will level out.

There are still production or processing licenses available, he said, and licenses that aren’t being used to their full capacity.

“As more companies come onto the market it’s going to get more challenging for the producer-processors,” he said. “I think it’s going to be a couple more years, maybe three, until it really starts to balance out and the strong survive. People are going to have their little niche market, or take their territories over, or have good representation in certain regions, and things will balance out.”

Other changes on the regulatory end make it harder to predict what’s coming.

On July 1, the state merged the legal recreational marijuana market with its older legal medical marijuana system. How that will shake out remains unclear, Christophersen said.

“We’re still learning a bit about the medical patient population and what the needs are, and I think the industry is responding,” she said, though it might not be moving as quickly as some would like.

“We’re only four months into the entire market being in the same regulated system. I think there’s still people that are getting their licenses up and running, and we’re still seeing retail stores opening,” she said.

Christophersen said the trade group, among other projects, plans to work with the state on changing how growing space is apportioned. It’s also working on smoothing out pesticide testing, looking into allowing consumption lounges and lobbying to increase the state Liquor and Cannabis Board’s budget.

At the federal level, there are questions about how the incoming administration’s attitude toward legalization may differ from the current one.

Alabama Sen. Jeff Sessions, an apparent frontrunner for President-elect Donald Trump’s attorney general pick, is known as an ardent drug warrior who’s against legalization.

Christophersen said she didn’t expect any of the possible changes she’s lobbying for, or any regulatory changes from the state or feds, to come for some time.

As the industry becomes more established, more of what she hears from business owners has less to do with its unique aspects and more to do with everyday business questions — issues such as finance or human resources.

They want to work, and they want the industry to work, she said.

“They are very supportive of and really want to be part of a fully regulated, safe industry that keeps its product away from children, that competes with the black market and provides revenue to the state,” she said. “They’re committed to that.”