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Pot of Gold? The US Legal Marijuana Industry*
By 2018, the legal marijuana industry had established itself as a significant component of both
the US agribusiness and medical sectors. Retail sales of legal marijuana in 2017 were estimated
at $9 billion by BDS Analytics—most of it for medically‐approved use. The 2017 US marijuana
crop was valued (at wholesale prices) at $5.7 billion by Cannabis Benchmarks—as compared to
the US wheat crop of $7.4 billion. For the states in which marijuana was legally cultivated and
distributed, the benefits included 121,000 direct jobs and $1.2 billion in tax revenues.1
Medium‐term projections for the industry pointed to continued strong growth. ArcView—a
marijuana information, consulting, and investment firm—forecast that, by 2021, US consumer
spending on legal cannabis would total $20.8 billion, and that the industry would generate
414,000 jobs and more than $4 billion in tax revenue.2
Like most growth industries, the industry has attracted considerable financial interest. Some of
the venture capital and private equity funds investing in the industry are listed in Table 1.
Investment in the marijuana sector was also facilitated by ArcView Group's intermediating role
in linking investors with marijuana entrepreneurs had generated a buzz of excitement about this
“new gold rush.” By October 2017, its network of angel investors had invested $125 million in
157 cannabis‐sector companies.
TABLE 1Private equity and venture capital funds investing in the marijuana sector
$129m. Backed by PayPal cofounder Peter Thiel. Investments include
Tilray (medical marijuana, The Goodship, (marijuana‐infused
candies and cookies), Marley Natural, and Leafly
$93m. Investments include Willie's Reserve (owned by Willie Nelson),
TeeWinot Life Sciences (cannabis‐based pharmaceuticals),
GreenDot Labs (cannabis extracts).
$130m. The investment arm of MedMen Inc., a chain of 11 dispensaries
in CA, NY, and NV. Has raised $176m in private equity funding,
with an implied valuation of $1 billion.
Invests in agricultural technology, SaaS solutions and data
analytics for the marijuana industry.
Chicago‐based venture capital fund. Initial investments:
company Headset (cannabis data analytics) and Front Range
$33m. Investments include Eaze Solutions Inc. (CA‐based medical
marijuana home delivery service), Trelis, Green Bits, and FunkSac
$10m. Investments include: New Frontier (data analytics), firm
Grownetics (growing solutions), Leaf (cannabis growing), and
Flowhub (business management platform for marijuana
The transformation of the marijuana business from one controlled by criminal gangs to a
legitimate business activity supported by an infrastructure of consultants, information providers
and investment funds had generated a buzz of excitement about this “new gold rush.” However,
there remained perplexing questions over the industry's potential to generate attractive profits.
Would the industry offer the sustained high profitability associated with the two other heavily
regulated industries supplying recreational drugs—alcohol and tobacco—or would it suffer the
squeezed margins and low returns typical of the agricultural sector?
In 1996, California became the first state to legalize the sale of marijuana for medical use. Then,
in 2014, Colorado and Washington became the first states to legalize the production, sale, and
consumption of marijuana for recreational use. At the beginning of 2018, the sale of marijuana
the sale of was legal in 30 states and, for recreational use by adults, in nine states (Colorado,
Washington, Oregon, California, Nevada, Massachusetts, Maine, Alaska, and Vermont).
Yet, amidst continuing concerns over the physical and psychological dangers of marijuana
consumption, the impetus to change federal law was weak. Continuing illegality of the
production, sale, and possession of marijuana under federal law was a major handicap for the
industry. In particular, firms engaged in producing and selling marijuana had limited access to
the US financial system. Banks were fearful that involvement with the industry might contravene
drug‐racketeering or money‐laundering rules. In the United States as a whole, law enforcement
against consumers and suppliers of marijuana continued to be active. In 2016, there were
653,249 arrests throughout the United States on marijuana‐related charges, down from 693,481
in 2013. Close to 90% of these arrests were for possession.
Moreover, the approach to enforcing Federal laws against marijuana had shifted considerably in
the transition from the Obama to the Trump administration. In January 2018, US Attorney
General Jeff Sessions rescinded the Obama‐era guidelines, known as the “Cole Memo,” which
discouraged federal prosecutors from taking action against state‐licensed marijuana businesses.
As a result, banks and credit unions became increasingly wary of transactions involving
companies engaged in marijuana businesses.
The Market for Marijuana
The US market for marijuana can be segmented between legal and illegal sectors and between
medical and recreational use. Table 2 provides some data.
TABLE 2Estimates of the US market for marijuana
Numbers of users, 2017
Total users: 33mn. (Gallup poll); 55mn. (Marist poll)
Medical marijuana users: 1.7mn. (Marijuana Business Daily).
Marijuana sales, 2017
Total legal sales: $9 bn. (BDS Analytics), $5.1–6.1 bn. (Marijuana Business
Medical sales: 60% of total; recreational 40% of total
Total illegal sales: $64.7 bn. (ArcView).
Leading states for legal
marijuana sales, 2017
California $1.45bn.; Washington $7.8bn. Colorado $0.44bn.; Arizona
$0.35bn.; Michigan $0.13bn.; Illinois $0.08bn.; Oregon $0.07bn. (Marijuana
Number of legal
Growers: 2500–3500; Retail dispensaries 3300–4300; Infused product
manufacturers: 1600–2000; Testing labs: 100–150 (Marijuana Business
Note: The sources of the estimates are shown in brackets.
Marijuana consumption in the United States has been widespread since the mid‐1960s, although
estimates of its prevalence are imprecise. According to the National Institute on Drug Abuse:
Marijuana is the most commonly used illicit drug (22.2 million people have used it in the past
month), according to the 2015 National Survey on Drug Use and Health. Its use is more
prevalent among men than women—a gender gap that widened in the years from 2007 to 2014.
Marijuana use is widespread among adolescents and young adults… Among the nation's middle
and high school students, most measures of marijuana use by 8th, 10th, and 12th graders peaked
in the mid‐to‐late 1990s and then began a period of gradual decline through the mid‐2000s
before levelling off. Most measures showed some decline again in the past five years… In 2016,
9.4% of 8th graders reported marijuana use in the past year and 5.4% in the past month (current
use). Among 10th graders, 23.9% had used marijuana in the past year and 14.0% in the past
month. Rates of use among 12th graders were higher still: 35.6% had used marijuana during the
year prior to the survey and 22.5% used in the past month; 6.0% said they used marijuana daily
Among adults, marijuana consumption was most prevalent among young males between the ages
of 18 and 34; however, the fastest growth in marijuana use was among older Americans—
especially those over 55.4
Development of Legal Marijuana Industry
The two lead states in legalizing recreational marijuana were Colorado and Washington; hence,
the industry's development in these two states offers pointers as to how the legal marijuana
industry might develop elsewhere—even though the structure and conduct of the industry will
depend greatly upon how each state frames its regulations. In the future, California—because of
the size of its market and extent of both legal and illegal cultivation—will have the biggest
impact on the fortunes of the marijuana industry at the national level.
At present, entry into the industry depends critically upon the allocation of licenses. The
availability of licenses depends upon the restrictiveness of eligibility criteria and whether the
state imposes a limit on the number of licenses. In Colorado, eligibility criteria are strict:
licensees must be US citizens, state residents, have clean criminal records, and meet other
standards, but there is no quantitative limit on licenses issued. In Washington, a fixed number of
licenses are available, and their allocation is by lottery. In California, eligibility criteria are
relaxed and there is no quota on the number of licenses that can be issued. As a result, Cannabiz
Media predicts that, by the end of 2018, California could grant as many as 10,000 licenses for
However, in all states, receiving a state license is dependent upon local authorization—in
Colorado, Washington, and California—many counties and cities have decided against
permitting marijuana businesses. As a result, most businesses are concentrated in relatively few
locations. In Colorado, over one‐third of the state's 500+ dispensaries are in the Denver
metropolitan area. In California, four cities—Oakland, San Jose, Sacramento, and San
Francisco—accounted for 30% of all licenses in April 2018.6
In addition to the conditions for obtaining a license, the industry is subject to a vast array of
regulatory requirements. All marijuana facilities have to have elaborate security equipment
installed, including surveillance cameras and precautions against theft. In addition, every
marijuana plant is subject to an elaborate system of tracking that includes RFID tagging. The
physical movement of marijuana is also highly regulated—including specifications for the
vehicles that can be used to transport marijuana.
The issuing of separate licenses for different types of marijuana businesses—growers,
distributors/transporters, manufacturers, retailers, and testing labs—tends to reinforce
fragmentation along the industry's value chain. Most states encourage small businesses—
including social enterprises—in the development of their marijuana industries. However, the
evidence in Colorado, Washington, and California shows an increasing role of large enterprises.
In Colorado, dispensary chains include Native Roots (21 stores), LivWell (14 stores plus
growing and processing operations), The Green Solution (11 stores), Green Dragon (11 stores),
and Starbuds (10 stores). In California, multiple license holders include Honeydew Farms LLC
(29 licenses), Harborside (12 licenses), KindPeoples (12 licenses), and CA Systematize (8
licenses).7 Vertical integration from seed to retail dispensary is a feature of several of the larger
The development of the industry has been accompanied by the development of an infrastructure
of support services. For example, MJ Freeway offers “seed‐to‐sale” tracking software that meets
states' regulatory requirements and assisted operations management; Advanced Cannabis
Solutions lease real estate to large commercial growers; Waste Farmers supply soils for cannabis
growing; and ArcView Group is a hub for data, investment, media, and consulting. Table
3 shows some of the main features of the legal marijuana industries of Colorado, Washington,
TABLE 3Some features of the legal marijuana sector in Colorado, Washington, and
Yes (max. 6 plants)
Yes (max. 6 plants)
Separate licenses for
cultivation, manufacture and
retailing, and for medical and
recreational marijuana. State
licenses only issued when
allowed by local jurisdictions
Single licensing system
for medical and
licenses for producers,
Separate licenses for
cultivation, manufacture, and
distribution. License applicants
must first have approval from
Application fees: dispensary Application: $266
$6000–$14,000; cultivation License fee: 1062
$1000. Licenses: dispensary
$1000 application fee. Licenses
on sliding scale based on
business throughput: e.g.,
2.9% sales tax
15% excise tax plus $9.25 tax
per pound on flower and $2.74
per pound on trim (in addition
to sales and use taxes)
State‐wide tracking system for all plants and processed products
Medical: 503 dispensaries;
issued (early 751 cultivators
Recreational: 518 stores
37% excise tax; 9.6%
486 retail stores
No more licenses being
1273 licenses issued: cultivator
322, dispensary/retailer 322,
manufacturer 302, distributor
176, microbusiness 57,
Delivery 52, testing 15.
aBy 2018, Colorado has highly developed marijuana industry with extensive infrastructure.
Marijuana generated over $200m. in taxes and licensing fees for the state.
bThe state has had a highly developed illegal marijuana market for decades with substantial
production in the east of the state and imports from British Columbia.
cTotal production approx.13.5 million pounds per year; consumption approx. 2.5 million pounds—
hence massive (illegal) exports to other states.
The Economics of the Marijuana Business
Growing marijuana, whether for the medical or the recreational market, requires, first, a
license, and then the acquisition of a growing facility. Marijuana is grown primarily in
indoor, climate‐controlled buildings under artificial light, but also in greenhouses and
outdoors. Although greenhouse and outdoor cultivation offers economies both in set‐up
and operating costs, these advantages are mitigated by the need for extensive security
equipment for all marijuana‐growing facilities. More importantly, the key advantage of
indoor cultivation is the ability to have multiple growing cycles each year. The average
size of an indoor facility is 18,300 square feet; that of a greenhouse is 39,000 square
The growing process involves the following stages:
1. Establishing stage: cloning new plants from existing female plants and allowing the new
plants 7–12 days to become established.
2. “Veg” (or growing) stage: two months under constant light.
3. Flowering stage: about two months with a daily cycle of 12 hours of light followed by 12
hours of darkness.
4. Processing stage: hanging the plants upside‐down, then harvesting their buds and leaves.
5. Curing stage: drying the buds and leaves.
Figure 1 shows the layout of a typical growing facility.
FIGURE 1 Layout of a typical marijuana indoor cultivation facility
Source: J. Maxfield, “More Legalized Drug Dealing: An Inside Look at Colorado's Massive Marijuana
Industry,” Motley Fool (January 5, 2014).
Early estimates of revenues and costs suggested that marijuana is a highly profitable
crop. For example, Motley Fool estimated that a 10,000‐square‐foot growing facility
with five annual growing cycles could produce 1250 pounds a year, with a wholesale
value of $2.75 million. With production costs of $1.25 million (i.e., $1000/lb.), this
implies a margin of 55%.9 However, estimates of production costs are highly variable:
one study estimates a range of $70–$400/lb10, while another study puts them as high as
As the industry develops and spreads to more and more states, more reliable estimates of
revenues and costs have become available. Table 4 provides estimates based on data available
during the first half of 2017.
TABLE 4Estimates of the costs, revenues and profitability of legal marijuana
Source: Marijuana Business Daily, Marijuana Business Factbook 2017.
Start‐up cost (per sq. ft.)a
Annual operating cost (per sq. ft.)b
Revenue (per sq. ft.)c
Average profit margind
Percentage of business that is profitable
Percentage of business that breaks even
Percentage of business that is loss making 30%
aEquipment and real estate accounted for 60% of start‐up costs, licensing, and security for a further
bWages accounted for 30% of operating costs, rent/mortgage for 18%, utilities for 16%.
cBecause of quality and consistency, indoor grown marijuana sells at a price premium.
dAfter‐tax, net margin.
Over time, production costs change. While increased productivity from technological advances
and greater operational efficiencies reduce production costs, these are offset by rising real estate
costs due to a shortage of suitable facilities and increasing wage rates for marijuana workers—
these wage rates tend to be above those for workers in similar horticultural and retail sectors. In
Colorado, Oregon, Alaska, and some other states, employees in marijuana businesses are
required to have state occupational licenses.
Most estimates of the profit margins on marijuana growing have failed to take account of the
many risks affect the industry. These include: diseases, natural disasters (California's wild fires
of 2017 and 2018 wiped out many producers), and other sources of crop failure. In addition,
there is the ever‐present risk of crime that affects all cash‐based businesses and the risk of
closure or loss of license resulting from failure to comply with state or local regulations.
The greatest uncertainty in projecting future profitability relates to prices. In the wholesale
market, prices are determined by supply and demand. Prices vary over times due to spikes in
demand (demand peaks during summer and holidays) and seasonal variations in supply (supply
from outdoor and greenhouse cultivation increases during the fall). Longer term, there has been
an overall downward trend in prices as growth in supply has outpaced growth in demand. Figure
2 shows prices between 2015 and the end of 2017. This downward trend has continued during
the first half of 2018. During mid‐August 2018, the average US spot wholesale price was $1130
per pound compared to $1486 at the beginning of the year. These averages masked considerable
price variation both between quality grades and localities. During the first half of 2018,
wholesale prices in Oregon were approximately 55% higher than those in Colorado.12
FIGURE 2 Average spot wholesale price of marijuana in the US ($ per pound)
Source: Cannabis Benchmarks.
There is a huge diversity in the retail outlets supplying marijuana and marijuana processed
products. There is a distinction between medical and recreational outlets, with the latter present
in only nine states, compared to 30 for medical. Variations in regulations among states mean
differences in size, operating practices, costs, and competitive conditions. In addition, some
retailers are stand‐alone, other backward‐integrated into cultivation. Some indications of average
revenues and costs are shown in Table 5.
TABLE 5Average revenues costs, and profitability of licensed marijuana retailers,
Source: Marijuana Business Daily, Marijuana Business Factbook 2017.
Average outlet size (square feet)
Start‐up cost (per outlet)
Annual operating cost (per outlet)
Revenue (per outlet)