Find Can Legal Weed Win?
Welcome to our 100th episode of WeedBudz Radio! I am your host, Ry Russell and I invite you to join this compelling discussion today of the economics of owning a business in the cannabis industry. There are many factors that can hinder growth and success in this competitive market so we ask the question – can legal weed win?
To answer that very question, we have the authors of the book “Can Legal Weed Win? The Blunt Reality of Cannabis Economics”, Robin Goldstein and Daniel Sumner.
ABOUT THE AUTHORS
Robin Goldstein is an economist and author of The Wine Trials, the controversial exposé of wine snobbery that became the world’s best-selling guide to cheap wine. He is Director of the Cannabis Economics Group in the Department of Agricultural and Resource Economics at the University of California, Davis. He has an AB from Harvard University, a JD from Yale Law School, and a Ph.D. in economics from the University of Bordeaux.
Daniel Sumner is Frank H. Buck, Jr. Distinguished Professor of Agricultural and Resource Economics at the University of California, Davis. He grew up on a California fruit farm, served on the president’s Council of Economic Advisers, and was Assistant Secretary of Economics at the US Department of Agriculture before joining the UC Davis faculty. He has a BS from Cal Poly and a Ph.D. in economics from the University of Chicago.
Transcript from this Episode:
Welcome back to another episode of WeedBudz Radio.
I’m your host, Ry, and as most of you
know, I opened a cannabis dispensary in northern Maine.
And as exciting and amazing and fun and
challenging as that is, you really need to
look at the economics of getting into the
cannabis industry and the economies of your business.
And that’s something that we’re going back
and forth with all of the time.
And as most of you have heard throughout my
grumblings that taxes are one of the things that
really hinder us as a business from being able
to scale, being able to employ more people.
And it’s a constant challenge of, is this worth it?
Are we crazy?
Some might say maybe a little bit of both.
But it’s always time to go to the experts.
Why hypothesize and sit here and fester
on things that I know nothing about?
It makes more sense for me to talk to individuals that
wrote the book on whether or not legal weed can win.
And so joining us today, we have
the incredible authors of Can Legal Weed Win? The
Blunt Realities of Cannabis Economics.
And so I’m really excited to have
both Robin and Daniel join us.
Thank you so much for joining us today.
Thank you very much.
So you two gentlemen obviously have an extensive
knowledge not just about cannabis economics and cannabis
business, but about economics in general.
I know that’s a topic that you both have
studied and teach upon and share your knowledge upon.
So I guess my very first question
to you gentlemen is, am I crazy?
Am I bonkers for getting into the
cannabis industry the way that I have?
Well, let me say something to begin with, and
that is, you know your local market, you know
your local competition, and Robin and I may give
you some background, but the most important thing is
what’s going on right where you are.
And we could say, boy, it’s really
tough, and here’s some examples where it
seems to be working more than others.
But you’ll know your local situation, if you’ve
got 13 other guys that are undercutting you
on price, we could say, gee, the market’ s
booming, and you could say, I’m getting screwed.
You see what I’m saying?
So we can have some insights about the
bigger picture, but, you know your local stuff.
Speaking of the bigger picture, would you consider
legal weed to be winning right now?
Would you say that it’s failing?
What is your perspective on how weed
is measuring up from an economic standpoint?
Well, we don’t think it’s winning
right now, that’s for sure.
It’s, of course, a different situation in every state, and
some states are doing a lot better than others.
So one of the things we do in the book
is we compare states that have been doing comparatively well
with ones that haven’t and look for some of the
reasons why, and we say, well, we mean the state.
It’s a viable legal market.
Legal weed is able to beat illegal weed.
That’s sort of a success for legal weed.
And it’s been really hard in states
like California, where we come from, for
legal weed to compete with illegal weed.
And the biggest reason is price.
Illegal weed is much cheaper to produce and sell
because they don’t have to pay all the taxes
and go through the regulations and follow all the
rules, including a lot of rules that you have
to follow in any legal business.
Not just weed, but a lot of specialized cannabis rules
that only cannabis companies have to follow has made it
more costly and more difficult for them to compete with
the illegal guys that have been around for a while.
So the states that have done best are the
ones where they’ve been able to bring prices down
and be more competitive, where legal weeds able to
be more competitive with the illegal stuff.
And there are neighborhoods where, for
one reason other, your customers don’t
really care about price that much.
Not very many, but some.
And you’re in some town where everybody really
wants to be legal in every way.
Even though they could have weed, it’s
legal for them to have it.
They want to deal with
local legal businesses, that’s great.
But not everywhere is like that.
So if I was thinking about the distribution,
it goes from really struggling to hanging on.
And the, boy, I’m just printing money here, at least as
far as there are people that have made those claims.
There may be a consultant that’s doing very well and
a lawyer who’s doing very well, but it’s tougher to
find somebody who’s actually in the cultivation business.
And it’s also easy for people in business.
And I do a lot of food economics.
And you talk to a farmer and he says,
oh yeah, that guy who’s just one step up
the chain from me, he’s making all the money.
And then you talk to the guy in the
marketing, the distribution business, the middleman, and he says,
yeah, the retailers make money, the farmers make money.
God, I can’t make a go of it.
And then you get to the retailer and he says, the
prices are so high, those guys are charging me so much.
Plus I have my rent and the labor, and who
knows where you can get a worker these days?
You see what I’m saying?
And I really do think it
goes from struggling to hang on.
But the big thing about weed is
that the illegal market is there everywhere.
The competition from the illegal guy is always there.
And that’s the point Robin was making.
That’s the challenge about price.
We’re talking about legal markets and illegal
markets and legal pricing and illegal pricing.
And I think something that is confusing
and misleading is the term legalization.
And when I think of my operations here in
the beautiful state of Maine, it’s a legal operation.
And I struggle to see where
federal legalization will make things better.
Everybody, I think touts that federal legalization
is going to make everything exponentially better.
But the feds are making a lot of money off of
me right now, and they do control some of the kind
of merchant services, if you will, systems of all of this.
And so it’s hard for me to see,
well, what’s the federal incentive to legalization?
So can you help demystify what legalization is?
But why ultimately, does the term
legalization become so misleading to people?
This is music to our ears, because that’s one
of our themes, and I’ll let Robin elaborate.
One of the first things we do in
the book is say this word legalization.
We’re using it, but it can be really misleading.
Yeah, and it can just mean a lot of different things.
For example, when a state passes a ballot question or
a bill that says weed is legalized, it can take
years between getting from that point to getting to the
point where you actually have stores open, because states take
years sometimes to drop regulations and so forth.
Vermont, 4 and a half years after they
passed a law legalizing recreational weed, they still
don’t have a single recreational store open.
Oklahoma, on the other hand, managed to do that in a day
with what Vermont took 4 and a half years to do.
But that was medical legalization.
So you have medical and then that’s basically a
market that’s limited to state residents with doctors permissions
and that’s sort of a lot more states are
set up that way than the recreational.
But when we talk about recreational legalization, Dan and
I, from an economic point of view, of course
you care whether the stores are open and they’re
doing business and there’s a market.
So we consider full recreational legalization to only start at
the moment when stores are actually open and you can
walk into a store and buy weed legally.
And there’s about 14 states that are
now at that stage with recreational.
I’m curious, in Maine, we’ve been looking at a
lot of data on prices and also on
the number of dispensaries in each or retailers
in each state and the density of retail.
One thing we noticed about Maine is that you guys
have a lot of stores for your population, and you
also have the prices on the lower side of
the spectrum of what we’ve been looking at.
So I’m curious, why do you think that is?
What’s the market like in Maine?
I take responsibility for the lower prices.
No, but our store does take a lot of pride in that.
For example, Budz Emporium, specifically, we have a
guarantee that we are the cheapest recreational store
in the state of Maine, and sometimes that
means selling our vendored wholesale products for less
than that vendor’s own retail establishments.
And we’ve kind of made that guarantee
because we know that price is the
primary driver of consumer behavior right now.
And within that, there’s different parameters around
selection, but it really is price.
We were the first store to offer
a $99 ounce in the rec market.
That was lower than many ounces in the medical market.
And frankly, it can be cheaper than
what you get from Bob next door.
And that really boomed our business.
And that was something that took a lot
of work, a lot of creativity, a lot
of partnerships from many different sides.
But that single handedly took the average cost of an ounce
in our store from about $200 down to about $125.
That’s a significant jump in 30 days.
And you are seeing a jump like that in the
state of Maine where, for example, when we open the
store, I think the average price per gram to the
consumer was right around $15, $14 and some odd cents.
And if I’m not mistaken, the latest reports are showing
about, $10.50, $10.75 I think, per gram right now to the consumer.
And we’re below that here at my store in particular.
But we built our business off value.
I used to operate a drive in movie theater, and
the only way that I saved that was creating the
value of kind of reducing that barrier of the ticket
price and increasing the value on food.
Everybody brought in sandwiches.
Nobody was buying food at the drive in.
And we kind of changed that model around where
you wanted the food at the drive in.
It was good and it was good value.
And so I try to take those principles
and bring them over here to my operation.
But it is in the state of Maine, you
have 3,500 to 4,000 medical shops which are untested,
and then you have about 100 or so retailers
in the adult use market right now.
And that’s definitely going to grow.
But there’s a lot more hurdles
in the adult use recreational market.
The med market is a piece of paper front and back,
and you can open a store within probably 72 hours.
The adult use side is a grind and a grueling
process that I think will get easier over time.
But the barrier to that’s very low
as well at $2,500 per license.
So I think if not the lowest in the country, one
of and so the barriers to entry are very low.
And that’s where I think branding comes into play
and value and all of that here in Maine.
But the economies here are very different.
And when we see tourists from Pennsylvania, New
York, Rhode Island, Massachusetts, they cannot even believe
what the price per pre-roll or per 8th
is here in the state of Maine.
And they want it.
The thing that in my opinion, and you two are
economists, but I think even having a market like Maine
is going to drive the prices lower in Massachusetts and
Vermont and kind of trickle down because those tourists are
going to start demanding it from their retailers, which, to
your point, Daniel, that works backwards.
The retailers will then put that pressure on
the middle man, the middle man backwards.
So it is a very unique segment of the industry.
We are in Maine.
Are you allowed to deliver Ry or is
it strictly storefront because that limits your scale.
It does very much, though.
And currently the adult use market
is not allowed to offer delivery.
That should be coming online hopefully
August, September, October of 2022.
And when that does, I think
that’ll help retailers out a lot.
However, that doesn’t come without its own challenges
and own infrastructure and all of that.
And I’m lucky.
I’m in the north Maine woods.
I’m the only adult use store really for an hour
south and probably an hour and a half north.
And so I’ve got a nice piece of territory where
you go to Portland, you’ve got 70 stores stacked on
each other, loyalty is zero, and it’s very price conscious.
Connecting back to the point you asked, the question
you asked earlier about federal legalization, I think you’re
really smart to care a lot about price.
And Maine is going to do comparatively well compared to
some other states around Maine when federal legalization comes in,
because you’re going to all of a sudden be competing
with stuff from all over the place.
Now, you’re also going to face competition from Wyoming
or Montana or Oklahoma, places that might be able
to make it even cheaper because they have lower
costs of land and labor and things like that.
But the thing that I think people we say a
lot in the book, the thing that people miss about
legalization, they think it’s just going to help everyone.
And actually competition will help
some people and hurt others.
You’re ahead of the game by caring about price,
by thinking about price, by figuring out how you
can price not just competitively, but at the bottom
of the price spectrum in your area.
And that’s the skill set and the advantages that
will be needed in the future with competition.
As a retailer, what we say about
federal legalization is first, do no harm.
In fact, my motto has been let cannabis be kale.
We don’t need a bunch of regulations from the Feds.
The states have been handling that pretty
well, and local governments and everybody else.
And in fact, this idea of federalism,
this idea that different states do things
differently, okay, that’s the way it goes.
But the last thing we need is to layer on a
set of federal taxes and federal regulations on top of that.
And what Robin is talking about is the
beauty you go back to the U.S. Constitution.
The beauty of the U.S. Constitution is
it made a free trade agreement.
So let’s just accept that.
So imagine the federal government did
one thing and one thing only.
It just took cannabis off this schedule
of prohibited substances or illegal substances.
The list of severe drugs, all you
did was cross that one line out.
Taxes would change, banking rules would change.
All of those things are just tied to
the fact that the raw material that you
buy is on this list of illegal stuff.
Therefore, you don’t get to deduct it
from your taxes as a retailer.
And the federally registered banks don’t want to deal
with you or they find it awkward because you’re
dealing with a substance that’s on that list.
Now, there may be some other places where somebody
has to cross something out, but what we’ve seen
about the federal regulations, no matter who they’re sponsored
by, even the one that was released yesterday or
today, it goes on for pages.
And Robin and I say, how about a postcard?
You don’t really have to do a lot here, and
maybe later you want to say, okay, we’re going to
add cannabis cultivation to some USDA program or something.
But as long as you don’t prohibit
it, it’s there for lots of things.
And so that’s what we’d say for you, and
particularly you, Ry, and I would say your customers
and the customers in Maine that want to take
advantage of access to Washington state or maybe eastern
Massachusetts, where they have some particular cultivars of ours
that are tasty or somebody likes, fine.
But it doesn’t tie you when you go buy a banana, you’re
not stuck to buying a banana that was grown in Maine.
And when you grow an avocado, yeah, same thing.
You buy that avocado, it can be grown in Mexico.
It could be grown down the
street from here in California.
Same with strawberries, et cetera, et cetera.
You go buy strawberries in January, you don’t
say, God, it’s coming from some guy with
a hot house under glass doing all kinds
of electricity to grow a damn strawberry.
Whereas in cannabis, it has to be.
And so this free trade, particularly in the raw material, I
think is a boon for your kind of business, and it
may not be a boon for the cultivators of Maine that
you could see some growers saying, wait a second, I don’t
want to have to compete with Colorado.
That makes a lot of sense.
That sounds so hopeful.
So I want to go back there for a second.
But first you said something about legalization, and then
the feds will put taxes on top of that.
But my argument is, where are they
going to put taxes on top of? What?
What could they possibly put taxes on top of?
Because we’ve got our sales tax, and then we pay our
income tax monthly or quarterly, and they’re getting a nice chunk
of change on that, upwards of past 30% of our revenue,
and there’s nothing we can do about it.
Now, there’s a lot of if you’ve got big money,
you can put a holdings company in between it and
a property management company in between it and stack and
layer and all kinds of other things, but just straight
up, pound for pound, what would it look like if
there was true federal legalization?
Well, here’s the problem.
Over the years, I lived in North Carolina for
a while, and I studied tobacco economics, and I
moved to California and started studying wine economics.
And so I can tell you there’s
a federal excise tax on wine.
So if you go to your local grocery store and buy
a box or buy a bottle, it’s got a bunch of
federal taxes later right into it, right off the bat.
Same with a pack of cigarettes.
Lots of federal taxes, then state taxes, then if you’re
in a city that puts local taxes on top.
So just because there’s state and local taxes
and regulations doesn’t mean the feds can’t put
some more taxes on the product itself.
We know they tax your business, your income
taxes, and other things on your business.
But this is product taxes.
Our argument is it’s not needed.
We got plenty of taxes already.
And particularly, and this is really crucial
for everybody to understand the health of
the industry because we’ve got this illegal
business that is running parallel now.
Maybe not in Maine, maybe nobody
grows illegal cannabis in Maine, right?
Yeah, I wish.
The feds aren’t going to tax illegal cannabis anymore
than they do now, and they’re not going to
stop it any more than they do now.
And at least in most jurisdictions when you legalize
it, the agency that’s in charge of monitoring legal
cannabis in Colorado, the Colorado agency that does that,
they don’t go after illegal cannabis.
They don’t even know how because they have a long
list of growers and retailers and wholesalers and testing firms,
and they say, here’s a bunch of regulations you have
to follow, and it’s their job to make sure that
the legal industry follows the law, okay?
That’s their job.
There’s this whole illegal industry that’s doing its
thing undercutting your prices and everybody else’s.
And that’s the big challenge
that Robin was emphasizing.
Robin, I just told him that he was giving me a glimpse
of hope and then right there all the way, oh no, you
signed up to be on their radar and on their list.
So I guess I have a question for
both of you gentlemen before we end today.
Where’s the hope?
I think there’s plenty of hope because people over time
see what works and doesn’t and learn from successes and
failures of others. I think we think that the most
hope is when people are willing to look at other
states and see what’s worked and what hasn’t.
Be brutally honest about what’s failed.
One of the mistakes regulators have made, as you see
more and more states opening up, and it’s like the
default is they just go copy the regulations.
They’re writing off the regulations, they just copy the
system from California or from Colorado, and you’re like,
well, why would you copy some regulations?
Why would you copy a system of a state that
where legal weed is not doing comparatively well against illegal?
But if they looked at what’s going on in Oklahoma
with the medical system there, they’re not at recreational yet,
and they see how much that industry is thriving and
they’ll be probably competitive in an interstate market, then you
want to set up more like that.
So we’re hopeful in the sense that over time, maybe
it will take a century or maybe 10 years, but
I think over time, people learn from their mistakes.
He’s the optimist, the real wild card, the real
question mark is what you’ve been getting out, which
is what form federal legalization will take.
Legal weed could, as Dan said, if
it’s just descheduled, that could really help
legally win in a lot of places.
If they add another layer of
taxation, then it’s anyone’s guess.
It could be a step backward
before we’re able to step forward.
Where your case is interesting a lot
of places, California is one of them.
Washington State is another.
There are several where when adult
use was introduced, medical died because
they had essentially the same rules.
Most people in California got both licenses
when they were both available same.
It wasn’t easy.
Neither license was easy.
They got both licenses, and then the customer
said, well, unless they were under the age
of 21 or had some, there was no
particular reason to get a medical card anymore.
Whereas what I found fascinating about what you said
was that if I declare and you always said
medical in quotes, you always said that.
And it’s interesting that I look at you as a retailer
and said, well, why don’t you go to the medical route?
You could access a lot of customers.
You could have stores side by
side, one medical, one adult use.
But in most places, there was just no reason for
medical once you had adult use up and running.
And it’s fascinating.
So there’s a case where Maine did something
quite different than the rest of the country.
We like to strive to say that we’ve seen
the future and we’re trying to reverse engineer it.
And it’s looking at state by state that has
come before us and trying to learn from their
mistakes, trying to innovate on where they left off.
And I think as long as we stay creative
and innovative and ultimately focused on the customer’s value
first, I’ve yet to see a business model truly
fail where the customer was ultimately the happiest.
And that’s something that we just
kind of strive for here.
And I think that’s ultimately how the industry wins.
Being an industry, that’s not just cool, but
it really, truly is part of the community.
And that’s easy for me to say in my tri
town area of 10,000 individuals, but also because of that,
it’s much easier for that community to know how hard
we work to live up to that.
It’s much harder at scale to show
the customer that same level of love.
And that’s really what we’re trying to
dial in before we replicate, is how
do we replicate true community value?
Because that’s what we did at
the drive in, and it succeeded.
And I think that is ultimately not only
the way cannabis will succeed, but in my
mind, that’s the way it should.
I think the people of the cannabis industry, hopefully
most of them, feel the same way that we’re
sharing love with the world when we put this
in a safe, legal fashion and bringing it.
And I think often that’s why the accidental air
quotes come out when I refer to medical.
It’s because they should be the ones
putting in the level of care.
The level of continuing education.
And the level of seriousness that we
emphasize with our teams because they’re medical.
They should hold themselves accountable.
And they should ultimately be testing their own product
if there’s no legal reason to do so.
We very much we were licensed to answer your
question, Daniel, why didn’t we were licensed as medical?
And when I learned that medical was not required
to test, we bowed out and decided that that
was not the values we stood for, ultimately not
where we wanted to be in the marketplace.
We felt that, yes, we’re entrepreneurs and
not necessarily looking for a boss, but
we are looking to be held accountable.
And testing doesn’t just hold us accountable, it
holds the cultivators and the processors accountable.
And ultimately, I think that just
makes a safer product for everybody.
So that’s ultimately why we decided
to do the recreational side.
Testing is an important one.
It’s one of the things that differentiates if you
ask what differentiates the legal from the illegal product
and experience, and you talk about both and the
testing is like the main substantive difference.
No one can necessarily from smoking weed, from
smoking in particular, where you can’t necessarily know
whether the person who grew it or packaged
it had a state license or not.
But the certification of testing
means something to some people.
Some people aren’t willing to pay more for it, but
some are, and it matters to a lot of people.
And so that’s one differentiator.
But I think you bring up a really important point
about the customer experience and the service element of it.
Most illegal weed is delivery.
And there’s something special about
this in-person’s storefront experience.
And I think some of the early storefronts that
would open, having to follow so many rules kind
of came off as kind of cold.
It was like an Apple Store pharmacy kind of thing.
And you didn’t really have it wasn’t like
such a nice experience that you’d pay a
little extra to have that experience.
But certainly that’s low hanging fruit for people that’s
a big part of the experience is buying it
and getting guidance on what to choose.
And this is a new industry where a lot of
people, especially people who are just starting to explore it
and haven’t been like long time consumers of weed in
the past, they just don’t know anything about what to
buy or what’s the differences between products.
And I think you’re delivering a
lot of value by doing that.
And I think that’s important for people around the country
to keep in mind as they figure out how to
navigate the legalization and compete successfully with illegal.
I really appreciate that.
We definitely strive to do our best.
It’s a humble family shop up here in the north
Maine woods and we’re loving every minute of it.
And honestly, I just want to thank you both so much for
taking the time to riff with me today on all of this.
It’s just overwhelming sometimes when you’re up here and you’re
in your own head and you’re looking at the future
and you’re looking at the past to predict.
And it’s nice to have minds that do that on
a daily basis, help kind of deweed that for us.
So thank you so much.
And gentlemen, how does our buds
at home find your book?
Amazon. Can Legal Weed Win? The
Blunt Realities of Cannabis Economics. Amazing.
Well, thank you both.
Tell your local library too.
Tell your local bookshop, et cetera.
We’re going to have to get a couple of copies
for our library here in Millinocket, so it’ll be fun.
And I think the community is always looking
for more ways to educate themselves on cannabis.
And I think one of the things I love most
about this is the community is part of this rally.
They are a part of the success of
the store and they feel that way.
They’re always looking for products.
And obviously, we are always grateful for all
of you that are tuned in and continue
to tune into WeedBudz year after year.
It has been incredible to
produce these shows for you.
So be sure to head over to
Weedbudzradio.com and check out those show notes.
We’ll have a link for you so
you can go purchase the book directly.
Take you easily right there.
And of course, we’ll see you in the next show.