Outrun Change

We need to learn quickly to keep up with the massive change around us so we don't get run over. We need to outrun change.

More news on the emerging state-legal-federal-illegal marijuana industry.

8/30/17 – Wall Street Journal- Buzz Kill for Pot Farmers: Lower Prices – Estimates are the increasingly legal cannabis business has industry wide revenue of somewhere around $6B of sales a year compared to the tobacco industry with $119B annual sales.

According to companies who track such things, the prices for legal marijuana have been dropping.

A retail company in Seattle offers the pricing of one specific brand as an indicator. It is currently going for $10 a gram now compared to $15 a gram two years ago (9/15), which is a one-third drop.

Another company reports wholesale prices have dropped from $2,133 a pound in 9/15 to $1,614 a pound in 7/17. An accompanying graph in the article says wholesale prices were around $2,000 at two points in early 2016, diving to around $1,400 in late 2016, recovering to around $1,850 in early 2017, before settling at $1,600 in July.

It should go without saying, but I will say it anyway: I have no clue about pricing of marijuana apart from what I’ve read in articles and have reported on this blog. The above indicators show a drop in price in the last two years. I do not have a clue how that compares to several years ago.

Article says this is putting a lot of pressure on retail outlets, processors, and growers.

Entertaining discussion in the article describes a divergence in the marijuana industry between inside growers and “natural” growers. Apparently, growing marijuana indoors, using a lot of high intensity light and probably artificial products for weed and pest control produces more crops per year, with a reportedly higher level of consistency, and with product that is reported to be visually more pleasing.

In contrast, the natural growers raise marijuana outside, with natural light, and with organic products for pest & weed control.

Indoor product is cheaper to raise compared to outdoor product. Some people quoted in the article speculate there will be a resulting split in the market between the “premium” brands grown outdoors and the “low-price” brands grown indoors comparable to what exists in the beer industry.

As I said before, I am monitoring the emerging state-legal-federal-illegal marijuana market since it is a natural experiment in the development of a brand-new industry. My favorite area to watch is what impact heavy-handed regulation will have on the industry.

9/5/17 – MarketWatch – The startup burning $1 million a month in hopes of selling $1 billion of pot a year –  The reporter gained access to documents being pitched to potential investors of a new company called Eaze, which is a marijuana delivery startup.

The company is not producing any marijuana, although it hopes to develop a private label brand in the future, but is instead delivering state-legal marijuana to customers in a number of states. Some locations, such as the city of Los Angeles, have regulations that make this very difficult while other locations, such as Orange County, are much more friendly to the delivery concept.

Eaze apparently is the dominant delivery company in California. Nationwide it is operating in over 100 locations, according to the article.

It is drawing increasing amounts of venture capital funding, although that pesky federal-illegal issue and volatile regulations make it a challenge to keeping the funding flowing when they have a burn rate of a million bucks a month

The goal is 20 minute delivery. In Orange County the cost for each delivery is about $27. Far more volume is going to be needed to bring that down. The financial challenge for the company is they charge a percentage of the retail price, which according to the article appears to be frequently less than their delivery cost.

From the article citing information in the promo material, the company’s revenue is somewhere in the range of the following:

  • $3.9M – 2015 revenue
  • $8.5M – 2016 – 118% increase
  • $18M – 2017 – 112% increase

(For the finance types reading this post, ponder a company with a $1M burn rate that is generating $9M or $18M of sales a year.)

Article speculates most of the competition will come from existing delivery services such as GrubHub.  Article suggests that UPS, Amazon, and Walmart will not touch delivery because of the significant brand risk. That’s in addition to the whole breaking federal law routine.

An underlying issue in the article is that regulation is having a major impact on delivery companies. Each city and state has its own regulations. The rules are changing frequently with promise of continued volatility in the regulatory environment.

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