The explosion of legalized medical and recreational marijuana use across the U.S. has been a boon for the cannabis industry. If you’re an aspiring cannabis entrepreneur and interested in opening a dispensary, read this article for vital insights before taking the plunge.
Let’s start with industry context: The revenue growth projections are staggering. Combined U.S. sales of medical- and adult-use cannabis in 2019 is projected to reach $12.9 billion, up 24% from sales of $10.4 billion in 2018. U.S. sales are expected to double to nearly $25 billion by 2025. That’s a compounded annual growth rate of 13.4% (2018 to 2025).
Cannabis use of some form is legal in 33 states and the District of Columbia, and four more states are expected to legalize marijuana in 2019. In spite of the challenging aspects of this emerging market, potential entrants are not dismayed. Instead, they are entering the space in large numbers.
Trying to quantify the number of U.S. cannabis businesses is challenging due to industry volatility. Contraction occurs when licenses are revoked for non-compliance to local or state regulations, resulting in business closures, or when well-funded firms enter the space and use economies of scale to undercut smaller operators. Expansion is a function of jurisdictions legalizing cannabis businesses to generate tax revenue for city coffers.
There were roughly 3,500 cannabis dispensaries in the U.S. in early 2018. The following chart shows the number of licensed dispensaries in five select states:
Further analysis of the underlying data shows Oregon and Colorado markets are saturated – both states have more dispensaries than Starbucks has locations. Conversely, California and Nevada have plenty of room for expansion based on the existing number of dispensaries per 100,000 residents.
Who are these budding entrepreneurs: Typically, they’re a diverse group of long-term cannabis consumers that are passionate about marijuana and its culture. These individuals overwhelmingly enter the retail space because of the lower cost of entry compared to other lines of cannabis businesses, all of which require significantly more capital or technical expertise.
In California, tech workers are a relatively new demographic in the space. These entrants usually leave their “day job,” and fund start-up costs with company stock options, 401(k) accounts, personal assets, or investor funding.
Prospective dispensary owners typically have two burning questions in the early stages of due diligence:
1. What’s the application process?
2. How much does it cost to open a dispensary?
Navigating the application process: The process of completing an application varies by state, as does processing time by the state cannabis regulatory agency. In many states, an applicant provides personal information and supporting documentation for the proposed business.
The challenge is identifying a town where cannabis businesses can legally operate.
Most states require a municipality to approve a local permit before the state processes an application. The challenge is identifying a town where cannabis businesses can legally operate. For instance, only one-third of California municipalities (161 of 482) allow cannabis businesses to operate within city or county limits.
On the other hand, some cities welcome marijuana businesses with open arms. San Francisco and Oakland are two examples where cannabis business development (green zone) is encouraged. Both cities changed local ordinances to establish green zones earmarked for marijuana businesses.
To recap, prospective business owners should find a town that has approved cannabis businesses to operate within its jurisdiction. Next, submit an application to the city for a cannabis permit. If the permit is approved, the final step is to apply for a cannabis license with the state’s marijuana department.
OK, so how much is this going to cost? As with any real estate transaction – location is critical. A cannabis dispensary is no exception. In addition to the site, other factors impact start-up costs; including, square footage and condition of the facility, tenant improvements, accessibility, traffic and commute patterns, regional product pricing, and security.
The cost to open a dispensary varies across the U.S. From a low of $150,000 in small towns (Anywhere, U.S.A.) to $1,000,000 to $1,500,000 in large metro areas such as San Francisco, Chicago, or Washington, D.C.
Final thoughts: You now have a better understanding of the cannabis industry and what is needed to open a dispensary. Once you’ve determined start-up costs and you’ve decided to move forward, there are other factors to consider to ensure success. We call these our “Top 5 Operating Principles.” We’ll cover these topics in subsequent articles. Stay tuned...
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