Tide Effect

6. The Shape of the Industry



Tantalus Labs, Canada

The majority of new industries begin at a great advantage over the lawmakers in charge of regulating them. The industry’s practitioners understand their businesses’ strengths and flaws better than the regulators, and can therefore minimise any negative effects of regulations. A newly-legalised cannabis industry is a different kettle of fish, however. It is already used not just to government regulation but to government prohibition: laws both too numerous and too prescriptive rather than the opposite.

There are three main aspects to any assessment of how this new industry will shape itself: the size of the sector, the scope of the sector, and the stresses which the sector will face.

The size of the sector

Following the California Yes vote to legalise cannabis this November, analysts are expecting a ‘green rush’. ‘We’re looking at the total market for legal cannabis in California to grow to $6.6bn by 2020,’ said Troy Dayton, chief executive of research firm Arcview. 1 And that’s just one state, albeit the biggest one. Arcview reckons that by the same 2020 date the entire annual American market could be worth almost $25bn.

Clearly such figures can only at this stage be rough estimates. Ask a dozen analysts and you’d get a dozen different answers, depending not just on the unknowns (how many other states would follow suit towards legalisation, how fast they would do so, how much the price of marijuana would move and in which direction), but also on what those analysts chose to include in and exclude from their calculations (are they counting all the ancillary industries which would spring up around a legal marijuana industry? Are they considering the effects of rising tax revenue and lowered law enforcement costs?) But whatever the figure, it’s safe to say one thing: it’ll be big.

"the UK cannabis economy would be worth approximately £6.8bn per annum"

The potential UK market is obviously a fraction of the size of the US one, and since we are not as far down the line towards legalisation, estimates are limited. But we can still make some educated guesses.

A 2011 study by the Independent Drug Monitoring Unit (IDMU) estimated that the UK cannabis economy would be worth approximately £6.8bn per annum – just under half the size of the British tobacco industry at the time, and more or less exactly the same as Arcview’s projections for California. 2

A report by The Beckley Foundation and The Institute for Social and Economic Research (ISER) has modelled three scenarios for a legalised and regulated market in England and Wales alone, depending on both the amount of cannabis sold and the average percentage of THC in that cannabis. It suggests that just the aggregate annual government benefits – that is, not including direct sales revenues, which will form by far the largest part of any assessment – would be between £750m and £1.05bn. 3

Pricing is obviously going to be a key factor in the value of the industry. Both available data and common sense suggest that cannabis prices will fall post-legislation (though in several newly-legalised markets there has been an initial price rise while supply volumes, customer demand and distribution networks sort themselves out and become used to the new paradigm. After that, prices fall.)

In Washington state, where cannabis is now legal, prices are falling by as much as 25% per year. 4 ‘It’s just a plant,’ said Professor Jonathan Caulkins of Carnegie Mellon University. ‘There will always be the marijuana equivalent of organically grown specialty crops sold at premium prices to yuppies, but at the same time, no-frills generic forms could become cheap enough to give away as a loss leader – the way bars give patrons beer nuts and hotels leave chocolates on your pillow.’

Falling prices are obviously good news for the consumer but also for the police who will find fewer people seeking out black market dealers. They’re not such good news for the taxman. Whether they’re good news for the business owners depends on the trade-off between price point and units sold. In order to maintain an equilibrium, governments may intervene to keep the price around a certain level, either directly (through price controls) or indirectly (sales tax increases). And if they push these prices too high, then they risk letting the black market dealers back in the game again. They have to perform the regulatory equivalent of keeping the bath level with the taps running but the plug out.

Tantalus Labs, Canada (tantaluslabs.com)

The scale of the sector

When people think of a regulated cannabis industry, they tend to think of the people who grow it. The people who distribute it and the people who sell it. Farms, vans and shops. This triad will indeed form the backbone of the industry, providing many thousands of jobs in the process.

But there are scores of other job opportunities available too. Who manufactures the high-intensity grow lights for hydroponic farms? Who makes the pipes and vaporisers through which many people will consume their cannabis? Who does the growers’ advertising and marketing? Who organises the cannabis equivalent of wine tasting tours for all those thousands of people who come from out of state? Who designs the cellphone cases, T-shirts, notepads and paperweights which can now be emblazoned with company logos? Who writes books or makes programmes about the perils of this new industry? 5 Who writes the business plans and assesses commercial loans? Who puts up the venture capital? Who writes and operates the software programmes which optimise growing methods, track deliveries and maintain real-time stock inventories?

In the last instance at least, we already have the answer. In June 2016, Microsoft announced its partnership with the software company Kind Financial, which ‘provides ‘seed to sale’ services for cannabis growers, allowing them to track inventory, navigate laws and handle transactions all through Kind’s software systems. The partnership marks the first major tech company to attach its name to the burgeoning industry of legal marijuana.’ 6

Most things which Microsoft does are news one way or another, and this is no exception. For a software giant of such size and reach to invest in the industry – albeit in a company providing services at one remove to the frontline manufacturers and vendors themselves – represents an enormous vote of confidence in the long-term viability of the legalised marijuana sector. 7

Other investors have been less sure: venture capitalist Zach Bogue, for example, has likened it to ‘investing in the porn industry. I’m sure there’s a lot of money to be made, but it’s just not something we want to invest in.’ 8 But Microsoft is so iconic that their vote of confidence may prove a self-fulfilling prophecy, not just in terms of attracting investors but also influencing legislation.

‘Microsoft has a leviathan [lobbying] effort in Washington [D.C.],’ says Allen St. Pierre, executive director of the National Organization for the Reform of Marijuana Laws (NORML). ‘Focusing in on these commerce reforms, for example to allow banks to handle this trade – they lobby hard for that stuff on the Hill right now, and to have a Microsoft weigh in saying ‘we want to be part of that commerce’ can only buoy those efforts…. Ten years ago, 20 years ago, if you were saying, I have a software and I’m hoping to track marijuana sale, you and I would be in a RICO conspiracy. So that speaks to how much has changed.’ 9

"I’m sure there’s a lot of money to be made, but it’s just not something we want to invest in"

Even if the likes of Microsoft might not touch the mechanics of the actual frontline industry for now, the way those mechanics play out will obviously be crucial in helping structure the industry. There are several different possible models, and the extent to which each is applied (and mix-matched with others) will vary depending on location and jurisdiction.

In terms of production, there are three main possibilities (and, as Uruguay shows, these can exist in parallel):

  • Large-scale licensed production for retail sales. A newly-created government authority oversees regulation. Producers have to satisfy stringent regulatory conditions before being granted a licence. Producers may or may not be: restricted to operating within their country of origin; limited in the volume they could produce; banned from vertically integrating with retailers. Possible application of the ‘seed to sale’ model (where individual cannabis plants are tracked through every stage from growth to sale) to minimise unlicensed sales and tax avoidance.
  • Small-scale licensed production for members-only ‘cannabis clubs’.
  • Unlicensed home growing for personal use, but with a limit on the number of plants per individual (existing limits in various jurisdictions vary from four to nine) and with enforceable penalties for breaching. The better (and more affordably) the large-scale licensed market works, the smaller the home growing sector: most users default to the convenience of retail.

As for vendors, they ‘have a crucial role in any cannabis regulation model. Firstly, they act as gatekeepers of the market, entrusted with exercising regulatory access controls, enforcing restrictions on sales relating to age, intoxication or other criteria. Secondly, the vendor-customer interaction provides a vital opportunity for targeted public health interventions, educating cannabis users about the risks of different products, harm minimisation, responsible use and where to get help or further information.’ 10 In terms of sales, there are again three main possibilities, and again they can work concurrently with each other:

  • Premises with consumption on site. This may be along the lines of the Dutch ‘coffeeshop’ model, or closer to the concept of the ‘cannabis club’ outlined above. Staff need to be well-trained: not merely in retail and health knowledge, but also in their ability to care for those customers who need it and to refuse service to those underage and/or obviously intoxicated already.
  • Physical premises with consumption off site, such as a pharmacy. Staff requirements are broadly similar to those for establishments offering on-site consumption.
  • Online and other postal/courier-based delivery networks. There’s a certain symmetry in this – the very first item ever bought online was a bag of cannabis back in 1971 when students at MIT agreed the deal with their counterparts in Stanford over the Arpanet network. And much of the trade in illegal cannabis has so far been conducted via darknet sites such as the Silk Road. 11 Online retail sites such as Amazon and eBay are some of the internet’s marquee brands. In many ways cannabis is a perfect product for online distribution. It’s small, light and hard to damage in transit. 12 Online user reviews are vital tools for undecided or adventurous consumers. The delivery network means the recipient doesn’t even need to leave home and is therefore less likely to, for example, drive under the influence.

The stresses which the sector will face

On a micro level, each individual company will be different: and as in any industry, particularly any new industry, there will be many more failures than successes.

Start-up costs are high: licensing fees, equipment costs, rent and tax liabilities can run into seven figures all told. Bank loans may be charged at high interest rates due to the uncertainty of the sector’s prospects, and as things stand in the US cannabis businesses are also ineligible for federal bankruptcy protection. ‘The sheer amount of knowledge you have to have to make legitimate investments is huge,’ says Rob Hunt of private equity firm Tuatara Capital 13 – and without that knowledge, your money may well go up in smoke.

On a macro level, it would be useless to suggest that any legalised cannabis industry modelled even vaguely along the lines of the alcohol and tobacco industries will not be prone to taking on their kind of troubles too.

Any commercial entity has at base only two obligations: to maximise profits, and to remain within the law. Maximising profits means increasing sales, cutting costs, or raising prices. Increasing sales means increasing consumption. Increasing consumption means persuading new users into the marketplace and/or persuading existing users to consume more.


"Perhaps alcohol, tobacco and pharma will object to the new kid on the block"

This is at odds with public health exigencies, especially since both the alcohol and tobacco industries (neither of them strangers to making the science fit their agenda) make as much of their profits from a minority of heavy or problematic consumers as they do from the much larger group of casual punters. ‘We’re going to see a lot of people struggling with marijuana dependency and wonder why we thought it was smart to create another industry that’s going to shape public policy around a dependence-inducing intoxicant,’ says Caulkins. ‘And 25 years later, people are going to look back and say, ‘What idiots you were; what were you thinking?’’

Perhaps alcohol, tobacco and pharma will object to the new kid on the block and try to muscle cannabis into the margins. Or perhaps they will not only welcome the newcomer but co-operate with it in order to improve their own businesses.

‘It may not be literally true that big tobacco companies will be the companies that end up selling marijuana,’ says Caulkins. ‘But you should expect the companies to have that kind of approach. It’s entirely possible that even if it’s a homegrown, new company that emerges in the marijuana industry, they may hire the VP of marketing from a tobacco company.’ 14

The majority of cannabis campaigners are probably instinctively wary of big business. This is a matter of great personal import to people, and few of them want to see the soul of it sucked out by venture capitalists. But even corporate greed would be a quantum improvement on what we have right now in the UK.

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