Struggles of weed companies in making money
Lofty taxes, siloed state demands and lack of access to capital make it very difficult to turn a profit. It’s not easy selling weed. The legal marijuana industry is booming — revenues are swelled to hit $32 billion this year, more than double what sales were just three years ago.
However, that didn’t prevent most weed companies from proceeding with the leak of benefits for almost a decade after Colorado and Washington; became the first states to establish legal markets for anyone at least 21 years old. An analysis of financial filings from two dozen of the largest publicly traded U.S. operators shows that they collectively lost more than $550 million in the first six months of this year on revenues of nearly $4.5 billion.
“It all stems from federal illegality,” said Anita Famili, who heads the cannabis and CBD industry group at Manatt, a law firm and consultancy. “The cost of doing business for weed companies is just much higher than any other business.”
The major obstacle in making money is the lofty taxes weed companies pay because they’re treated like illegal narcotics traffickers under the federal tax code. The goods also cannot cross state lines, and that lack of interstate commerce means companies must build separate farms, factories and stores in each state where they do business and navigate a rapidly maturing patchwork of state regulations. Finally, raising capital is extremely expensive due to a dearth of financing options, an issue both Republicans and Democrats in Congress recognize but have yet to address.
“If you’re able to generate cash flow with all of these headwinds, when these headwinds start to be removed it’s going to be an incredibly, incredibly good business model,” said Jen Drake, co-chief operating officer of Ayr Wellness, which has retail and cultivation operations in eight states, including Florida, New Jersey and Pennsylvania.
Another factor exacerbating the current financial malaise: Companies spent heavily last year to expand capacity due to misguided optimism about the prospects for loosening federal marijuana restrictions after Democrats won control of Congress and the White House. That’s led to a glut of product and plunging prices in many of the largest state markets like California, Colorado, Michigan and Massachusetts. Those struggles are being compounded by inflation and an illicit marijuana market that remains robust in many states.
“You have more capacity coming into a marketplace with less spending power from the consumer base,” said Charlie Bachtell, CEO of Cresco Labs, one of the country’s largest cannabis companies with more than $800 million in revenues last year. “It’s a lesson in Economics 101 of supply and demand.”