Blog

Chart of the Week: Profitability in the Cannabis Industry

temp-post-image

Despite all the challenges, regulations and roadblocks the cannabis industry faces, the vast majority of marijuana companies are actually doing well financially.

Nearly 90% of operating dispensaries and recreational marijuana stores, infused products companies and wholesale cultivators – the three pillars of the MJ trade – report that they are profitable or at least breaking even, according to the 2016 Marijuana Business Factbook.

The cultivation and infused products/concentrates sectors are particularly lucrative, with 29% of wholesale growers and 27% of infused companies saying that they are “very profitable.”

Cultivators can hit profitability fairly quickly – often after the first harvest – and many find it relatively easy to stay in the black.

This is particularly true in states such as Connecticut that issue a small number of grow licenses, which helps minimize the competitive playing field. That, in turn, can help prevent price drops.

However, wholesale growers in some markets that have higher (or no) caps on licenses are increasingly facing competitive pressures and other challenges that could have an impact on the bottom line. Growers in these markets also have to face off against a vast number of competitors.

Infused products companies also hit profitability fairly quickly. They lead all sectors of the industry, with 91% of infused products businesses reporting that they are at least break-even.

Startup costs are often much lower for infused companies vs. cultivators and retailers, making it easier to turn a profit.

Profit margins in the retail side of the cannabis industry are more modest due in part to the fact that average startup costs for dispensaries and rec shops are higher than other sectors of the marijuana business. Median operational costs for retailers are also the highest in the industry, at around $600,000 annually.

Notably, there’s a split when it comes to ancillary business. Companies that provide services to the marijuana industry and its customers are doing very well, with more than 40% reporting high profitability.

However, many ancillary products and technology firms are still finding their footing, with 26% losing some or a lot of money – the most by far of any sector. Many of these companies must shell out a lot of money to get started and face very strong competition, making the runway to profitability much longer.

Most of the businesses that aren’t yet making money are likely startups that are just getting underway, although some simply aren’t doing well. And, of course, the numbers don’t include businesses that were losing money and eventually folded.