Who Makes More Money: Colorado’s Legal Weed Dealers or Its Illegal Ones?

Inside Colorado's marijuana economy.
Jan. 16 2014 11:34 PM

Dime Store

How lucrative is it to be one of Colorado’s legal marijuana dealers? (Not as lucrative as being an illegal one.)

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It’s a smart business move, but on top all his other business costs, it means Brandon’s business doesn’t look all that impressive on paper. Generally speaking, investors are interested in checking out a company’s gross profit margin, which is the ratio of its revenue minus cost of goods to its overall revenue. A high gross profit margin suggests the company could be highly profitable as it scales up its production. Over a six-month period, Brandon’s dispensary had an average gross profit margin of 32 percent. That’s not terrible—most grocery stores have gross profit margins around 20 percent—but it’s not great either, and not at all the financial bonanza many people make the legal marijuana business out to be. Starbucks, another company that deals in mind-altering, plant-based substances, regularly has gross profit margins of 57 percent, nearly twice that of Brandon’s dispensary.

140116_ALT_ProductDisplay
Marijuana for sale at the Medicine Man dispensary in Denver.

Photo by Ry Prichard

When we shared a redacted version of Brandon’s financials with Alexander Ooms, managing partner at ClearCreek Partners, a Denver financial advisory firm, he was circumspect, to say the least. “Since I help companies raise capital, my thought here is, ‘Wow, it’s going to be really hard for any marijuana business to raise institutional equity,’ ” he says. “Can retail marijuana be a solid business? Clearly, yes. Can it be highly profitable? Not sure.”

Maybe that’s why Brandon, like the majority of Colorado dispensary owners, didn’t open his doors to the recreational market on Jan. 1, despite the head start he has over other potential marijuana entrepreneurs in the state. Only 136 of the 517 dispensaries currently operating in Colorado applied for a Colorado recreational sales license when it was first offered last fall. Brandon was among those who applied for a license, but like many others, he’s waiting a few months to see how the retail market pans out before making use of it. The cost of opening a legal marijuana shop is just too high, and the margins too thin, to jump in without careful planning. Besides, he’s able to sell all of the 50 or so pounds of marijuana he produces each month to his existing medical customers; if he didn’t have enough pot for them, those loyal customers might look elsewhere.

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Colorado’s medical marijuana market, in other words, isn’t going to be killed off by the recreational market anytime soon. In fact, when recreational marijuana shoppers notice the significantly cheaper shelf prices for those carrying a $15 Colorado medical marijuana card, they might consider making an appointment with their doctor. In this way, the opening of the legal market could lead to an increase, not a decrease, in the number of medical marijuana patients. In addition to lower prices, medical patients will be able to purchase more pot (2 ounces versus 1 ounce), pay lower taxes, and purchase at age 18 rather than 21.

Nor will recreational marijuana be killing off Colorado’s other marijuana market—the black market—anytime soon. We spoke with “CT,” a Denver-based street dealer who’s been making a good living over the past five years servicing a client base of 30 to 40 people with a personal, illicit marijuana crop of 80 to 200 plants. One benefit he offers is a good price; unlike Brandon, CT does not have to pay licensing fees, taxes, or other regulatory expenses. Over the past few years he’s dropped his rate for an eighth from around $50 to $30 to meet or beat the going price at Colorado dispensaries, which means he’s now significantly cheaper than the new retail outlets. But more important, he says, he offers quality, convenience, and a personal touch retail outlets can’t match. He makes house calls, and, as he puts it, “A lot of people would rather go to their drug dealers’ house and buy a bag and sit down and smoke a bowl with them than go to a store.”

With a social drug like marijuana, that personal connection goes a long way. Since he grows and sells his own product, CT is like an illicit version of the local-foods movement. “You go to a big supermarket, and you don’t know where the produce is coming from. If you go to a farmers market, you are probably buying your food from the person who grew it and knows all about it,” he says. “There are a lot of things that go down at these dispensaries and grow facilities that nobody really knows about. My clients know where my product is coming from. They can ask me anything about it.”

Yes, some of his clients stood in line at the new pot shops on Jan. 1 to be a part of marijuana history, but then a couple of these same people stopped by CT’s house on the way home, bought some more marijuana from him, and laughed about the whole thing. As CT puts it, “Who wants to wait 30 minutes in line to score a bag?”

Next Up: Colorado's new gold rush. A look at the pot realtors, pot testing facilities, pot insurance agents, and pot security companies all hoping to strike it rich in Colorado's legal marijuana economy.

Sam Kamin is professor and director of the Constitutional Rights and Remedies program at the University of Denver Sturm College of Law.

Joel Warner is a former Westword staff writer.

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