Is the Marijuana industry still profitable?

As an insurance broker in California, you’re likely to get approached to provide policies for these Businesses, whether it’s healthcare for employees or business insurance.

Your first question should be if the business is profitable or not. While there does seem to be a gold rush in the cannabis industry, it doesn’t mean that a business is making money.

The legal marijuana industry is evolving since California legalized medical marijuana in 1996. Almost 16 years later, Colorado and Washington were the first states to legalize the recreational use of marijuana.

The marijuana industry reached the stock market and is continuing to adapt as it seems like everyone is trying to cash in while the industry is hot.

What does the future hold for the industry? Will it remain profitable? How will COVID-19 affect the industry?

Keep reading to find out the answer to these questions and more in this marijuana industry analysis.

Are Marijuana Businesses Profitable?

Do you remember Silicon Valley about 22 years ago? That was a bubble that was waiting to pop. Money was being thrown around to companies that didn’t even have a product yet.

Investors couldn’t get into the .com boom fast enough. That drove an insane amount of growth. It also led to a ton of bad investments. Remember Pets.com? Boo.com, Global Crossing, were spectacular failures, too.

The marijuana industry has the potential to turn into a bubble. There are a lot of players getting into the game. There are also a lot of investors who want to cash out with an IPO or a smart investment.

The good news for these investors is that COVID-19 accelerated growth. There were a few industries that exploded over the last year. Ecommerce, marijuana, and fitness equipment manufacturers are good examples.

Since people spent more time at home than ever, they started to drink more at home and turned to weed to entertain themselves. Marijuana sales jumped by over 40% in 2020 compared to 2019.

Again, that doesn’t mean that all marijuana businesses are profitable. In 2016, a whopping 90% of dispensaries reported being profitable. That number has only dropped slightly in the last few years, as the market matures and there is more competition.

What Holds Marijuana Businesses Back

Marijuana businesses have the odds in their favor to have a profitable business. It doesn’t automatically mean that they will see a profit. There are a number of things that can prevent a marijuana business from being profitable.

These are some of the most common sticking points for marijuana business owners that keep them from seeing profits.

Tough Regulations

It isn’t easy to start a marijuana business. As you already know from being in the insurance industry, marijuana businesses face tough regulations.

Each state that has legalized marijuana has its own laws and regulations for businesses to follow. Marijuana is still classified as a Schedule I drug. That means it is still federally illegal, which has major implications for the business.

In the space for CBD products, the regulations are much less stringent. CBD products are regulated by the FDA, but they’re not held to high standards. Many see the CBD industry as an unregulated one.

This can be good for businesses that want to jump into the space because of the lower cost of entry. There is a price the entire industry has to pay overall for a lower barrier to entry.

That means that almost anyone can label a product as a CBD product and market it as such. That creates mistrust in the market and dilutes the impact that CBD products have.

One way a CBD business can set itself apart is to subject its products to third-party testing.

Lack of Insurance Options

The tough regulations on marijuana businesses have a few unintended consequences. One of them is that it is almost impossible to get a bank account and proper insurance.

Since these businesses can’t get a bank account, they often have to deal in cash. That makes insurance companies stay away.

There are only a handful of insurance companies that are willing to work with marijuana businesses. This may change in the near future if marijuana is declassified as a Schedule I drug.

Not Knowing the Tax Code

Business owners in just about every industry have trouble figuring out taxes. There are payroll taxes, sales taxes, self-employment taxes, and income taxes.

Marijuana businesses are under much more scrutiny and are more likely to be audited. Last year, the U.S. Treasury released a report saying that the IRS should step up its capacity to audit these businesses.

Most businesses report their income correctly, but they don’t understand or don’t know about Section 280e in the tax code.

A regular business can deduct all business expenses to operate the business. This includes advertising, office supplies, inventory, and rent.

Since marijuana isn’t legal at the federal level, marijuana businesses can’t take these deductions. Businesses that try to take these deductions can get into hot water with the IRS.

It also makes it more difficult to run the business because it is a lot more expensive. Marijuana businesses are going to pay a lot of taxes on their total income.

The only way to lower that number legally is to write off the cost of goods sold. That becomes a risky mess for business owners.

The Wrong Kind of Business

It is very possible that a marijuana business is a bad business from the start. There are certain types of businesses that are poised to do well in the future. Marijuana dispensaries and products are among them.

These businesses depend on one thing to thrive: a good marijuana product. You would think that marijuana cultivation would cause a resurgence in small farms.

It did early on in the industry. However, a study of Washington State farmers over several years showed that it’s hard to be profitable.

What happened was that marijuana prices dropped. There were other growers that got into the game with much deeper pockets, seeking to become the go-to suppliers.

It seems that like other parts of the farming industry, big businesses are making money while the small farms are struggling.

This is a scenario that’s likely to take place in states where marijuana is newly legal. State legislators should be aware that when crafting legalization bills that small businesses are protected.

Poor Financial Management

A marijuana business can do more than a million dollars in sales a month and not be profitable. That’s because the owner of the business doesn’t have a good handle on company finances.

It’s a common challenge for all types of businesses. Most businesses close because of cash flow issues. It was already noted that taxes are a significant challenge, but managing the day-to-day operations is as well.

A marijuana business owner needs to be a very strong financial manager or hire someone who is. 

Marijuana Industry Post-COVID

What will become of the marijuana industry in a post-pandemic world?

One potential trend is that it becomes legal in more states. Over the last year, state budgets were decimated because of COVID. Businesses that had to close couldn’t pay payroll taxes.

Incomes for many people declined. The demands on government services increased since most of the COVD-19 response fell to state governors to manage.

This created a gaping hole in state budgets across the country. What’s one way to fill that gap? Find a new source of revenue.

Marijuana can be a jackpot for these states to make up for budget shortfalls. Pennsylvania has a bipartisan bill in the works and the Lt. Governor has long supported legalized marijuana.  

State laws are great, but you can’t get anywhere as an insurance broker unless federal regulations loosen up. There is some hope for that.

In December 2020, the U.S. House of Representatives passed the MORE Act, which decriminalizes marijuana and expunges the records of those who were charged with small amounts of marijuana.

Senate leaders recently announced that they are making marijuana legalization a priority. They have the momentum since a majority of voters support this.

You should look for a bill to be unveiled in the next few months.

If or when marijuana is federally legal, there is going to be a retail boom. Insurers can take advantage of this by targeting marijuana businesses and get them the policies they need.

Emerging Products and Partnerships

The marijuana industry will continue to thrive in a post-COVID world. Big names are jumping into the industry in the hopes of capturing market share early on.

Beverage companies partnered with marijuana companies to release CBD-infused drinks. This is poised to be a multi-billion-dollar market in just a few years.

How big is the market? Constellation Brands, the company behind Corona, Modelo, and Robert Mondavi wines, partnered with Canopy Growth Corporation. Canopy Growth is the biggest cannabis producer in Canada.

Molson Coors isn’t going to sit on the sidelines, either. They partnered with HEXO, another cannabis producer based in Canada.

Martha Stewart jumped into the cannabis product game as well. In 2019, she joined Constellation as an advisor to help them develop cannabis-based products. She’s now on the verge of releasing a line of CBD products of her own.

New Products

There are some interesting things happening on the product front in the marijuana industry. Not only are there beverages and beauty products on the market, but there is also another part of the cannabis plant that is making headlines.

Most people are only familiar with two cannabinoids of the marijuana plant: CBD and THC. They understand at the most basic level that CBD doesn’t get you high, but THC does.

What many people don’t know is that the marijuana plant has more than 100 cannabinoids. One of them that’s making headlines is delta 8 THC.

It turns out that there are two types of THC in the plant. There’s delta 9 THC, which is the part of the plant that has psychoactive properties. Delta 8 THC is closely related to delta 9 THC but doesn’t carry the psychoactive effects of delta 9 THC.

Cannabis producers are making money by isolating and extracting delta 8 THC. It can now be found in several products, and it is legal.

This 3Chi delta 8 guide gives you an introduction to delta 8 THC and how it differs from other parts of the cannabis plant.

Mergers and Acquisitions

One thing that you cannot overlook is the impact of corporate money making its way into the industry. While this lends legitimacy to the marijuana industry, there are plenty of pitfalls to worry about.

You should expect a whirlwind of buyouts and mergers as these larger companies buy out smaller companies. That will limit the size and scope of competition in the market.

Companies that deal with declining vices, such as alcohol and tobacco, are actively seeking smaller cannabis companies to buy.

What Does the Future of the Marijuana Industry Look Like?

This is an interesting time for the marijuana industry. It seems to be taking off and maturing at the same time. The only thing that is certain is that this seems to be the golden era of the industry.

New products and partnerships are emerging in the marketplace. New cannabis businesses are popping up every day, whether a giant corporation or a solopreneur.

Does that make a marijuana business a sure bet to be profitable? There are many factors at play, and you need to look at the business model and management team to see if it has a shot.

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