Answer by James Fisher:
Let's assume that you are asking how profitable is a retail outlet in Colorado that is selling recreational marijuana. The short answer is that, at present, the profitability of such operations is not enormously attractive. One reasonably competent dispensary in Colorado reports gross margins of about 32%. (A gross margin would just be the selling price for a bag — typically 1 ounce or an "eighth" — less the cost of the item sold.) This eighth might range in price from $30 to $60 dollars (probably closer to $30). Compare this with, say, Starbucks, which gets a gross margin of almost 60% on that skinny vanilla latte you just ordered.
Let's peel back the economics a little further.
Here are a few factors limiting the retailer's profitability:
Start-up costs: retail space (how many square feet), fixtures (how to merchandise, how to limit "shrinkage") are all substantial questions to ask and answer. Typically location is a crucial determinate of retail success (how close do you live to your favored grocery store?), and the better your location the more you will likely pay per square foot. I have a former student who just built out a space in Boulder (software, not pot), where location was less crucial, yet that lease was very pricey. It's a seller's market there for commercial real estate — residential, for that matter.
On-going operating expenses: Here, too, the economics are daunting. Some retailers may want to integrate backward and grow their own. Cultivating marijuana requires more than seeds and a grow-light. Mold, mildew and pests can easily destroy a crop and top-notch grow managers are, as you might imagine, in short supply. A good retail sales clerk — the so-called "budtender" — is a key hire as well. To all this we must add extraordinary regulation and compliance costs. In Denver, state and local marijuana taxes sum to a confiscatory 29%. I have read that under Section 280E of the Internal Revenue Code growers and retailers alike are very limited in what business expenses the can deduct. Couple this with close regulatory or tax scrutiny and you have a very challenging operating environment. Says one operator: "Everyone is going to be audited."
Competition: You can buy more at a medical dispensary and typically at a lower price point. Shorter lines and greater convenience if you opt for the old-school, black-market pot dealer with his dime bag tucked away in his army surplus coat. One customer asks rhetorically: "Who wants to wait 30 minutes in line to score a bag?"
So here's my back-of-the-envelop pro-forma for a Colorado dispensary:
$1,000,000 [100% – Sales revenue]
– 680,000 [68% – Cost of goods sold]
320,000 [32% – Gross Profit]
– 200,000 [20% – Operating Expenses]
$120,000 [12% – Earnings before taxes as well as any interest or depreciation expenses]
This, of course, does not include start-up costs, which are not insignificant. This economic picture may improve, but right now the retail business does not appear to be highly profitable.