California marijuana industry is a '$25 billion opportunity'

California marijuana industry is a '$25 billion opportunity'

A worker tends to marijuana plants at the MedMen cultivation facility in Sun Valley near Los Angeles, on Tuesday, Nov. 15. These plants are ready to be harvested. MedMen currently grows 20 strains of marijuana plants.

LOS ANGELES — MedMen likens itself, as many cannabis companies do, to an early tech startup. Its West Hollywood dispensary looks a bit like an Apple store, with samples of product in polished glass cases and information about each on iPads. In a grow facility in Sun Valley, north of Los Angeles, marijuana plants grow in coconut fiber, sustained by drip irrigation and marked by thin plastic labels stuck in soil. Beyond the dispensary and cultivation center, the company offers "turnkey management services" to others in the cannabis space and boasts a $100 million venture capital fund.

This is the future of legal marijuana in California: Diversification, slick branding and professional investment.

California marijuana industry is a '$25 billion opportunity'

Tablet computers provide information on the edibles at the MedMen marijuana dispensary in West Hollywood Nov. 15.

Even before California voters passed Proposition 64, the state's medical marijuana market was two decades old and fairly sophisticated. California marijuana has apps, wealthy investors and companies that specialize in packaging and branding. But even now it lacks some key resources: For example, many banks won't serve cannabis businesses while the drug remains illegal at the federal level.

"Something people forget is that medical marijuana has been around in Cailfornia for two decades now," MedMen communications director Daniel Yi said. "I think we are at an inflection point in our industry now where it's going from legacy growers — people who were in the trenches at the beginning of the medical marijuana fight — and it's becoming more and more business-like. Some people see negative connotations in that, but this has become more of a mainstream industry."

California marijuana industry is a '$25 billion opportunity'

Flowering marijuana plants grow at the MedMen cultivation facility in Sun Valley near Los Angeles on Nov. 15. The plants grow in coconut fiber and drip irrigation provides the water and nutrients.

There are thousands of people who have been operating marijuana businesses for years — and unlike MedMen, most have been operating illegally. They risk arrest, but they also avoid taxes and the cost of complying with regulations.

They might not survive.

"If you're a small pot grower and you don't have the money and resources to turn into a bigger player... then unfortunately you're not going to be around," Yi said. "Nobody wants to see people lose their businesses and lose their jobs, but there's the flip side — you either have this gray market forever and ever, or you institutionalize that and become mainstream. A lot of these folks might be able to find jobs in the evolving industry, but the business model is not going to survive unless they adapt."

California marijuana industry is a '$25 billion opportunity'

A worker processes a marijuana flower at the MedMen cultivation facility in Sun Valley near Los Angeles Nov. 15.

California marijuana industry is a '$25 billion opportunity'

Employees prepare products at the MedMen marijuana dispensary in West Hollywood.

Proposition 64 allows California to start licensing sellers of recreational marijuana on Jan. 1, 2018. But because marijuana remains illegal at the federal level, it can't be transported across state lines — meaning it will have to be California grown.

One cultivation facility is already online in Desert Hot Springs; MedMen and G FarmaLabs are both building facilities in the desert town two hours from Los Angeles. Industrial land prices in the city have spiked as would-be growers try to secure space and start selling medical products, though recreational sales are still 14 months away.

In Colorado, demand spiked when licensing began in 2014, driving prices way up. But as more growers and sellers joined the industry, prices plummeted. Joshua Haupt, co-owner of Colorado's Superfarm, a 2-facility cultivation company, said marijuana there sells for $900 to $1,200 per pound — down from about $4,000 a pound right after legalization. He thinks California's large population will keep prices higher for longer, but eventually, margins will shrink.

Haupt said Superfarm takes in about $1.1 million in revenue on about 1,000 pounds of marijuana per month. They pay more than $250,000 in taxes and spend about $350,000 on production. The rest is overhead, salaries for 80 employees and, of course, profit.

"If you're getting in now and only have a few hundred thousand dollars and a genius grower who's been growing under four lights in his basement... they're so stuck in the world of the black market, they've done incredibly well in the black market, and they think it's going to transfer into the legit industry, and that is an incredibly large mistake on their part," Haupt said. Taxes and regulatory costs are high; profits can shrink in the legal market even as the customer base grows. "It's one thing to run four lights in your basement. It's another thing to run 400 lights in a 25,000 square foot grow. Is it too late? Absolutely not, but the barrier for entry has gotten much higher."

Investor Chris Leavy, considering the state of the industry, summarized, "I think we're at the end of the beginning."

California marijuana industry is a '$25 billion opportunity'

MedMen marijuana dispensary in West Hollywood offers a variety of edibles.



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