Assignment 1: Pots of Gold?

The US Legal Marijuana Industry

To analyze how attractive the Colorado marijuana industry is to investors, we developed

a detailed Porter Five Forces analysis:
Threats of new entrants:
 Depending on the allocation of licenses given by the local government. Although the
eligibility criteria in Colorado law is strict, there is no quota on the number of licenses
that can be issued (no barriers to entry)
 Business is concentrated in only a few cities that allow marijuana business
(government policies), but even they face problems with the local residents.
 The vast array of regulatory requirements and the necessity of separate licenses for
different types of marijuana businesses (capital requirements), makes it relatively
difficult to enter the market.
Bargaining Power of Buyers
 The market is made up of several small players that buy small quantities (low bargain
power)
 There are no switching costs
 There are quality differences between competitors based on the type of plant
harvested, and the customer is willing to pay more, according to the quality level.
Colorado has a low quality comparing to other locations, for example, Oregon (low
differentiation)
 There are not many available places in Colorado where customers can buy
marijuana due to the marijuana market concentration in a few cities, therefore there
is a low buyer's ability to substitute the product in a legal way.
Threat of Substitute Products
 The illegal market, because of the already well-established logistics, still has the
biggest market share (Command relatively lower prices but more accessible to the
public)
 Colorado allows home cultivation (max 6 plants)
 The more strict the regulations against the illegal marijuana market, the less the
competition with legal marijuana, and therefore there is an increase in price.
Colorado does not have strict enforcement against illegal marijuana, therefore there
is high competition with the illegal market, which causes a decrease in the prices
 Other illegal drugs such as cocaine, amphetamine, ecstasy, etc threaten the current
market with better ‘effects’, with almost zero switchover costs from marijuana.

Bargaining Power of Suppliers

 The increasing role of large enterprises, together with vertical integration in the
industry (increasing industry concentration, resulting in only a few players in the legal
market industry)
 A large number of cultivation licenses had been released, increasing considerably
more supply and dropping prices as smaller establishments can enter the market
with their products.
Rivalry Among Existing Competitors
 The industry has a considerable number of suppliers, however, there is an integration
trend among them to consolidate and even merge among themselves to increase
profits and reduce operational costs.
 On the other hand, the illegal market, because of their already well-established
supply chain and operational network, is still huge and results in great competition
 with the legal market. They offer a variety of products and substitutes at lower prices
and can run rampant in areas where laws are not strictly enforced, which is the case
for Colorado.
After a thorough analysis of the information above, we concluded that the Colorado market is
not an attractive investment destination. The barriers to entry in this market are not low,
meaning that it will not be promptly available to anyone, especially due to the government
eligibility criteria to provide the mandatory licenses, which results in huge investments to get
the necessary standards to start operating, therefore increasing the risk for the investor.
Moreover, this industry shows signs of rapidly consolidating and integrating with the few big
players in the market, making the possibilities of investments quite restricted. Since the
companies that operate in this market are merging forces and getting bigger, it also
increases the risk associated with investing in a startup.
Another important fact is the huge amount of licenses released mainly to the growers in the
state in the past years, which has considerably increased supply but has severely decreased
the margins as the other operations involving supply and transportation have to be scaled up
to cater to it, which makes it even more costly due to the strict regulations imposed by the
government regarding storage and transportation of such drugs, including the required
security procedures..
Finally, the Colorado marijuana market presents a low product differentiation, together with
the fact that there is no strict law enforcement against illegal marihuana, leading to an
increase in the competition level, pressuring down the prices even more.
All these factors together corroborate to high risks and low profit opportunities from an
investor point of view and therefore forces us to make the conclusions that Colorado’s
marijuana market is not an attractive investment destination.
At the same time, comparing the three parts of this industry in the Colorado state: growing,
distribution and infrastructure, we believe that the last one, i.e. Infrastructure offers the best
prospects.
Although the growing part of the marijuana industry has been able to increase productivity,
high wage requirements for the licensed workers, high risks associated with agriculture
production, low product differentiation in the Colorado market and again, the high number of
licenses released in the area, have contributed to an increase in the competition and
pressure prices to the growers.
Looking at the distribution part of the industry, the low capacity of the retail system to
differentiate its product, combined with the relatively lax laws in Colorado, has caused the
Colorado market to compete directly with the illegal market resulting in much lower price, i.e.
it has led to a negative impact on the legal market prices.
This relatively pessimistic scenario for the investors, growers and distribution system
impacts the infrastructure providers, but looking close to how this industry was structured,
we can see that all the marijuana facilities' requirements made the infrastructure key to the
growth of the entire industry.
Equipment, real estate, licensing, and security costs associated with the production account
for 80% of total costs. The tracking, transportation, rastreability, and level of security also
hits the distribution system, which requires an investment of a lot of money on those services
in order to get its license and keep operating.
Therefore, the development of the marijuana industry has been accompanied by the
development of an infrastructure of support services, which consumes great part of the
margins of the industry, not being subject to the high level of competition in the growers and
legal retailers; therefore, the best prospect among the three (growing, distribution,
infrastructure).
In the next 10 years, we believe that the US marijuana industry will develop greatly, being a
very attractive and lucrative industry. One big factor for this to happen is the federal
government’s acceptance of marijuana as a legal product.
If we look to the past decade, even with the unacceptance of the US federal government, the
marijuana industry has seen great development within some regions, and it continues to
grow to even better standards each year. In our point of view, the US federal government will
not be able to contain this advancement much longer. There will be some point in a close
future, where the US federal government will have to accept marijuana as a legal product
due to its huge spread among the US territory, as it happened in Canada, and create more
strict laws and enforce them against the illegal market. When it happens, the entire industry
will have more access to bank systems and property protection. Moreover, with a lower
competition with the illegal market, demand will grow considerably, allowing prices and
margins to rise, and becoming a more attractive market for investors and other investment
firms like tobacco and alcohol, their close legal competitors.
The industry possibly will continue its integration trend, since it will be an advantage to own
more parts in this future-profitable chain; but currently, with more competitors entering this
market. We believe that this market would face a lot of dissent from the big organizations
and the local community, but will slowly improve its margins in the next 10 years.

Dalla’s version of competition use what you think we need:

The Internal competition given by this case can be a little tricky. Although from a
review you can break it down into two different groups:
1. Competition amongst legal vs illegal MJ
a. Legal Marijuana sectors that are regulated by the government. (See
table 1).
b. Illegal MJ is MJ produced domestically and imported outside of the
United States in which in some countries low-cost of labor and outdoor
production are extremely valuable.
c. Furthermore, it should be taken into consideration that domestically
grown illegal MJ is a bigger threat than imported MJ because of the
lack of tax and regulatory compliance unlike legal MJ.
2. In the second competition we look at state to state competition.
. Although the three major states involved in MJ are Colorado, Washington,
and California. When looking at Table 1, California has been around the longest with
medical MJ.
a. As a result, California has a more established community with a surplus
of licensing fees and taxes than any other state.
b. Washingtoin, being the second oldest established is self with single licensing
for cheaper than the other state however, has generally the same taxes as
California. While Colorado, one of the youngest states, has lower taxes but high
licensing fees.

Appendix
Table 1