Future Feature: Budding Industry Battles Black Market
Startup costs, complex permitting, and black market prices challenge legal marijuana business
A robust licensing and permitting process offers protection from federal prosecution for the Alaska cannabis industry, but the time and expense of participating in that process has created a market in which licensed businesses are vulnerable to being undercut by black-market prices.
When Alaska legalized cannabis for recreational use in 2015, the industry was able to quickly secure two prominent segments of the market.
“We were able to wrest very many individuals from the black market when the legal industry started. These were people who just wanted the convenience and could afford the higher prices, the people who really didn’t like only being able to go to their guy and just have whatever bags he had that day,” Good Titrations COO Brandon Emmett says. “And then we created a smaller but new consumer group: those individuals who like substances but are also very law abiding.”
Emmett estimates that those two segments only make up about 60 to 70 percent of the consumer base in the state; the rest of the market is composed of people who are making purchases based completely on price.
“Those consumers are almost impossible to capture; the black market is significant competition,” Emmett says. “Essentially, there’s 30 percent of the consumers—I’m speaking as a concentrate manufacturer—that we just cannot capture because you can go on Facebook right now… you could go on to many of these cannabis forums and identify and ultimately purchase cartridges and hard concentrates that are roughly 50 percent the cost of what you could if you were to purchase one of my products in a legal facility.”
The Price of Starting Up
One of the major hurdles Emmett and others faced getting their cannabis-based companies off the ground was the significant startup costs.
“[Three years ago] if someone didn’t have half a million dollars, they’d be crazy getting into this thing. If you wanted to get in now… I’d say unless you have a million dollars, don’t even try,” Emmett says, speaking directly to the costs associated with the permitting process.
One key difference between Alaska and other states where recreational cannabis is legal is that all parties involved in the business must be state residents, which exacerbates the challenges of launching a cannabis-based business.
“In Alaska, the regulators wanted to limit the economic opportunity to the citizens of Alaska, so they imposed the Permanent Fund Residency requirements as a baseline requirement to hold a State of Alaska issued marijuana license,” explains Jana Weltzin, an attorney who specializes in Alaska and Arizona cannabis law. “This means that you need to be an Alaska resident for the entire calendar year preceding the date that you applied for the dividend and intend to stay here indefinitely. The basic nuts and bolts of licensing requirements, other than residency, remain fairly constant across the board: adequate security measures, ability to show you understand the complex set of regulations you must follow, adequate business plan, camera storage, ability to connect with the state tracking software system on a real-time basis, et cetera.”
While the intention was to preserve the industry for Alaskan entrepreneurs, the significant start-up costs associated with entering the market means that Alaskans who do not have enough capital within their social circle to start the business are unable to secure out-of-state funding, according to Emmett.
“My counter-argument was, ‘No, you guys want it to be old, rich Alaskans only,’” Emmett says. “There’s only a narrow sliver of individuals who are allowed to get in: only Alaskans and only those Alaskans with significant resources.”
Read more about the hurdles addressed by Alaska cannabis companies in the upcoming June 2020 edition of Alaska Business.
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