Ready or Not, Big Business Is Taking Over the Marijuana Industry

By Sean Williams Markets Fool.com

If you're looking for one of the fastest-growing industries in the United States, you'd likely struggle to find any with a more sustainably rapid growth rate than marijuana.

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According to cannabis research firm ArcView, the legal marijuana industry grew to $6.9 billion in sales in 2016, a 34% increase from the prior-year period. What's more, investment firm Cowen & Co. is predicting legal sales will hit $50 billion by 2026, representing a compound annual growth rate of more than 23% per year over the next decade.

This rapid growth means one thing: Investors and businesses rushing in to get their piece of the pie. Since 2012, eight states have legalized recreational marijuana, and more than half the nation has now legalized medical cannabis, which is providing a broadening platform with which cannabis businesses can make money.

Image source: Getty Images.

Big business is taking over

Earlier this month, a Forbes report noted that wholesale marijuana prices in legal markets were plunging. CannaSaver.com CEO Brian Shapiro listed a 60% drop in wholesale prices from $2,500 a pound to $1,000 a pound in just one year. The story was similar in Washington state, where the average selling price per gram plummeted from $25 to around $6 in a span of just over two years.

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The culprit for the substantial drop in marijuana prices appears to be big businesses infiltrating the industry and flooding the market with product. While it's true that oversupplying the market will drive down prices and hurt margins for all pot businesses, big businesses presumably have deeper pockets than small businesses, which may not even have access to lines of credit. As with any industry, if big business can push the little guy out, they'll have considerably more liberties down the road to raise their prices back up and capture a juicier margin, along with greater market share.

Yet the rise of big business in the marijuana industry may not be solely attributed to the actions of bigger companies. State governments may be playing a critical role, too -- whether they realize it or not.

Image source: Getty Images.

Are state governments leading to pot monopolies?

As reported last week by Florida's Sun Sentinel, there are two competing bills in Florida's legislature that'll help guide the state's medical marijuana industry -- one of which would lead to a veritable oligopoly or monopoly situation.

During the November elections, Floridians voted to legalize medical cannabis with a 71% "yes" vote. A medical cannabis measure had previously failed to pass in 2014 by just 2%. What's left to be decided is how Florida's medical cannabis industry is implemented.

One measure, from Sen. Jeff Brandes (R-Fl.), would allow companies to compete for licenses, therefore giving the companies that are best at growing, processing, transporting, and dispensing cannabis an inside path to these licenses. It would also allow for more treatment centers and give physicians more freedom to prescribe cannabis to patients whom they believe would benefit from the drug.

The other measure, from Sen. Rob Bradley (R-Fl.), would allow the seven existing companies that have been in charge of growing, processing, transporting, and dispensing a non-euphoric strain of cannabis since 2014 to be the state's only companies involved in medical cannabis. Bradley's bill would allow the number of medical cannabis firms to grow if the medical population grew, but it would essentially hand the state's medical pot industry over to just seven companies which may or may not be best-equipped to handle taking medical cannabis from seed to store. Bradley's bill also bans smokable cannabisand would make patients wait 90 days to fill a prescription.

Should neither bill pass, the state Department of Health's policy will take precedence.

Image source: Getty Images.

This has happened before

However, Florida is far from the only instance of state government actions potentially leading to a monopoly or oligopoly.

In 2015, Issue 3, which would have legalized recreational and medical marijuana in Ohio, completely crashed and burned. The final tally showed the bill losing 64% to 36%. While there were plenty of reasons Issue 3 failed, the primary reason Ohioans couldn't get behind the bill is because it would have limited commercial cannabis growing to 10 pre-selected sites. These sites were acquired by a group of investors who'd paid more than $4 million apiece to run the campaign in favor of Issue 3's approvaland to acquire the land needed for large indoor growing facilities. Ohioans recognized the chance for a growing monopoly and voted down the bill, despite an improving favorability toward cannabis among the public.

In similar fashion, the state of Colorado has allowed bigger businesses to flourish because of a moratorium on new marijuana license issuances. What few licenses were available were gobbled up by big business, and in the interim those businesses are being protected by the state holding back on issuing new licenses.

Image source: Getty Images.

A double-edged sword

So, what does the entrance of big business into the marijuana industry actually mean? For consumers, it could wind up being bad news over the long run. In the short term, flooding the market with pot means lower prices for the consumer. However, as smaller businesses bow out because of insufficient margins, the remaining big businesses will likely pare back on supply and increase their prices. What remains to be seen is if consumers will accept these presumed higher prices if they deviate too much from prices found on the black market.

Conversely, the emergence of big business is great news for investors. The marijuana business is highly fragmented, and consolidation would provide a means that may allow investors to take part in the industry's rapid growth prospects.

Whether you're ready for it or not, big business is making its presence felt in the marijuana industry.

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