Washington State Cannabis Industry and the Argument for Free Market Capitalism

3,746. This is the number of businesses applying for a license in Washington State to sell, process, or grow marijuana.  The official breakdown of applicants is 1,670 producer applications and 1,209 processor applications, the state has released details on 867 proposed retail outlets.  In comparison, the state would like to use their previously-failed approach of limiting the number of retail outfits to 334, almost 2/3 fewer outlets.  With unemployment rates at 6.8% in the state, millions of dollars slashed from state coffers, commercial real estate and other industries only starting to see some light at the end of the tunnel from a half-decade's long recession that has seen foreclosures skyrocket to highs not seen in almost a century, one would think that almost 4,000 new businesses opening up would be a miracle sent form God himself.  However, in Washington State this is not the case.

Despite national polls nearing 57% of Americans who believe marijuana should be legalized, our state is cowering to unfounded Federal Government concerns and leaving the growth of an industry to the Washington State Liquor Control Board (WSLCB), the same organization who was stripped of most of its powers by
Washington voters in large part due to the departments inability to run the industry efficiently or prosperously.   This time there is a lot more at stake.  Unlike the alcohol industry, the marijuana industry is at the beginning to what will be a world-wide legal industry.  Washington-based marijuana companies will not be just "Captains of State Industry" or "Captains of a National Industry" they are positioned to be "Captains of a Global Industry" with conservative estimates putting the global recreational marijuana at $450 Billion/year.  It should be noted, the recreational marijuana industry is the smallest segment of the cannabis industry.  Hemp and medical cannabis are far larger markets, but Washington State seemingly has blinders on, or are completely unaware of the golden, no, platinum goose egg they were handed.

Instead of a letting free market capitalism prevail, Washington State is taking an approach that will kill the industry, if we are lucky, it may only severely disable the industry.  The first major issue is their lack of sense of the size of the market.  RAND Corporation recently doubled its original "guestimate" of Washington State's marijuana market from a conservative 40 metric tons to upwards of 225 metric tons.  Further exacerbating the issue is WSLCB only allowing 12.5% to 25% of the "guestimated" market to be produced.  This already sets the stage for a supply and demand issue.  As economics 101 dictates, a decreased supply and increased demand will lead to skyrocketing prices.  The state's original approach would likely cause marijuana prices to be north of $750.00/Oz or almost triple the prices of the black market.  Now add the realization they the state will only allow production of 3% to 8% of the real marijuana market, we have a severe problem!

Skyrocketing prices and dwindling supply will wreak havoc throughout the industry.  It is extremely likely marijuana stores and processors will run out of product quickly.  This will leave shelves empty with no revenue coming in to these start-up businesses.  Marijuana typically takes 3 months to grow and 6 weeks to cure before it is ready to sell.  This means, retail stores and processors may have empty shelves for almost 4 months.  This will be a death-blow to most companies, and even worse, the industry as a whole.  But it will not only hurt the marijuana industry, it will hurt all the ancillary businesses that support marijuana including commercial real estate, marketing businesses, sign making businesses, electricians, point of sale companies, and the long list goes on.  So what is the answer? Free market capitalism!

Free Market Capitalism Provides a Win-Win for all Stakeholders

Free market capitalism is the best approach to solving these issues facing the industry's development.  Most importantly, free market capitalism will be a win for all stakeholders; Washington State, the Federal Government the entire marijuana industry, police departments, the unemployed, commercial real estate, marketing agencies, and the departments receiving budget increases from marijuana taxes.

Washington State Will Make $3,746,000 Off of License Fees Alone

Using the free market capitalism, the state will make nearly $4 million alone off of $1,000 marijuana business licensing fees.  This does not include business licenses, electrical, plumbing, or other construction permits required for building out commercial real estate to the needs of the industries.  There are thousands of dollars in other licensing and permitting fees both state and local governments will experience.

Commercial Real Estate Industry Would See $142 Million in Yearly Revenue
The WSLCB has set a maximum limit to growing to 2 million square feet for 40 Metric tons of marijuana.  However based on RAND Corporations new estimates of upwards of 225 metric tons, the state would need 11.25 million square feet.  According to Loopnet, the average industrial real estate lease is renting for $6.25/sqft/year.  This means, the industrial commercial real estate market could easily see $70 million/year from the marijuana growers industry alone.

The 1209 processors of marijuana would occupy spaces likely in between industrial and retail spaces in more of a commercial kitchen/laboratory space.  We are applying the average of the two space types to come up with $11.75/sqft./year cost.  We also conservatively estimate the space to be 3000 sqft. for such an operation.  Based on these estimates the processors could provide another $42 million in annual revenues to the commercial real estate market.

Retail marijuana stores would have another huge effect or commercial real estate.  Again, according to Loopnet the average retail space is renting for $17.25/sqft/year.  Assuming the average retail space of 2,000 sqft., this means allowing 867 retail marijuana stores would produce another $30 million/year in commercial real estate retail revenues.

The average asking rental rate per sq ft/year for Retail Commercial properties in Tacoma, WA as of Nov 13 was $14.17. This represents a decrease of -3.5% compared to the prior 3 months, with a decrease of -11.5% year-over-year. County-wide, average rental rates in Tacoma are -3.3% lower at $16.22 per sq ft/year for Retail Commercial properties currently for lease.

Marketing Companies Would See $800 Million in annual revenues from the Marijuana Industry if Free Market Capitalism Were Applied and $270 Million Annually After the First Two Years

Regardless if you are a grower, processor, or retailer, you will have to spend money or marketing your business.  Website development, business cards, brochures, email marketing, public relations and the long list goes on.  If there were no restrictions applied and the industry was treated like the alcohol, coffee, or tobacco industries, the marijuana industry could spend money on TV commercials, radio commercials, advertisements, and sponsorships much like Budweiser. Iowa University estimates small businesses budget between 20 - 30% of their annual sales during the first 2 years of start-up and reduce the budget to 7 - 10% of sales once the business is established.  Based on RAND Corporations upward estimate of 225 Metric tons and Washington states per/gram estimate of $12/gram the estimated market will be $2.69 Billion/year.  While there are restrictions on advertising, the free market approach would remove these restrictions.  Instead, we will see a severely stifled marketing industry, but even with the severe restrictions on advertising, marketing spending will reach tens of millions for local companies.

The Industry Would Employ 31,841 Full-time People in Washington State
Marijuana and coffee hold many similarities; they are both grown in the same types of climates;  both require growers, processing facilities, and retail stores to serve the industry;  they require the same staffing models.  Fortunately as Washingtonians, we can look to our very own coffee's captain of industry to understand what the employment potential for the marijuana industry would be like in the state.  Starbucks in many ways models the marijuana industry and we can accurately use their numbers to predict the employment potential of the marijuana industry should free market capitalism be allowed to flourish the industry.

Starbucks in 2012 employed 151,000 full-time people world-wide and had 17,572 retail stores.  Some simple math will give you 8.5 full time employees/store.  While it is true, all of their employees do not work in retail stores, thousand work in the corporate offices, warehouses, and other locations outside of retail, the marijuana industry model is much them same.  Based on the 8.5 full time people per store, we estimate the 3,746 marijuana businesses would yield 31,841 full time employees. 

Currently Washington State has a 6.8% unemployment rate leaving a little more than 220,000 people unemployed.  Washington state also average $384/week in unemployment benefits. A free market capitalism approach to the industry would significantly reduce these numbers of unemployed and the money the state spends on unemployment benefits.  Most importantly, as the industry matured and these companies expanded into a national and then international companies, the number of employed people would greatly expand.

State Sales Taxes of $174 Million, B & O Taxes $40 Million,  and $80 Million for Local Governments Yearly

Free market capitalism would allow Washington State and the local municipalities to realize the full potential of the retail marijuana industry.  Based on the $2.69 Billion in revenue the State and local governments would see $254 million in sales tax alone.  This does not include the 25% tax at the three tiers of for growers, processors, and retailers.  Specifically, the state would realize 6.5% of the estimated industry sales or $174 million.  The local governments would vary depending on their tax rates, but assuming a 3.0% tax rate, the local governments would see a total of an $80 million boost.

Marijuana Taxes Would Yield $1.29 Billion/Year

If implemented with free market capitalism, the marijuana industry would produce $1.29 Billion/year in marijuana taxes for the state.  The 25% tax on each tier of the industry creates and effective tax rate of 48% of the retail sales price.  Again, based on RAND Corporations upward estimate of 225 metric tons and Washington States estimate of $12/gram this would equal roughly $1.29 billion in marijuana taxes.

Black Market Drug Dealers are the Big Winners and Washingtonians are the Big Losers

In spite of the overwhelming support for the legalization of marijuana both locally and nationally, Washington State government is poised to destroy what should be an economic boom for the state for decades to come.  Make no mistake, the next "Starbucks of Marijuana", "Pfizer of Medical Marijuana", and "Weyerhaeuser of Hemp" are here looking to set up what will be a multi-trillion-dollar global industry.  Instead of seeing the obvious potential, our politicians seemingly scoff at the industry and lack the vision and the business acumen needed to fully leverage this once-in-a-lifetime opportunity.  This article solely discussed the potential of the recreational marijuana market, however this is likely only 10% of the entire cannabis industry, which again, encompasses hemp and medical marijuana.

Our state will let billions in economic activity, billions in tax revenue, and nearly 30,000 jobs slip through its fingers as they unwittingly destroy an industry.  Instead of reaping the near $300 million in sales tax, B & O, and local taxes, they choose to kill an industry they do not understand.  Instead of capturing the $1.29 billion in marijuana taxes, they choose to strangle a legal, licensed, and tax-paying industry which will be starved of product and/or experience skyrocketing prices to 300 - 400% of street prices.

Our state's approach is the single best news the black market could have asked for.  Their mishandling of the industry will allow Mexican drug cartels and illicit black market enterprises to thrive.  We will see an increase in criminal enterprises whose backs have been against the wall thanks to the medical marijuana industry which has driven the costs below what is considered profitable.  Criminals can continue to enjoy tax-free money and could increase their prices when the combination of high taxes, state mismanagement, and and anemic supplies trickle legal marijuana into the struggling marijuana retailers.  Marijuana entrepreneurs will either get wiped out or will be forced to carry business-killing debt in the hopes the state will let free market capitalism and sound business principles prevail.