Tom Adams, managing director of industry analytics for BDS Analytics, which covers the cannabis industry, said high taxes and limits on legal dispensaries have damaged the California market. Taxes and regulators mean that legal marijuana can cost nearly double black-market prices, Adams said.
Even worse for legalized operators, cannabis consumption is concentrated among a small group of heavy users, the 1-in-5 users who get high every day. Because they use so much, they are price sensitive and appear happy to buy through black market suppliers.
"Lots of people came into stores," Adams said, speaking of the California market — though not specifically MedMen. (BDS does not comment on specific companies.) "They took a look at product prices, especially the heavy using, long-time consumer, and they said, 'I know what the right price is, and that ain't it.'"
As a result, BDS estimates that the illicit market still provides about 80 percent of all California sales, and dispensaries only 20 percent. The problem is so severe the head of the state's cannabis regulatory commission is now calling for increased law enforcement activity against illegal suppliers.
Some of the other states to legalize, like Colorado and Oregon, pursued a different strategy, liberally granting dispensary and farm licenses. In those states, retail legal prices have plunged, and dispensaries now account for about 60 to 70 percent of all sales.
But profit margins are tighter in those states. MedMen has avoided them, focusing on those where legal supply is constrained — and instead focusing on trying to charge premium prices to new users, people who were not willing to use cannabis much, if at all, when it was illegal.
Unfortunately, despite the help of Jonze, MedMen hasn't found those users fast enough to cover its costs. Now it is running short on time to do so, raising the question whether legal cannabis companies will ever be able to earn big profits serving the price-sensitive market of current heavy users — and whether the new-user market is nearly as large as investors hope.
— Alex Berenson is the author of "Tell Your Children: The Truth About Marijuana, Mental Illness, and Violence," published in January.