Medical marijuana is coming to New York state, and it could make some companies a fortune. But small-business owners shouldn’t expect to make money from it.
Providing New Yorkers with medical marijuana could be a profitable business for those savvy enough to get a license. Derek Peterson of Terra Tech, who ditched Morgan Stanley in 2012 to become a medical marijuana entrepreneur, says profit margins for the leafy business can be anywhere between 30% to 45%. A retail dispensary can make from $3,500 to $5,000 in revenue per square foot, he said. In comparison, in 2013, Apple made about $4,650 in sales per square foot and Tiffany & Co made about $4,221.
Those kinds of riches are hardly there for the taking. It’s also a difficult business to break into thanks to New York lawmakers. The medical marijuana law passed by New York state senate two months ago is a patchwork of compromises – each one pitting yet another obstacle in the way of those looking to enter the market. The state will hand out only five growers’ licenses, and each of those is limited to just four dispensaries each. The growers competing for the five licenses must also prove that they have money to back their businesses. Only those who can post a $2m bond will qualify.
The bill is outfitted with a kill switch which allows the governor to shut it down on the advice of the New York health commissioner, and a seven-year sunset clause. If in seven years the state lawmakers chose not to renew the legislation, the bill will expire.
The upshot: the standards for doing business are so high that only those companies already established in the medical marijuana field would be able to compete.
State lawmakers feared a worst-case scenario: a New York flooded with small shops selling medical marijuana. The authorities fear that if there is more cannabis than prescriptions, the excess would make its way to the black market.
That certainly puts a damper on the medical marijuana boom in New York. What’s an aspiring cannabis merchant to do?
Too few licenses, dispensaries
A total of 20 dispensaries will be allowed to service all of New York’s 55,000 square miles. Some fear that that might be too small a number. Derek Peterson, CEO of Terra Tech Corp, predicts that as many as half a million New Yorkers could be eligible for a prescription for medical marijuana.
“I don’t know what the right number for New York is,” admitted state senator Diane Savino, who sponsored the bill. She said her goal is to get the regulations up and running and then fight for more licenses. “Somewhere between five and 1,800 in Colorado is a sweet spot.”
Regulations such as the $2m bond are stifling, making it difficult to run a business and compete, says Hanan Kolko, a partner at law firm Meyer, Suozzi, English & Klein. Lawmakers, however, insist the bond ensures that only cannabis experts will pursue a license.