Pubdate: Sun, 03 Mar 2013
Source: Denver Post (CO)
Copyright: 2013 The Denver Post Corp
Contact:  http://www.denverpost.com/
Details: http://www.mapinc.org/media/122
Author: John Ingold
Page: 1A

SMALL SHOPS WITHER AWAY

Forty Percent of Colorado's Medical-Marijuana Businesses in 2010 Have 
Been Weeded Out.

Michael Lee is not a man who gives up easily.

When he opened his doors in 2005 as what he believes to be the first 
medical marijuana dispensary in the state, he didn't know if police 
would come right through them and haul him off to jail.

He's been robbed. He's been audited by the Internal Revenue Service. 
To measure the potency of his product, he opened a marijuana-testing 
lab - which the Drug Enforcement Administration raided. And just 
months ago, he escaped felony charges alleging he was cultivating too 
many marijuana plants at his dispensary, Cannabis Therapeutics in 
Colorado Springs.

But neither cops nor prosecutors nor feds have matched up to his 
greatest challenge: enduring in a regulated, maturing 
medical-marijuana marketplace.

After eight years, Lee says he wants to sell his dispensary.

"I don't know how anyone can survive this pressure," Lee said. "I 
just can't keep doing this. I want to get out."

So do many others. Statistics show a sharp decline in the number of 
Colorado's medical-marijuana businesses.

In the summer of 2010, after legislators passed a law legitimizing 
dispensaries, there were 1,117 medical-marijuana businesses in 
Colorado, according to lists provided by the state's Medical 
Marijuana Enforcement Division and tallied by The Denver Post. (The 
number includes both dispensaries and makers of marijuana-infused 
products.) By the end of that year, as a "green rush" of cannabis 
entrepreneurs reached its apex, the total ticked up to 1,131. Today, 
there are 675. In terms of sheer numbers, Colorado's 
medical-marijuana industry has shrunk by more than 40 percent.

"We predicted a consolidation," said Matt Cook, a former state 
official who oversaw the creation of Colorado's medical-marijuana 
business rules and now works as a consultant. "I think it's playing 
out exactly that way."

Part of the contraction - call it a green crush-is a result of the 
quirks of an industry that is regarded as an illicit drug market 
under federal law. Some stores near schools, for instance, closed 
after receiving warning letters from the state's U.S. attorney 
telling them they could face prosecution if they didn't move. Others 
drowned because of federal rules that make it impossible for 
marijuana businesses to get bank loans or take common tax deductions.

"It's a capital-intensive industry," said Jill Lamoureux, a former 
dispensary owner, "and it's extremely high-risk."

But other dispensaries succumbed to the more mundane challenges that 
all new businesses face.

In the past three years, profit margins for the industry have changed 
significantly. In 2010, an eighth of an ounce of marijuana often sold 
in dispensaries for $50, Lamoureux said last month at a Rand Corp. 
panel discussion on marijuana. Today, it goes for half that.

At the height of the boom, the state's dispensary owners diverged 
wildly in terms of financial backing, business smarts, marketing 
talent and management experience. In a business as heavily regulated 
as marijuana, being able to know and precisely follow all the rules 
is a skill in itself. As competition among dispensaries tightened, 
those traits mattered more-just as they would in a tire store or a 
cupcake bakery.

According to the U.S. Small Business Administration, 30 percent of 
all new businesses fail within two years.

"We're seeing the maturity of an industry," said Robert Frichtel, who 
runs the Medical Marijuana Business Exchange, a consulting company. 
"At a fast pace, we're seeing something that was brand-new now coming 
into the early stages of a new business cycle."

Frichtel said the dispensaries that thrive today have a lot of money 
behind them, which they have used to scoop up failing businesses and 
create dispensary chains. They have business-savvy managers.

And, perhaps most important, they have large growing facilities that 
churn out marijuana that people want to buy. Because 
medical-marijuana dispensaries must grow most of what they sell, the 
surest way to expand a business' front room is to improve the back room.

"The bigger players have done well with having adequate grow space to 
support patient demand," Frichtel said. "One of the things that's 
very clear is the more successful your grow operation is, the better 
positioned you are to serve your patients."

While the total number of dispensaries is declining, the number of 
big dispensaries - classified by the state as Type 3 dispensaries 
that serve more than 500 patients - has remained steady. The number 
of Type 2 dispensaries, serving between 300 and 500 patients, has 
increased. Though many small dispensaries are closing, the market 
itself doesn't seem to be shrinking.

There are still more than 108,000 registered medical-marijuana 
patients in Colorado, according to the state health department. 
That's roughly the same number as in 2010.

State sales-tax revenues, meanwhile, have grown. The Department of 
Revenue collected $5.4 million in sales tax frommedical-marijuana 
businesses in the fiscal year ending last June. The amount is $1 
million more than the state collected in sales tax in the 2011 fiscal 
year and extrapolates to $186 million in gross sales.

"I don't think it's a decline in the market at all," Cook said. "From 
what I'm hearing, they're selling 100 percent of what they're able to 
grow. The reality is it's not as simple as sticking a seed in the 
ground and watering it."

That hints at the stealth reason many dispensary owners are leaving 
the industry: fatigue.

Lamoureux, who owned multiple dispensaries with her husband, was one 
of the pioneers of the state's medical-marijuana industry. She served 
on two committees that helped draft rules for medical-marijuana 
patients and businesses.

But after years of hopscotching from bank to bank because of federal 
laws that make banks leery of working with dispensaries and days of 
worry after her dispensaries received warning letters from the U.S. 
attorney, she'd had enough. She spent four years in the industry, 
"which felt like 24," she jokes. She now works as a national medical 
marijuana advocate.

"We opted out," she said. "We just didn't want to put in any more 
capital. It was exhausting."

Lee said state regulations pushed him to his breaking point. As soon 
as he got up to speed on one set of rules, they would change, he 
said. After he invested heavily in his marijuana-testing lab, for 
instance, the state passed a law saying labs couldn't be owned by 
dispensary owners.

But, despite the risks and the pressure, he's confident someone will 
line up behind him to take another swing. For one, medical-marijuana 
dispensary owners will have an inside track to open 
recreational-marijuana stores.

"Oh, I'm sure there's going to be interest," Lee said. "I think we 
should have no problem selling it."
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MAP posted-by: Jay Bergstrom