Is the pot industry doomed in Denver?

The metro area's real estate boom might make marijuana crash and burn

Although marijuana just enjoyed a record month ($117 million according to the Denver Post), one small rural church is about to turn the industry upside down. This church is just the beginning of a seismic shift in the marijuana industry.

How can a small rural church have such a profound impact? A few weeks ago, I was near Pueblo inspecting a ranch property in the middle of nowhere. I ran across a vacant church that had been converted to a marijuana operation with grows inside and greenhouses on the property.

Why is this so groundbreaking? This church is merely a symbol of what is to come in the marijuana industry. The church highlights the trend of migrating from Denver to less costly markets. This trend is occurring at record pace as Denver and the metro areas become increasingly expensive to operate in.

In our current marijuana cycle, price, as in most industries, is a critical indicator of success. If we compare marijuana  with another comparable industry, such as wine, we can begin to understand the new dynamic. Wine Business did an interesting study that showed that the most important factor when selecting a wine was price.

About 70 percent of respondents cited this as their number one consideration. What you have seen in the wine industry is that the vast majority of wine bought/consumed is under $15 a bottle (according to the survey, this was the most common price). The marijuana industry will likely evolve similarly where the vast majority of consumers are price-conscious in their decision-making.

With price the number one concern of buyers, it is only natural for producers to analyze their costs so they can meet the new consumer price expectations. At its core, marijuana is a plant and ultimately a commodity. The raw materials are seed, soil, light and water. But marijuana is usually grown indoors, which means substantial costs for rent, heat, cooling, labor ― costs which quickly increase the cost of goods sold.

As a result, it is not surprising that producers are analyzing ways to minimize costs. Fortunately for marijuana, transportation of the product is not a huge cost (unlike steel or concrete), which opens up many alternative locations for growers. 

Let’s look at why this is so appealing for many operators. Assume a grower buys a building in Denver metro that is 30,000 feet. This building would cost around $3 million, depending on location, finishes and other factors. This same building in Pueblo would cost around $300,000. This gives the Pueblo grower many distinct advantages. Not only do they have a less expensive building, but labor costs, taxes, insurance and other costs are lower, adding up to substantial savings.

To make matters even more interesting, many growers are transitioning part of their production to greenhouses in rural areas, further lowering cost. This new exponentially lower fixed cost structure provides a huge advantage for producers operating outside the metro area.

The large cost advantages for non-metro producers will allow lower price points for a comparable quality product. These large price drops will have a huge impact on growers with much higher fixed costs; as a result, they ultimately will be unable to compete as price points drift lower. This occurs even as their competitors can still be profitable at these lower price points.

We have a setup for the “race to the bottom” with regard to cost/price that is really only getting started as the industry begins to mature.

This transition will be extremely painful to existing growers who have a huge fixed cost basis (overpriced buildings, improvements, taxes, etc.). This will ultimately lead to the demise of a large number of growers in the metro area, since they are unable to meet consumer expectations by being able to compete on price for comparable quality.

The little rural church is a harbinger for change that will be monumental for the industry and will ultimately end the gold rush prospects for many early marijuana prospectors.

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