Over the years, politicians, health officials, and enthusiasts have long debated the legalization and commercialization of cannabis. Surely enough, cannabis enthusiasts have continuously pushed for the decriminalization of cannabis so that it can be commercially available for medicinal or recreational use.
Consumption aside, people have found great potential in managing and operating cannabis dispensary stores. Despite the risks and roadblocks that the industry still experiences—including cannabis still being federally illegal—there is still a considerable profitable margin awaiting cannabis dispensary owners, from 15 percent to 20 percent.
In this article, we will tackle how cannabis dispensary owners can maximize the profitability of their business venture.
Cannabis retail by the numbers
According to Fortune, cannabis retail sales are set to surpass those of chocolate, eggs, and craft beer at an estimated annual retail sale of $33.5 billion in 2023. By 2028, annual sales of cannabis could reach $50.7 billion, according to Forbes.
The proposal to legalize marijuana started in 1993, and 1996, California became the first state to permit the medical and recreational use of marijuana. To date, 38 states have allowed the use of cannabis for medicinal use, and 23 states have allowed for its recreational use.
In terms of taxation, different states have different methods of imposing taxation on cannabis growth and use. For example, California—the first state to legalize cannabis use—imposes a $1.29 to $9.25 cultivation tax, a 15 percent excise tax, and a state retail sales tax of 7.25 percent plus local taxes. Because of this, California recorded the highest tax revenues from cannabis in 2021 amounting to $1,314 million—three times higher than the state’s alcohol tax revenue.
Maximizing profits of cannabis retail businesses
Optimize media and digital marketing
The divisive opinion on the use of marijuana in the United States makes marketing, mainly digital and social media marketing, a challenge for most cannabis store owners.
A study published on Biomed Central discussed social media platform strategies for cannabis promotion, marketing, and sales. The ambiguity and lack of policies on social media marketing for cannabis, especially with the wide reach of social media not only in the country but around the globe, may facilitate unnecessary underage exposure to federally illegal substances.
Andrew Pierce, CEO at LLC Attorney, says, “Because of the reach of social media, jurisdiction and general age restrictions are difficult to control and implement despite existing platform policies. Internet censorship has a very broad scope, and the existing regulations for cannabis use differ from state to state, making it difficult to limit what should be seen and accessed and who should have or should have no access to something.”
In this regard, cannabis store owners must carefully assess whether social media marketing is a viable marketing effort to get into, especially when the cost of this marketing strategy continues to increase. Cannabis dispensary owners may opt to improve brand awareness, offline marketing methods, in-store environment, website development, SEO, PPC, or content creation as viable marketing strategies.
Identify cannabis store best-sellers
A study from Headset reveals that vape pens and pre-rolls take up the top spots in cannabis products from 2020 to 2021. The accessibility and portability of vapes have made it one of the top best-selling cannabis-infused products, raking in $2.6 billion in sales in 2021.
According to Forbes, cannabis beverages and pre-rolls saw the most year-on-year growth in the United States in 2021. Grand View Research says the cannabis beverages market could be worth $2.8 billion by 2025. Alcohol drink companies are investing in the research and production of marijuana-infused drinks as a low-sugar alternative to soft drinks or alcoholic drinks, as well as marijuana-infused chocolates, cookies, and confectionaries.
Also, despite the decline in flower market share in the U.S. and Canada in 2021 because of the COVID-19 pandemic, it still has one of the highest market revenues in both countries. In Canada, tincture and sublingual breath strips are recorded as the best-performing segment with ground flowers coming in fifth.
Cashless dispensary payments
The classification of cannabis or marijuana as a Substance I drug makes it a federally illegal drug, and because of this, major card networks’ transaction policies do not allow the facilitation of cashless payments for cannabis transactions.
In July 2023, Mastercard issued a memorandum to decline PIN debit transactions, while Visa issued a similar action in 2021.
Some solutions in payment trends that cannabis dispensaries can use to facilitate cashless payments include ACH (Automatic Clearing House) payments to electronically transfer payment from bank to bank, which would need the help of a dispensary payments solution, whether in-store or eCommerce transactions.
According to Michael Power, CMO at DTF Transfers, “Facilitating a cashless method of payment would mitigate the security risks involved that are prevalent among cannabis dispensaries, as well as increase sales due to the trend of consumers preferring cashless and digital payments over actual cash.”
Inventory management
The biggest factor affecting a cannabis dispensary’s income statement is its COGS (Cost of Goods Sold) portion. COGS is subtracted from your gross revenue to arrive at a profit, and a major factor in arriving at your final COGS is ending inventory.
Technically, higher ending inventory means lower COGS, which means higher profits in the income statement. This looks positive on the income statement side, but what this also means is that a cannabis dispensary has a lot of inventory it cannot sell. Had it been sold, the money stuck in the inventory as an asset could have been translated as a sale.
Managing cannabis inventory by maintaining an inventory POS system that manages and gives an overview and aging of existing inventory will help retailers assess which inventory they should prioritize in selling and marketing. Cannabis retailers should also take into consideration the following factors in their purchases to effectively manage inventory levels:
- Lead time between placing an order and receiving items
- Projected sales to estimate the amount of stock needed as inventory for the month
Jonathan Elster, CEO at EcomHalo, says, “It is important for cannabis retail owners to find the right balance between ‘just enough’ inventory to meet demand, but not too high that inventory gets stuck in the shelves for more than three months.”
Managing overhead costs for cannabis retail
Managing overhead costs can be a significant make-or-break strategy for a cannabis dispensary to become profitable. Federal taxes for cannabis transactions can range anywhere from 20 percent to 40 percent, which can eat away a huge chunk of your before-tax profits.
This makes it a challenge for cannabis dispensary owners to find creative and sustainable ways to manage overhead costs, which can include:
- Renting vs. buying real estate for a cannabis dispensary
- High banking or borrowing fees from credit unions and private marijuana banks
- Digital payment solutions and POS systems
- Advertising and marketing
- Insurance
- Administrative costs, including the salary of employees
- Security and legal fees
- Interest and surcharges
Properly managing overhead costs can also impact positive business cash flow. Cannabis dispensary balance sheet and income statement can look different from other types of merchandising because of the significant costs for cannabis retail insurance, security, and licenses.
Jim Pendergast, Senior Vice President at altLINE Sobanco, says, “Cannabis retail is still a highly regulated industry, with risks present at every corner, thus investing in security and insurance is an unnegotiable line item on its expenses.”
Conclusion
Cannabis retail, despite its roadblocks and challenges, is an ever-growing industry, especially with many more states in the works of allowing its medicinal and recreational use. Cannabis retailers need to take a look at relevant data and insights that drive cannabis sales to maximize their potential for profit through effective marketing and accounting strategies.