How Profitable Is Running A Dispensary?

We’ve come a long way from cannabis being a primary target of the misguided War On Drugs.

The first revolutionary step came back in 1992 when the first medical cannabis dispensary, The San Francisco Cannabis Buyers Club, opened itself to the public to serve patients.

Soon after, both Cannabis Buyers Club founders co-authored Proposition 215 to legalize medical cannabis in California in 1996.

It took 17 years from that point for Annie’s, a Colorado-based medical cannabis dispensary, to receive the US’s first license to sell recreational (also known as adult-use) cannabis in 2013.

Five years after that, in 2018, Massachusetts awarded the east coast’s first two recreational cannabis licenses.

We’re well into 2022, and adult-use cannabis use is legalized in 19 states, Guam and Washington DC. Furthermore, the industry is booming, with national cannabis sales skyrocketing upward by 40% last year, reaching $25 billion. Even better, the industry is playing its part in bolstering the economy, supporting 428,059 total jobs.

The growth in the cannabis space is promising. All the same, there are still many challenges facing dispensary owners.

Namely, legal and regulatory issues will always present hurdles since cannabis remains a Schedule I drug federally. Banking-related obstacles persist since traditional banking services aren’t readily available for US-based cannabis companies.

On top of the above challenges, the Federal Reserve raised interest rates this year, making it more difficult for cannabis dispensaries to gather capital to bolster long-term growth.

There’s also the matter of a saturated market. Entrepreneurs far and wide now see how lucrative recreational cannabis can be, and dispensaries are popping up everywhere. Establishing a foothold with a reliable, profitable clientele isn’t necessarily guaranteed.

Fortunately, dispensaries can be incredibly profitable if you follow the correct steps, which we’re providing in the ultimate guide for understanding dispensary profitability.

Part 1: Medical vs. Adult-Use Cannabis

Medical cannabis is for patients who’ve been recommended cannabis products by their doctors. You can only make purchases if you’ve been registered with the state and hold a valid Medical Marijauna Card. Over 23 states have legalized medical dispensaries (e.g., New Jersey, Rhode Island, Connecticut, Illinois, Oregon, Minnesota, Nevada, Washington, and California), adhering to federal restrictions.

Medical dispensaries are drastically different than adult-use dispensaries in the way they operate. While they may carry similar products, medical dispensaries will have a stricter protocol on who they allow inside, how much you can purchase, and how much you’re taxed. It’s important to note, however, that this does vary from state to state.

The Difference In State-to-State Costs

The potential profitability of your dispensary can be limited or bolstered by the state in which it’s located. 

It’s through the following three ways that the state will influence your dispensary’s ability to turn a profit:

Licensing costs

• In the regulatory sense, obtaining licensing from state and municipal governments is incredibly hard.
• These licenses can be exponentially expensive, depending on where you’re located.
• The square footage of your operation can dictate your licensing fees, depending on the state. Conversely, other states charge massive upfront fees no matter the size of your dispensary.
• There’s no US-wide standardized licensing process, so choosing the state for your operation should be a strategic decision. Otherwise, it could drain a massive chunk of your capital upfront.
• For further context, the average cost per square foot of a commercial licensing and leasing is between $17 and $18. In Oregon, it’s between $8 and $9

Operating electric bill

• Your operating electric bill will be one of your dispensary’s most significant year-over-year expenses (especially if you grow your own product).
• Your choice in lighting system and equipment will dictate much of your costs, but the state decides how much you pay per kilowatt hour.
• Here are some examples of the difference a state can make for electricity:
  • The Louisana price per kilowatt hour in 2019 was 9.37c
  • The same year, the price per kilowatt was 32.76c in Hawaii
• By choosing a state with cheaper utilities for your dispensary, you can avoid having your electric bill cut into your profits too much.

Revenue wholesale price per pound

• Research historical wholesale cannabis product prices per pound in your state.
• Viable data is limited, as there’s only about a half decade’s worth. Still, a state-to-state wholesale price per pound pattern has emerged.
• There tends to be a loftier price per pound sales point in the year after adult use is legalized. Then, as the market familiarizes itself with regulations, a flood of supply continually reduces the price per pound.
• Within 3 years of legalization, the per-pound prices get halved.
• Be mindful of these factors because it might be illegal to traffic cannabis products from state to state if you wish to operate in multiple states.
• For context, wholesale cannabis costs $750 per pound in California, while it costs $1,000 per pound in Massachusetts.

Before moving forward, we’ll double back toward the licensing fees to explore them through a different lens.

In a state new to recreational cannabis like New Jersey, the annual retailer license fee is $10,000.

California, a state long rooted in the cannabis industry, has a $1,000 application fee. If approved, the licensing fee can land between $4,000 and $120,000, depending on your dispensary’s estimated value.

Part II: Initial Lease and License

We’ve already discussed state-to-state differences in licensing costs and how the process can be more rigorous in various regions.

Regardless of your state, expect to create an executive summary, marketing plan, business model, financial plan, cannabis business plan, and a real estate plan for any regulatory body approving your license.

There’s also the matter of finding real estate. We’ve discussed the price per square footage in different states in the previous section, but other factors must be considered. For instance, there’s the property type you want.

Note that the cannabis space deals with government scrutiny that can border on impossible if you aren’t careful. You need connections with the right stakeholders and investors to best handle to situation. Otherwise, you can be denied real estate and licensing without much reason, or your terms to get your license might be virtually impossible.

The federal illegality of cannabis makes landlords hesitant to lease to cannabis business owners. As a result, there are more private funders for purchasing, who will lease back to the operator.

Expect to pay $100,000 annually in rent. However, if your dispensary needs renovations, throw $50,000-plus onto your upfront costs.

Lastly, you’ll need to weigh property taxes chewing into your profits if you purchase the property outright.