Going to Pot
Retailers weigh risks, rewards of entering the newly legal marijuana business.
Years from now, retailers may look back on the 2012 election as a game changer. Not because of the passage of the Affordable Care Act, not because of any local or state measures, certainly not because of President Obama’s re-election.
Rather, 2012 may be remembered as the year things went to pot. Literally.
With voters in Colorado and Washington approving legalization of commercial marijuana (vs. only for medicinal purposes), retailers there could be adding joints at the checkout area.
Will the move truly affect c-store operators? With only two states legalizing marijuana—and yet to write the rules on exactly how and where it can be sold—it’s too early to tell. And, of course, there’s the federal ban against marijuana that may ultimately overrule state rights.
Still, it’s worth exploring this issue further. With Colorado’s legalization efforts pioneered by The Campaign to Regulate Marijuana Like Alcohol, it’s easy to envision the alcohol- and tobacco-driven c-store channel as a natural market for this “new” product.
“The stars are certainly aligned, and I think the convenience channel makes the most sense, provided the legislation permits it,” says one multistate retailer, with stores in at least one of the legalized states. Because of the uncertain nature of this conversation, he requested to remain anonymous. “We are already battle-tested in terms of our ability to validate other age restricted items, like alcohol and tobacco, so in theory, this would be no different.”
It’s all speculative at this point, but with economist Stephen Easton estimating legalized marijuana could be an industry of $45 billion to $100 billion per year, has the time come for retailers to speculate about going green?
As with any new business venture— especially one that has previously been illegal—there are plenty of potential downsides.
Among the biggest is the fact that retailers do not know what a legalized environment would look like. The Colorado Department of Revenue has until July 1 to write the rules, and localities will then have until Oct. 1 to start accepting license applications to sell marijuana. Washington retailers will likely face a similar wait.
A Colorado retailer, who also requested anonymity, says, “There are many questions and variables that remain before an educated decision can be made on whether or not to become a marijuana retailer.”
Even if the laws allow c-store operators to sell marijuana, even if there’s an interest from the store level, there’s likely to be pushback from upper levels of management conscious of the stigma that comes from selling such a product.
“I can imagine there will be some buyers sitting there thinking they would do it, but there will be an initial battle within the company,” says Lou Maiellano, a former tobacco buyer for Sunoco who now works as a tobacco consultant.
“There’s the potential that there will be people and organizations who will refrain from shopping in your locations,” he continues. “I suspect major chains are not going to want to have all the negative press that could happen with this. It’s legal to sell male sophisticate magazines, but there are retailers out there who choose not to sell that product.”
Of course, the biggest challenge facing any potential marijuana retailer is the fact that it’s still illegal on a federal level. Although U.S. Attorney General Eric Holder has been asked repeatedly how the federal government will respond to the Colorado and Washington measures, he has yet to give a response, further clouding an already uncertain situation.
“Obviously the greatest risk is that marijuana is still illegal federally,” says the Colorado operator. “I do not see any legitimate c-store operator risking the DEA coming down on them.”
Or in the words of Colorado Gov. John Hickenlooper,”if it’s still illegal under federal law, I can’t imagine that 7-Eleven is ever going to sell it.”
The Potential Windfall
With such a high risk factor, why would any retailer even consider selling marijuana? That projected $100-billion-a-year profit potential could be an awfully big payday to walk away from.
“By most accounts, there are likely billions of dollars in annual marijuana transactions that are currently underground, illegal or both,” says the multistate retailer, “so the idea that these items would be treated like other ‘sin’ sales and brought above ground could be accretive to the average store’s revenues.”
And, with Philip Morris estimating cigarette sales dropping 31% in the past decade, marijuana could also offer tobacco-reliant c-store operators some relief. “The biggest benefit would be the opportunity to add another profit center to the store mix,” says the Colorado retailer.
Legalized marijuana could even provide relief for c-store operators who choose not to get in the game: Per the Associated Press, analysts project marijuana tax revenue could net $5 million to $22 million a year in Colorado.
“One might look at the tax ramifications and the potential of releasing pressure on the tobacco business,” says Maiellano. “Some believe this would slow taxation on cigarettes and other tobacco products.”
While the risks may outweigh the potential financial gains at this point, the c-store channel may prove to be an ideal fit for highly regulated marijuana sales, because operators are already well versed in the importance of age verification and adhering to tobacco and alcohol sales rules.
“As a multistate, company-op organization, we can’t afford not to be on our game when it comes to age verification sales,” says the operator with stores in various states. The sentiment was echoed by the Colorado retailer, who says carding for marijuana sales at his stores “would not require additional emphasis, as it is already very high on our list of priorities to be a responsible retailer of age-restricted products.”
With little change to the training practices needed and the potential of a windfall in sales, Maiellano predicts there will be some retailers willing to bet on selling marijuana at retail, assuming there is clearance on the federal level.
“I’m in no way endorsing [legalized marijuana],” he says, “but you are going to have buckets of retailers who will be on board and whose businesses will potentially benefit from this.”
As with any new product, legalized marijuana will be embraced at different speeds—if at all.
“If you look at it as a legalized product,” says Maiellano, “I believe there will be retailers that jump on the opportunity. Others will proceed with caution after a period of review, and there will be those that will not look at this opportunity as an option.”
“I do not believe c-stores would be a good venue ... until it is determined how marijuana will be packaged, distributed, etc.,” says the Colorado retailer. “C-stores would potentially be a good retail option down the road if there were a distribution chain for marijuana similar to cigarettes.
“But as it stands, I see too many complications in this area for a c-store chain to be a viable retailer of marijuana.”
Until the rules in Washington and Colorado are written, and until the federal government provides a clear indication of whether or not it will attempt to regulate in those states, retailers will have no choice but to take the wait-and-see approach. But there will probably come a point where most retailers will need to take a long, hard look at the potential of this uncharted territory.
“A retailer is probably going to say, ‘If this is a go, if all the pieces are put in place to make it legitimate, I have to consider it,’ ” says Maiellano. “That doesn’t mean they will do it, but they will have to consider it.”