Is the green rush headed for bust in Colorado Springs?
Possibly, some say. Not only are new state laws weeding out what had grown into a heady supply of medical marijuana centers, but store owners say tighter government restrictions on the industry are forcing those remaining in business to spend their profits on meeting demands of lawmakers.
"Stores have closed because the fees have become extremely high, or because they don't have the money for the new 70-30 model," says Colorado Springs Medical Cannabis Council president Tanya Garduno, alluding to the regulation requiring that every medical marijuana center grow 70 percent of what it sells. "Everyone who's left is just waiting every day for more regulations to come from the Department of Revenue."
The city of Colorado Springs had registered 176 centers by the end of June to meet new licensing requirements; a statewide moratorium on licensing new dispensaries for one year went into effect July 1.
The high number of applicants seemed to indicate market saturation, Garduno says. But many have already closed shop or never got up and running. She estimates that there are roughly 100 dispensaries in Colorado Springs currently, and predicts the number will dwindle to about 60 by the time the moratorium ends.
One 1,000-watt setup costs about $1,000, Garduno says, and a typical operation requires 30 to 60 setups. Larger cultivation facilities invest $350,000 to $500,000 in equipment, she estimates.
On top of that, there are application and licensing fees ranging from $7,500 to $15,000 per year; the required purchase or rental of a business space; bond insurance and background checks; and potential new requirements, such as the installation of sophisticated surveillance cameras, floated in 90-plus pages of additional proposed rules the Colorado Department of Revenue released at the end of August.
"We haven't seen any large profit margins, and right now, with all these costs, any profit we had is getting eaten up," Garduno says. "Owners have invested a lot of money hoping for a good return, but we've got a lot of poor centers out there."
Stiff competition in the first half of the year decreased product prices — and profits — says David Schiller of All Good Care Center. Six months ago, centers were selling an eighth of an ounce of marijuana for $60. Now, Schiller says, "I see it as low as $35."
The center owner says he's paid more than $12,000 in state and city fees in the past few months. And though he, like Garduno, believes that the regulations will eventually chase away unscrupulous players, for now he's concerned that they're hauling in the dough, while those struggling to be compliant are taking the hit.
"It's exhausted us financially, emotionally and mentally," says Schiller, a former masonry contractor. "The only ones that seem to be doing well are those that aren't complying.
"But our plan is to weather it out. This is free enterprise. This is building something out of nothing. This is what America stands for."
Market forces are in full effect, agrees Mark Slaugh, a member of the Cannabis Council.
"When you have centers literally opening up across the street from each other, you start to cannibalize your own market," says the University of Colorado at Colorado Springs business student. "When you have new industry that's a $3,000- to $4,000-a-pound commodity, what's really going to differentiate you is how you market your product."
The bubble effect, of quick growth, then retraction, is typical when any business sector is born, says Fred Crowley, an associate research professor and senior instructor at UCCS and director of the Southern Colorado Economic Forum.
"Invariably, there's a rush of businesses, and then it's survival of the fittest," Crowley says. "Sometimes they fail due to pure competition or not having a good location. Sometimes it's regulatory issues."
Crowley supervised an economics study that Slaugh and four of his fellow UCCS students compiled a few months ago. Their conclusion: The industry has too many risks for business owners.
"There isn't enough profit with the cost of compliance, the price of the product is often above the street price of illegal drugs, and the legal risks are high," Crowley says.
So even though the demand isn't going anywhere — Garduno estimates the state will have some 100,000 patients registered by year's end, including 10,000 in the Colorado Springs area — worry reigns among local MMJ professionals.
"We're all still scared," Garduno says. "The worst thing is, we're helping people, and we don't want that to stop."