Friday, April 25, 2014

Expanding The Market For Legal Marijuana

I caught a story about the marketing of legal marijuana on public radio yesterday that was predictable in its content.  It is always interesting to observe human behavior when it comes to selling a potentially addictive intoxicant.  Suddenly - people with no interest or aptitude for science and medicine become "master growers" and gurus of the medical effects of marijuana.  It takes on an eery analogy with the business types who have taken over medicine.  Money gives you immediate legitimacy whether you know anything or not.  And really - how much do you have to know to grow and sell pot?  Feign a little concern and market it to everybody - just like tobacco.

In all of the agitation about "medical marijuana" and the gnashing of teeth in state legislatures across the land, I guess nobody was anticipating that there will now be a branding and marketing emphasis on weed.  How do you determine if 30% or your audience is minors?  The MPR story illustrates how some dealers want to differentiate their product by the people who use it.  They want to make sure that they are attracting more than "stoners".  Put it in an upscale store and market it like fine wine.  Having gone from Cheech and Chong comedy albums and movies in the 1970's to weed as a serious product is a mind expanding experience for people from my generation.  Besides getting used to the concept there are probably a couple of other things for consideration.

The issue of crime and marijuana production is real.  As a student of reality TV, there are clearly growers and dealers out there who have questionable ethics and seem to do more than just drop prices to compete with one another.  The people on reality TV seem to carry firearms and steal from one another at the minimum. It makes sense to me that with an increasing concentration of people who expect to get wealthy from selling weed, that this kind of activity will increase.  The 2009 letter from the Department of Justice on potential federal prosecution in states where medical marijuana is legal addresses this to some extent:

Typically, when any of the following characteristics is present, the conduct will not be in clear and unambiguous compliance with applicable state law and may indicate illegal drug trafficking activity of potential federal interest:

• unlawful possession or unlawful use of firearms;

• violence;

• sales to minors;

• financial and marketing activities inconsistent with the terms, conditions, or purposes of state law, including evidence of money laundering activity and/or financial gains or excessive amounts of cash inconsistent with purported compliance with state or local law;

• amounts of marijuana inconsistent with purported compliance with state or local law; 

• illegal possession or sale of other controlled substances; or

• ties to other criminal enterprises.

It seems to me that the DOJ anticipated some of this activity with medical marijuana.  I have not seen any specific guidance on legal marijuana for non-medical purposes.

What about the economic effects?  Will marijuana dispensaries become as common as liquor stores and if so does the economics of liquor stores have any implications?  Lotterman points out that liquor stores are intensely competitive businesses and no one seller has enough leverage to increase the price.  Demand is also inelastic and that means that the amount purchased does not vary significantly with any initial price increases.  Inelastic demand also occurs with food and emergency medical services.  Buyers tend to not postpone purchases based on price - at least initially.  As a result the businesses have low margins due to competition but fairly high volume and it does not take much to impact their profitability.  The article is written about the potential impact of of a law that keeps liquor stores open on Sunday.  Lotterman also talks about the cost to society of keeping the liquor stores open on Sunday.  I think that marijuana dispensaries and the dispensaries of whatever other drug the politicians legalize will eventually resemble the liquor store scenario with a proliferating collection of low margin businesses.  It will take a while for the market to get to that level, largely due to the folklore associated with the product at this point in time.    

Why is this model important?  Two reasons really.  The first is the current marketing angle.  The marijuana entrepreneurs want to expand the market including expanding it to people who are not using the product.  Secondly will be the level of availability.  If we are looking at the liquor store model, each establishment will have to move a large amount of product to stay in business.  That will involve a range of product analogous to expensive wines and liqueurs in fancy bottles to the inexpensive vodka that is the mainstay of alcoholism.  Few people will get rich,  In many ways it will be similar to the Freakonomics analysis of why it is hard to get rich selling crack cocaine.  In the end, high volume low margin business benefits the few and not the many who may end up taking the risks.   It is the ideal low cost mechanism for maximizing exposure of the product to the most people.  

I expect the learning curve on all of this to be high.  As I have watched the reality TV shows about this phenomenon as well as the dramatic adaptations like the television series Weeds it is clear that the goldrush myths are alive and well.  The product is hyped as being benign and it will be widely marketed.  It doesn't take a lot of imagination to predict that there will be crime activity associated with the overall process.  The idea that addictive intoxicants can be removed from the sphere of criminal activity so that we can all enjoy the benefits of getting high and spending the increased tax revenues is a recurrent fantasy.  There is significant criminal activity associated with the legal drugs - alcohol and tobacco and they have their own agency to deal with those problems.  

 George Dawson, MD, DFAPA

Edward Lotterman.  The Cost of Sunday Liquor Sales.  March 16, 2014.

Luke Runyon.  To Keep The Business Growing, Vendor's Rebrand Pot Stoner's Image.  Minnesota Public Radio.  April 21, 2014.  (listen to the link).

Steven D. Levitt, Stephen J. Dubner.  Why do drug dealers still live with their moms? in Freakonomics, Harper Perennial, New York, 2005, 2006, 2009: 85-113.

Supplementary 1:  I intentionally avoided any reference to the medical costs of cannabis even though we know more about that now than at any point in history.  There have been some high profile stories recently but the most believable one should come from long time cannabis advocate Tommy Chong during an interview on TMZ a few weeks ago.  I personally saw the video in real time where he comments that pot is not for everybody and that some people should avoid it.  That is a paraphrase.  I thought the actual video would be out there but it is not.  Probably too much at odds with his other videos.

Supplementary 2:  Public domain photos of marijuana courtesy of U.S. Department of Justice Drug Enforcement Administration.

Supplementary 3:  It will be an interesting twist if cannabis is marketed as anything but a drug.  That will be the difference between direct-to-consumer pharmaceutical ads where the consumer is rapidly advised of a string of significant side effects (including the possibility of death in some cases) and some ads contain the phrase: "this drug is not  for everybody" and an ad for an alcoholic beverage that says "drink responsibly".  The latter by definition will result in broader exposure for a larger number of people.

Supplementary 4:  I was just (4/30/2014) informed by a reader from Colorado that medical marijuana is still the preferred product there because the taxes on it are lower.


  1. I live in Washington State, one of the two states where cannabis is now legal. My concern is for teenagers who now appear to preferentially use cannabis over alcohol--based on info from some polls and feedback from teens I know. Not that alcohol is safe but I have big concerns about the effect of cannabis on the developing teenage brain (plus I HAVE a teenager at home). I have no doubt cannabis will be marketed to kids. I have no answers.

    1. There is no doubt that most industries target this demographic for various reasons. With tobacco it was the potential for building a customer base addicted to the product. The goal described in this article was to make it as socially acceptable as alcohol. The advocates of widespread legalization and sales have done a good job so far of minimizing that fact that it will be broadly marketed with the intent to greatly increase the number of users.

      I share your concern about the effects on brain development. Another issue is the number of people who eventually try synthetics to avoid a positive drug screen at work. With broader adaptation the number of problems will increase.

  2. This link was sent in but the post was lost (Thanks RB):

    Note the estimated market for legal marijuana greater than a typical Big Pharma blockbuster drug.