The US legal marijuana industry has expanded over the years, with more states recognizing the role of marijuana in the medical and business sub-sectors (Vitiello, 2009). This industry has gained substantial traction, positioning itself as a prominent contributor to the country’s revenues. By 2017, retail sales of legal marijuana had reached an estimated $9 billion, primarily for medically approved use. In addition, the industry brought significant economic gains, including 121,000 direct jobs and $1.2 billion in tax revenue. The analysis of the case projects that this industry is poised for higher growth, with expectations of consumer spending reaching $20.8 billion by 2021 and generating 414,000 jobs along with over $4 billion in tax revenue (Rotering & Apollonio, 2022). With the legalization movement gaining momentum, the industry attracted substantial financial interest, as evident in Investment Case 3 from various venture capital and private equity funds. The transformation from a criminal-gang-controlled industry to a legitimate business arena sparked excitement, though questions remained about its long-term profitability compared to other regulated sectors. This analysis will utilize Porter’s Five Forces Model to comprehensively examine the competitive landscape of the US legal marijuana industry.
Competitive Analysis
Threat of New Entrants
Entry barriers into the legal marijuana industry vary by state due to differences in licensing regulations and eligibility criteria. The availability of licenses is critical, as it determines the number of entrants. In states like Colorado, the state has adopted strict legalization criteria, including US citizenship, clean criminal records, and residency. However, there is no quantitative limit on the number of licenses issued. In Washington, there is a fixed number of licenses allocated through a lottery, while California has more relaxed criteria and no license quota. This divergence impacts the industry’s competitive intensity across states. Moreover, compliance with extensive regulatory requirements, including security protocols and tracking systems, contributes to entry costs and complexity.
Besides the acquisition of licensees, the industry faces imminent regulations. For instance, all the marijuana processors must have security equipment installed, such as surveillance cameras and measures to protect against theft. Also, every marijuana plant is subjected to an inherent tracking system that incorporates RFID tagging. Also, there is strict regulation of the physical movement of marijuana, including specifying which vehicles can be used for transport. Therefore, the threat of new entrants is low, considering the strict regulations and licensing requirements. Also, the high capital would keep off the majority of the new entrants.
Bargaining Power of Suppliers
Suppliers in the marijuana industry include different players such as labor, real estate, equipment, and security, among others. There are also suppliers involved in the upstream processing, including manufacturers and distributors. While there is potential for differentiation through strains and quality, the wholesale market primarily treats marijuana as a commodity. There are different strains and types of marijuana based on therapeutic use. Coupled with the inability to trademark products, suppliers have limited power to significantly impact the marijuana industry. Indoor cultivation commands a premium due to its consistent quality.
The process of cultivating marijuana and the upstream processes incorporate various activities, from facilities to labor and technology. The relative power of suppliers is influenced by factors such as the availability of growing facilities, advanced technologies, and skilled labor.
The production process includes cloning, cultivation, and processing. These processes incorporate distinct stages, each with specific requirements and regulatory demands. These processes accompany variations in supplier power. In this aspect, supplier power can differ between indoor, greenhouse, and outdoor cultivation methods. For instance, indoor cultivation offers advantages like multiple growing cycles, enhancing supplier influence due to higher costs and technology dependence. The production of marijuana is characterized by dynamic changes in production costs. The adoption of modern technologies enhances operational efficiency and lowers production costs. However, the real estate costs are high owing to limited facilities and high labor rates for workers. Suppliers are therefore instrumental in the production and distribution of marijuana due to their possession of equipment and resources, which are critical to maintaining quality. Therefore, the suppliers may hold some bargaining power, but these factors may affect their engagement with the industry.
Bargaining Power of Buyers
From the case analysis, buyer power in the legal marijuana industry is influenced by several factors. These include the product’s quality, the segmentation of users between medical and recreational, the prevalence of home cultivation rights in certain states, and the availability of alternatives. The industry faces imminent competition from illegal marijuana cultivation and other recreational drugs with similar therapeutic effects. Buyers can therefore choose depending on their price needs. However, legal buyers can grow their own marijuana for domestic use, and retailers can differentiate each product through quality tests. Medical users have distinct needs compared to recreational users, potentially leading to differentiated demand. Moreover, in states allowing home cultivation, users can produce their own marijuana, impacting demand for legal products. Buyer power can be further influenced by pricing differentials between legal and illegal products.
Threat of Substitutes
Competition in the marijuana industry is based on the licensing requirements and the ease with which new products can enter the market. The threat of substitutes encompasses not only other legal and illegal recreational drugs but also the broader array of leisure activities available to consumers. The primary substitutes for legal marijuana include other recreational drugs such as alcohol, tobacco, and other illegal drugs. Alcohol and tobacco are well-established legal substances with their own consumption patterns and cultural acceptance. These substances compete for consumers seeking relaxation, stress relief, or altered states of consciousness, similar to the effects of marijuana. However, the legal status and cultural norms associated with alcohol and tobacco reduce their direct substitution threat.
The acceptance of marijuana as a substitute for alcohol and tobacco varies among different consumer groups. For instance, some users may prefer marijuana due to its perceived milder effects and potential medicinal benefits. Other consumers may stick to more traditional options. The cultural and societal norms surrounding these substances play a significant role in determining their interchangeability. The legal status and health considerations associated with substitutes are crucial determinants. Marijuana’s legalization for medical and recreational use has helped reduce the threat posed by illegal drugs, but it still competes with legal substances. Health concerns related to smoking also affect the choice between marijuana and tobacco.
Marijuana offers unique effects and experiences compared to alcohol and tobacco. This uniqueness can make it less substitutable, as consumers seeking specific effects or therapeutic benefits may not find suitable alternatives in alcohol or tobacco. Government regulations and controls on the sale, distribution, and consumption of marijuana influence its competitive landscape. For instance, strict regulations and age restrictions on alcohol and tobacco sales provide a level of protection against substitution. Besides, each state has strict licensing requirements for marijuana products. This makes the product a preferred choice for those seeking a different experience. Market trends also impact the threat of substitutes. As attitudes towards marijuana evolve and the industry continues to innovate, new products and consumption methods may emerge that create differentiation and reduce the substitutability of marijuana with other substances. However, it is imperative to note that one of the challenges in the legal marijuana industry is differentiating its product from legal alternatives while also competing against the illegal market. Additionally, as the industry develops, there is potential for product differentiation through branding and quality, aiming to minimize substitution.
Competitive Rivalry
The competitive landscape in the marijuana industry is moderate to high. The level of competition within the legal marijuana industry is determined by factors such as market concentration, industry growth, and differentiation. The industry currently experiences moderate to highly competitive rivalries. This is due to the availability of many players who have shown interest in the industry. This competition is also evident in the number of new players who have shown interest in financing products and sales for legal marijuana. The industry has attracted substantial financial interest, with a range of private equity and venture capital funds investing in marijuana-related businesses. For example, the MedMen Opportunity Fund injected $130 million in 2016 into 11 dispensaries, with an implied valuation of $1 billion.
These investments have led to the growth of companies, from cultivation to retail and support services. The potential for strong growth, as projected by industry forecasts, attracts new entrants and intensifies competition. The growth potential makes it an appealing industry for both existing players and newcomers looking to capitalize on rising demand. Although marijuana is considered a commodity at the wholesale level, differentiation opportunities exist at the retail level through branding, quality, and customer service. However, the inability to register trademarks for marijuana-based products limits branding efforts. The industry operates within a complex regulatory framework that can deter new entrants due to the barriers associated with obtaining licenses, adhering to regulations, and ensuring compliance. This can create a barrier to entry for new competitors.
The industry remains fragmented owing to the variation in regulations across states. This fragmentation may vary the competitive landscapes within different regions. This variation affects the overall competitive intensity. Prices for marijuana are influenced by supply and demand dynamics, leading to price fluctuations. This price volatility can impact profit margins and create challenges for businesses to maintain stable revenues and profitability.
Thus, competitive rivalry within the legal marijuana industry is determined by factors such as license availability, quality differentiation, and brand establishment. Licensing restrictions influence the new entrants and the extent of competition in each state. Also, the impact of brand recognition and product quality significantly influences new entrants. Quality and brand recognition play a crucial role in establishing competitive advantages. Invariably, registering a trademark for marijuana-based products is challenging due to legal constraints. The lack of uniformity in regulations across states also contributes to fragmentation and varying competitive dynamics.
Conclusion
The US legal marijuana industry has therefore evolved from an illicit market to a legitimate business sector. The industry has attracted significant attention and investment from stakeholders due to its promising future. While the industry faces challenges of federal legality, limited credit access, and regulatory complexities, it shows high optimism due to its economic potential, job creation, and tax revenue generation. A comprehensive analysis using Porter’s Five Forces Model highlights the diverse factors shaping its competitive landscape. Licensing acquisition, supplier influence, buyer preferences, substitution possibilities, and competitive intensity all contribute to the industry’s dynamics. As the industry develops, differentiation through branding, consolidation, and potential federal policy changes will potentially shape its trajectory. Ultimately, the legal marijuana industry’s success hinges on the effective management of these competitive forces. It is also imperative that the industry continue to adapt to the dynamism experienced in the industry. Through this approach, the industry will be able to carve a unique niche as a recreational option and medicinal substitute.
References
- Rotering, T., & Apollonio, D. E. (2022). Cannabis industry lobbying in the Colorado state legislature in fiscal years 2010–2021. International Journal of Drug Policy, 102, 103585.
- Vitiello, M. (2009). Legalizing Marijuana: California’s Pot of Gold. Wis. L. REv., 1349.