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4 Ways To Fix Oregon's Saturated Cannabis Industry

On Nov. 21, The Guardian reported that Oregon's marijuana industry is in crisis due to market saturation: there are simply more dispensaries than the market currently needs.

The state has taken an incremental approach to legalization. Oregon voters legalized cannabis through a ballot measure on Nov. 4, 2014. But the retail market won't be officially launched until the fall of 2016. To prevent the black market from thriving in the meantime, legislators decided to allow medical dispensaries to sell cannabis to recreational users at the beginning of October.

News of medical dispensaries tapping into a recreational market led to a surge in applications for licenses in the summer of 2015. Many of those businesses are now selling or closing their shops because they cannot compete in the market.

This development led International Business Times to offer a gloomy forecast for the industry's future.

"In many ways, Oregon's cannabis market is a classic example of a gold - now green - rush. First there's the boom, then there's a bust."

But should we really be ringing the alarm bells already? To find out, we took a look at the reasons behind Oregon's struggles and possible solutions. States and countries interested in legalization should take note!

1. An overcrowded market

Problem: There are simply too many medical dispensaries in Oregon. Sam Chapman of New Economy Consulting - a firm that advises investors in the cannabis industry - told Oregon Live that there are approximately 50 medicinal cannabis patients for every dispensary in Portland. And the state is currently working through a backlog of applications for even more prospective businesses.

Many of those dispensaries are staying afloat by tapping into the lucrative recreational market. But those profits will diminish in the fall of 2016 when retailers open. And the revenue stream will end completely on Dec. 31, 2016, when medical dispensaries will no longer be allowed to sell to recreational users.

Solution: When the state is ready to begin retail sales, dispensary owners will have the option to switch from the medical to the recreational market.

Market contraction isn't new. According to The Guardian, only half of the 900 medical marijuana dispensaries that operated in Colorado five years ago are still open today. But business there is still booming. The number of stores decreased as dispensaries moved into retail.

However, contraction could make life difficult for Oregon's medicinal cannabis patients. If there were no medical dispensaries nearby, a patient could purchase cannabis through the retail market, but she would have to pay sales tax for her medicine. That could make treatment unaffordable.

Another Solution: According to Oregon's regulations, a business cannot hold a license to sell medical as well as recreational marijuana. But that can change if the the state legislature agreed to allow "co-location," which means recreational and medical cannabis could be sold at the same store. Colorado has already adopted co-locating, so changing Oregon's industry would simply be a matter of following the best practices in another market.

Donald Morse - chairman of Oregon Cannabis Business Council - has another idea. In February 2016, his group plans to get a bill introduced in the state legislature that would allow patients to receive tax exemptions at retail outlets by presenting their medical marijuana cards.

"We don't charge tax on anyone else seeking medicine," Morse told The Guardian. "We have to find a way to marry these two systems in a way that's not going to screw over the patients."

2. 'Mom and Pops' going bust

Problem: Why are there so many dispensaries in Oregon? Because licenses are affordable. When Anthony Johnson and New Approach Oregon crafted the bill to legalize cannabis, they wanted to keep the fee for licenses low so that "mom and pop" shops weren't crushed by Big Marijuana.

But the downside to that strategy is an overcrowded market. As Johnny Green noted last summer, "Oregon has the lowest barrier to entry than any other state that has a legal marijuana industry....That combined with the fact that everyone and their grandma wants in on the industry is creating a very crowded Oregon cannabis scene."

Solution: Let the market sort itself out. That's Donald's Morse's advice. "We didn't need all those dispensaries," he told The Guardian. "A lot of people got into it, but they were not well financed and were hanging on by their fingertips. The shake-out has begun. Those with sound business practices will survive, those without are going to fail."

If that seems harsh, take heart with some advice from Johnny Green, who says over-saturation, "doesn't mean that people will be pushed out of the industry by default, but it does mean that those that are in the industry, or are going to get in on the industry, need to step up their game."

3. License speculation is collapsing

Problem: Not everyone who applied for a license is a salt-of-the-earth entrepreneur. Many bought licenses and opened stores in hopes of reselling them for a profit later on when the market boomed. But their scheme has busted, says Sam Chapman of New Economy Consulting.

"A lot of these licenses trying to sell on the open market have been overpriced," he told Oregon Live, "and a lot of the larger investors looking to acquire the license will continue to wait for those businesses to go under or will (enter the market) through other options."

Solution: Don't panic. The fact that license speculation has turned out to be fool's gold doesn't mean that the industry itself is in peril.

4. Cash-only crisis

Problem: Because cannabis is still illegal under federal law, many banks refuse to conduct business with the marijuana industry. Operating cash-only stores makes business expensive and complicated. It also prevents businesses from getting loans and tax breaks that help other struggling entrepreneurs.

Solution: Patience. Help is on the way!

Last week, CNN reported that Fourth Corner - a credit union created to serve the cannabis industry - could open as soon as January. This could open the doors for similar initiatives in other legal states.

Meanwhile, the Marijuana Businesses Access to Banking Act is gaining momentum in Congress. The bi-partisan bill has been endorsed by high-profile politicians including Senators Harry Reid, Rand Paul and Bernie Sanders.

h/t The Guardian, Oregon Live, The Weed Blog


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