Analysis: Cannabis is slipping into a barbell economy

John Arano / Unsplash

The barbell economy: Thick on both ends, skinny in the middle.

Forty years ago, they stood atop American commerce: Businesses that served the everywoman and man of the land. Department stores like Marshall Field’s, Wannamaker, and Filene’s. Now those names are dust, consumed by Macy’s, the last of the great department stores, which wobbles and announces new layoffs almost every year.

In media, Americans gravitated to Look, McCall’s, and Life, publications that seemed to define middle class existence. All of those are gone now.

And four decades ago, a major airport might have hosted a dozen different domestic airlines, each with their own levels of comfort, customer service, and price points. Now, there is just a handful of domestic carriers still flying, all offering either super-cheap cattle car class, or plush cabins seemingly built for the Monopoly Man.

Each of these consumer-facing industries, and hundreds more like them, were subjected to the harsh realities of the barbell economy where buyers gravitate to either value-pricing at one end or luxury experiences at the other. For clothing, department stores are out. There’s the pricing pressure of Walmart/Amazon at one end, or the luxury experience of Prada at the other. For media, you’re either getting free stuff through Yahoo or YouTube, or paying a subscription price. And for airlines, it’s the price pressure of Southwest on one end, or the champagne service of the Red Carpet Lounge on the other.

Once you start looking for it, signs of the barbell economy are everywhere.

If you look at Michigan’s cannabis industry, the state closest to an unregulated market east of the Mississippi, the Barbell is already beginning to form. On the one hand, companies chasing scale with dispensaries, like Lume, Skymint, and Ascend’s Michigan Supply & Provisions, all have offerings online below $30 for an eighth of flower. Individual mom and pop stores, like Grand Rapids’ Pharmhouse Wellness and Greenhouse of Walled Lake have one $30 offering, but most are $35, $45, and $50. Redbud Roots, which is largely a cultivator, has a single dispensary in Muskegon, but it’s cheapest flower offering online is $50 and eighth.

In the barbell economy, retail offerings are all about scale, so you can push down the price. Or they’re about exclusivity and quality, so you can raise the price. In the middle? Well that part goes away, because how do you define a middle market product when you’re attacked by price on one side and high quality on the other?

There’s already a number of sizable cannabis companies. Columbia Care has 99 dispensaries nationwide. Trulieve has 100, and Curaleaf has 109.

Does that sound like a lot?

Subway sandwiches has over 22,000 stores globally. McDonald’s has over 13,000.

But they aren’t necessarily the biggest revenue makers, with average annual sales of $375,000 per unit and $2.9 million respectively. The top fast food chain revenue maker is Chick-fil-A with $5 million per store per year and 2,607 stores, according to QSR magazine.

Those are seriously scaled up operations, making the low end of the barbell work for them.

Maybe cannabis doesn’t really fit into that space though. In Illinois, there are 110 dispensaries right now. In July, the state sold an estimated $151 million of cannabis. That’s an average $16.5 million per dispensary, annualized. 

Maybe Apple stores are a good comparison. Today there are 271 Apple stores in the United States, and in 2017 they were selling $5,546 per square foot, according to a study by CoStar. If you figure an average store size of about 7,000 square feet, that comes to $38.8 million of sales per year. There are certainly dispensaries in Illinois with those sales numbers like that – but it’s not an average.

Either way, there are two big pressures cannabis companies are struggling with that Apple doesn’t have to contend with: A steadily increasing number of competing stores – Michigan added 210 dispensary licenses in six months – and an underground economy that some analysts estimate serves over 70% of current cannabis consumers. Both of those pressures, more dispensaries and street dealers that offer mostly lower quality product at a discount, are forcing bigger cannabis companies to figure out how to slash costs and scale up as fast as possible.

WIth these pressures, and Illinois’ announced intentions of licensing up to 500 dispensaries over the next few years, it doesn’t seem likely they’ll continue their current sales pace. But still, if Illinois doubles its cannabis sales totals over three years – a likely possibility – and adds 500 operating dispensaries, you still get an average of $7.2 million sales per store. Certainly better than a Chick-fil-A.

But then there’s that underground market sales pressure. Lately, I’ve encountered illegal delivery companies in Illinois and Michigan operating almost entirely in the open, with websites, guaranteed delivery times, and much lower delivery prices. One service’s website was offering $18.75 for an eighth of flower – if you bought a full pound at a time. 

How does legal market scale compete with an underground market already built for scale?

Maybe the barbell economy is already operating, where the underground market is the value end, and the legal market is the luxury end.