By Aaron Sankin
After toiling for decades in relative obscurity, the fight to legalize marijuana for recreational use in the United States is finally having its moment in the sun.
For the first time ever, a recent Gallup poll found a solid majority of Americans in favor of legalizing the drug—a 10-point swing from 2012. The Department of Justice recently said it won’t interfere with Colorado and Washington , states whose citizens voted to legalize pot last year. Earlier this month, the city of Portland, Maine, as well as a trio of Michigan municipalities, followed suit and voted to permit recreational pot use.
Four decades after President Nixon declared the War on Drugs, the government’s battle against marijuana may be beginning to subside. If the trend continues, it presents a massive business opportunity for people looking to get into the weed business without worrying about pesky drawbacks like getting arrested.
Legal marijuana, already a $1.4 billion industry, is one of the most rapidly expanding markets in the United States. A recent study by Arcview Market Research predicted the industry has the potential to reach over $10 billion within five years and experience growth outpacing that of smartphones.
Conversely, as with any major economic change, this growing acceptance—and possible full-scale legalization—has the potential to disrupt a whole host of long-standing industries.
Here then is a guide to the winners and losers in the wild world of pot legalization:
The most obvious profit center arising from the legalization of marijuana is the cultivation and sale of the product to consumers.
Since pot is currently outlawed at the federal level, it’s difficult for economists to pin an exact figure on the size of the black market. However, Harvard economist Jeffrey Miron has estimated the overall size of the marijuana economy, which includes both illicit sales and legal ones made in the 21 states (including Washington, D.C.) that allow medical marijuana, at around $20 billion per year with the majority share going into the black market. A 2006 study out of George Mason University put annual domestic cultivation at somewhere in the neighborhood of 22 million pounds.
Shifting that demand into the legal market presents an enormous opportunity—one that many people are already taking advantage of.
While Colorado voters approved a marijuana legalization initiative last year, the ban on recreational pot sales won’t officially be lifted until the beginning of next year. The state has seen a rush of activity among ganjapreneurs filing for the requisite permits to register their operations. Colorado officials expect to see over 100 legal pot shops open their doors on Jan. 1, 2014.
As the law stands, doing the actual growing and distribution has both pros and cons. ‟The fastest opportunity for profitability in some states centers on wholesale cultivation, whereas in other states vertically integrated cultivation and dispensary operations take the lead,” notes the Arcview report. ‟However, these businesses often have the most restrictions on investors and carry the greatest risk of federal enforcement actions.”
Outside of growth and sale of the actual plant, the marijuana industry comprises a range of related products and services designed to assist consumers with everything from procuring weed to putting it in their bodies. For a long time, these ancillary businesses have been relegated to dark corners of the counterculture. The increasing legal acceptance of marijuana has the potential to broaden the demographics of those who regularly ingest the drug while simultaneously creating a more mature consumer market where users can be more discriminating in their choices.
One of the companies cashing in on this shift is Medbox (NASDAQOTH: MDBX ) , a firm that builds automated weed vending machines. Medbox, which was recently the subject of a bruising investigation by the Southern Investigative Reporting Foundation , saw its stock skyrocket from under $3 to nearly $100 following the marijuana-legalizing votes in Washington and Colorado. The price has since settled to around $20 per share.
Other businesses include the dispensary finder and strain review site Leafly, and the handheld vaporizer the Pax Ploom. The latter is explicitly designed for tobacco use only, but it has managed to gather a sizable following among pot smokers. A review in Death and Taxes magazine recommended it as an ideal accoutrement “for the executive stoner.”
Over the course of the past 40 years of drug prohibition, black market growers have been under pressure to breed their products to become more and more potent. Stronger pot allows people to smoke less of it to achieve the same high. Therefore, suppliers need less space to transport the same monetary value of product. Operating under a prohibition, space is often at a premium because smaller physical loads make it easier to sneak packages past law enforcement undetected.
The downside of this THC ‟arms race” is that consumers who want marijuana products for reasons other than getting baked out of their skulls have been largely left in the dust. As regulations loosen, there’s likely to be a corresponding increase in demand for non-psychotropic marijuana-based products targeted at a much different demographic than the stereotypical young, male pothead.
Take, for example, Seattle-based cosmetics company Cannabis Basics, which offers a line of skincare and beauty products. While the lip balms and body lotions sold by Cannabis Basics have virtually nothing to do with getting high, they can only be obtained through licensed clinics in states with approved medical marijuana. Products like these, ones that take advantage of marijuana’s non-intoxicating aspects, are likely to expand into wider use if prohibitions are repealed.
Drug prohibition is expensive. Harvard economist Jeffrey Miron told The Huffington Post that it’s costing the U.S. government nearly $20 billion a year to keep marijuana illegal. To put that figure in perspective, NASA’s budget for 2014 is $16.6 billion.
About half of that expenditure comes from direct government spending on law enforcement, but the rest is the result of lost tax revenue. In November, Colorado voters overwhelmingly approved a ballot measure imposing a 25% sales and excise tax on all marijuana legally sold in the state.
The Colorado vote showed the electorate’s willingness to tax marijuana at the same time it resoundingly rejected a measure that would have hiked the state’s income tax—indicating that levying sin taxes on legalized pot may prove a broadly acceptable solution for increasing government revenue.
The tax rate on marijuana imposed by Colorado may seem steep, but it could serve as a model for the rest of the country. A RAND Corporation study surmised that widespread legalization would result in an 80% drop in pot prices . As long as taxes don’t push the cost of legal weed significantly over black market prices, there’s little chance high taxes would push consumers into illicit channels.
“As some states are legalizing marijuana and others there not, I think a lot of people are going to be surprised by the growth of the marijuana tourism industry,” explained Betty Aldworth of the National Cannabis Industry Association. Denver-based My420Tours offers tours of the Mile High City that founder Matt Brown likens to wine tasting tours of Northern California’s Napa Valley, except for pot.
Private prisons & drug treatment centers
The prison-industrial complex is an approximately $3 billion per year industry that houses about one out of every 10 inmates in the country. The biggest private prison firm, Corrections Corporation of America (NYSE: CXW ) , earned $1.7 billion last year.
CCA’s business is largely dependent on the number of people the government feels the need to lock up. ‟The demand for our facilities and services could be adversely affected by the relaxation of enforcement efforts, leniency in conviction or parole standards and sentencing practices, or through the decriminalization of certain activities that are currently proscribed by our criminal laws,” the company outlined in its 2010 annual report. ‟For instance, any changes with respect to drugs and controlled substances…could affect the number of persons arrested, convicted, and sentenced, thereby potentially reducing demand for correctional facilities to house them.”
Even so, the vast majority of the three-quarters of a million people arrested each year for marijuana possession never actually serve time in prison. Most are issued fines or put into some form of community supervision. Often that supervision comes in the form of drug treatment programs, which could also lose out if many of those court-ordered diversions evaporate due to fewer convictions.
Brewers & distilleries
Christian Groh and Brendan Kennedy of Privateer Holdings, a private equity firm operating exclusively within the marijuana industry, explain that legalization has the potential to do greater harm to companies selling certain already-legal drugs than others. ‟We’ve found that people don’t substitute marijuana for cigarettes, but they do often substitute it for alcohol,” explained Groh.
He noted that one of the ideas that sparked the creation of Privateer Holdings in the first place was as a means to attract investment from alcohol companies looking to hedge against any possible losses from increased pot consumption.
Since marijuana is still prohibited at the federal level, large corporate and financial players have stayed out of making direct investments in the pot field. However, alcohol producers could still easily make those investments if marijuana were to be made legal. This potential avenue for investment may be why direct opposition on this front has been less than some have expected. “We’re not actually seeing the kind of resistance against legalization that many people assume coming from alcohol and pharmaceutical companies,” explained Aldworth.
In an interview with ABC News last year, the executive director of the Fraternal Order of Police, the largest police union in the nation, said that, ‟the law enforcement community is universally consistent in its opposition to legalizing pot, in the interest of public safety and public health.”
While, as reason.com points out, there are some notable exceptions to that rule, law enforcement has been just about the largest single group fighting drug legalization in any of its forms.
This opposition is at least partially due to the drug war being a major funding source for local police departments across the country. One way this occurs is through asset forfeiture , where law enforcement officials confiscate and then sell items—such as automobiles—connected to drug crimes. According to the General Accounting Office, the Department of Justice gave almost a billion dollars raised through asset forfeiture to local police departments in 2011.
Critics argue this revenue-generation mechanism leads police departments to prioritize drug arrests over the investigation of other crimes; however, agencies also use the money to increase staffing and purchase new equipment that makes the communities they serve safer.
Medical marijuana dispensaries
In many cases, some of the most vocal opponents of full-scale legalization are the operators of medical marijuana dispensaries. The rationale behind this opposition isn’t only that recreational legalization would depress prices and eat into medical dispensaries’ market share. Medical marijuana dispensaries are, by definition, places where people go to get medicine. By legalizing pot and then slapping a large sin tax on it, the sense of marijuana as legitimate medicinal product that dispensary owners have worked for years to build, could evaporate.
Politico reports that earlier this year, Medical Marijuana Caregivers of Maine joined a coalition to oppose a bill legalizing the possession of small quantities of marijuana for recreational use in the state.
At this point, picking winners and losers is an act of speculation. No market as large as the United States has ever experimented with full-scale drug legalization, so there’s no telling what the ultimate effects will be.
When the United States ratified the 21st Amendment in 1933 ending alcohol prohibition, voters and legislators had some idea of what lay ahed, but they had no way of seeing the wave of boozy innovation—some of it positive, some of it decidedly less so—that would wash over the country in the ensuing decades. If local, state, and federal governments decide to do something similar with marijuana, seeing precisely what businesses and regulators do with it may end up being the most exciting part of the whole endeavor.
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