Budding Entrepreneurs Will Race for Retail Riches if Ohioans OK Pot

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By Mike Brunker

Entrepreneurs looking to cash in if Ohioans vote Tuesday to legalize both recreational and medical marijuana need only look to the west to get an idea of what awaits them: Possible riches and headaches –- lots of headaches.

Ohio’s initiative, which would amend the state constitution, aims to apply lessons from the four Western states that have already approved sales of recreational marijuana — Colorado, Washington, Alaska and Oregon — to avoid some of the pitfalls that pot pioneers there have experienced.

That should make running a pot shop in Ohio quite lucrative if voters approve the measure, said Chris Walsh, managing editor of the Marijuana Business Daily, an industry news publication and conference sponsor.

File photo of a bag of marijuana being prepared for sale next to a money jar at BotanaCare in Northglenn, Colorado.RICK WILKING / Reuters File

“What we’ve seen with the recreational industry, at least in the beginning, the stores do very, very well,” Walsh told NBC News. “There’s good reason for people to be excited if they can open a store in Ohio.”

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The vote on the initiative, which would make the Buckeye State the first in the Midwest to legalize recreational pot and the first anywhere to approve both medical and recreational use in one fell swoop, was expected to be close. While polls show a majority of the state’s voters supporting legalized pot, opposition to the measure focused on a controversial provision of the initiative that expressly reserves the right to grow marijuana for sale in the state to 10 entities that — not coincidentally — are owned by individuals who backed and financed the measure.

But Walsh said that would still leave plenty of room to profit for those who can navigate the tricky path to opening a retail marijuana shop. And there are even more opportunities in ancillary businesses, including creating “infused products” containing tetrahydrocannabinol — the active ingredient in marijuana — like brownies, sodas and topical creams, and for supporting operations, like glass case makers, he said.

Walsh said that data compiled by his publication show that retail marijuana operations in Colorado and Washington generally have profit margins between 15 and 25 percent. That compares to an average profit margin of just 2.67 percent for general retailers, according to an analysis by the Stern School of Business at New York University.

The Ohio initiative would further benefit retailers by charging a lower tax rate on marijuana than those imposed by Colorado and Washington: a flat 5 percent rate on gross revenue for retailers, in addition to normal state business taxes and a $10,000-a-year licensing fee.

“That’s only about half of what taxes were in Colorado and Washington,” said Joseph Henchman, vice president of legal and state projects with the Tax Foundation, an independent, nonprofit tax policy research organization, who recently analyzed the taxation schemes in those states.

Henchman said the lower tax rate is apparently an effort to bite into the “gray and black markets” that continue to exist in Washington and Colorado.

Pot Risk vs. Profit: Bankers Cautious of Marijuana Dispensaries

But landing that coveted retail franchise could prove difficult.

Under Ohio’s initiative, the number of pot retail stores would be limited to one for every 10,000 Ohioans. At the state’s current population of 11.59 million, that would work out to a maximum of 1,159 stores.

The licenses would be awarded by a newly created Marijuana Control Commission, but it’s not clear from the initiative how the selection process would work in the event there are more applicants than licenses, which is likely.

If you get that piece of paper, finding the right location will be a challenge.

Stores cannot be located within 1,000 feet of a house of worship, public library, public or chartered elementary or secondary school, state-licensed day care center, or public playground. And once you’ve found a spot that clears those obstacles, the location would also need to be approved by voters in the precinct in which the store would be located.

Even with rental agreement in hand, the challenges will continue, said James E. Fisher, department chairman and professor of marketing at the John Cook School of Business at Saint Louis University.

For starters, he questions some of the reports about the profitability of pot retailers. He recently published a breakdown on Quora.com that estimated an average retail operation would clear only 12 percent before taxes, and notes that marijuana retailers are often limited in what they can claim in deductions.

“In retail there are so many ways you can go wrong or in which the economic forces can turn back against you,” he said. “You have to have a location that will serve you well and in the early stages of this industry, good retail clerks are going to be hard to find …. Start-up costs can be significant if you’re funding this out of pocket, and I can’t imagine too many banks are going to be willing to loan you money on a project like this.”

Read More: Legal Pot Market Helps Fatten Bottom Line for Vape Shops

That’s particularly true given the Federal Reserve’s recent court filing stating that banks under its control are barred from accepting money from the sale of pot because the drug remains illegal under federal law.

Fisher, who has studied other so-called sin industries, including gambling and tobacco, notes that pot retailers face additional competition from other industry players — both legal and illegal.

“Dispensaries may have advantages such as shorter lines and cheaper prices, and some people may continue to buy from their dealer, who also can probably beat the retailers’ prices,” he said. “That’s the free market for you.”