A Tale of Recalculating Averages:
Recreational Dispensaries in Colorado made an average of $155,166.38 in revenue for the month of April. This is down from an average per store of $168,877.27 in April of 2023, a decline of $13,710.89 per store.
Why is this important?
This decline of $13,710.89 per store Year-over-Year could be the difference between a profit and a loss for the month of April. We know that April and 4/20 is the Cannabis Industry version of November and Black Friday for traditional retail, so that means that retail prices are artificially lowered through heavy discounting. That heavy discounting, even if partially shared with vendors in the form of trade credits or other reimbursements, severely compresses margin for the retailer.
Why should you care?
Well, strictly speaking it is the alarm bell that the retail side of the industry in Colorado is not doing well and that further compression will lead to business closures. The reason being that these retailers are facing a broader market decline, consumers are struggling and are spending less on weed. This is evidenced by the continued decline in state marijuana revenue. So in effect, these dispensaries are fighting declining sales because people are spending less and in April they had to fight compressed margins as well.
Were dispensaries squeezed in April?
Short answer, Yes. Long answer, here is how: Margin Compression can take many forms, but put plainly, it can be simply explained as paying the same price for inventory that you now have to sell at a lower price than before, thus reducing your overall margin.
Inventory Cost | Retail Price | Gross Profit | Gross Margin | |
Normal Period | $50.00 | $100.00 | $50.00 | 50.00% |
Discount Period | $50.00 | $80.00 | $30.00 | 37.50% |
This is a simplified example of what happened in April, but the overall effect is that the dispensary makes less money per transaction. However, something else happened in April to add to the squeeze. Wholesale sales increased significantly as is shown in the following table:
2024 | 2023 | YoY Change | YoY Change % | |
Cultivation & Manufacturing Revenue | $32,387,760 | $28,349,440 | $4,038,320 | 14.24% |
So, April not only experienced a decline in sales per store of $13,710.89 but an increase in inventory spending of 14%. We believe this is largely due to an increase in wholesale pricing since the AMR (Average Market Rate) has increased roughly 15% Year-over-Year in April. So, Dispensaries are fighting an increase in inventory costs and a decrease in revenue in the same month, this trend will put pressure on already struggling stores and ultimately lead to multiple business closures.
But that is only part of the Picture…
This analysis relies heavily on store averages, but the state average is skewed higher because of six counties that have significantly higher sales averages than the rest of the state. The following table will show a high level breakdown of county revenues in April:
Rec Market | 2024 | 2023 | # of licenses | YoY Change | YoY Change % |
Boulder | $7,502,424 | $8,460,589 | 58 | -$958,165 | -11.33% |
Denver | $26,954,492 | $29,300,487 | 201 | -$2,345,995 | -8.01% |
Adams | $9,125,650 | $10,452,141 | 37 | -$1,326,491 | -12.69% |
Arapahoe | $12,409,539 | $13,784,435 | 38 | -$1,374,896 | -9.97% |
Jefferson | $6,066,926 | $5,995,492 | 32 | $71,434 | 1.19% |
Larimer | $7,775,872 | $8,247,711 | 16 | -$471,839 | -5.72% |
Weld | $2,989,217 | $2,766,005 | 10 | $223,212 | 8.07% |
Pueblo | $5,756,347 | $6,778,872 | 38 | -$1,022,525 | -15.08% |
Total | $78,580,467 | $85,785,732 | 430 | -$7,205,265 | -8.40% |
Total as % of state | 74.47% | 74.70% | 63.24% | 77.28% |
|
State | $105,513,139 | $114,836,546 | 680 | -$9,323,407 | -8.12% |
All Other Counties | $26,932,672 | $29,050,814 | 250 | -$2,118,142 | -7.29% |
This shows that the majority of state revenue is produced from a total of Eight counties, but the caveat is that Denver and boulder combined equal 38% of the state’s recreational store licenses with 259 stores. So they are going to represent the middle of the state averages as you see in this table:
Per License | 2024 | 2023 | Change Per License |
Boulder | $129,352.14 | $145,872.22 | -$16,520.09 |
Denver | $134,101.95 | $145,773.57 | -$11,671.62 |
Adams | $246,639.19 | $282,490.30 | -$35,851.11 |
Arapahoe | $326,566.82 | $362,748.29 | -$36,181.47 |
Jefferson | $189,591.44 | $187,359.13 | $2,232.31 |
Larimer | $485,992.00 | $515,481.94 | -$29,489.94 |
Weld | $298,921.70 | $276,600.50 | $22,321.20 |
Pueblo | $151,482.82 | $178,391.37 | -$26,908.55 |
Combined Average | $182,745.27 | $199,501.70 | -$16,756.43 |
State | $155,166.38 | $168,877.27 | -$13,710.89 |
Other Counties | $107,730.69 | $116,203.26 | -$8,472.57 |
Other Counties + Boulder & Denver | $120,608.23 | $131,261.08 | -$10,652.85 |
Just Boulder and Denver | $133,038.29 | $145,795.66 | -$12,757.37 |
There are really Three Separate Averages!
When we look at the population centers that have Recreational markets, they make up almost 75% of the state revenue but only 63% of the stores. This creates an imbalance in the average per store in the following counties: Adams, Arapahoe, Jefferson, Larimer, Weld, and to a lesser extent Pueblo. These counties all have to some degree a limit on the number of stores in their municipalities, so this skews their averages significantly higher than the rest of the state.
Denver and Boulder counties have the opposite problem, they have too many licenses for their market sizes, so they are skewed lower than even just the suburban counties surrounding Denver. But, they make up the middle of the pack so to speak in terms of revenue per license. When we look at the remaining counties we know that they only account for 25% of state sales but almost 37% of the state licenses. The “Other” counties quite frankly have too many licenses for their share of revenue. While they many not have the same high rents and labor costs as the population centers they have the lowest average revenue in the state and even that is still decreasing Year-over-Year.
What does this all mean?
Ultimately, as I have previously written about, the state is going to lose licenses because stores are going to go out of business. The current market in Colorado is squeezing retailers on both sides, and even if wholesale prices decline, the market is showing no signs of reversing course and increasing revenue. It is time to take a hard look at which businesses have the right models to survive in the long-term and which businesses will be hard pressed when the summer peak season ends and the calendar marches towards the slow months.
Later this month I will write on our thesis about what will happen to the market when stores close, and show why we believe that some store revenue will disappear entirely from the market, at least in the short term. That Insight will highlight the effect to the cannabis supply chain we believe is imminent.
As always, thank you for reading. We are currently offering complimentary consultations during the summer, so if you would like myself or my team to evaluate your position in the market please reach out.
Sincerely,
Michael Legler
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