Cannabis dispensaries—the sweet spot of the cannabis supply chain and dream business for many marijuana aficionados. The allure that comes with the satisfaction of providing the end product to consumers through either a cannabis dispensary license or cannabis delivery license, coupled with the fact that the supply chain’s dispensary element typically carries with it the greatest gross margin, can be very appealing. In fact, dispensaries and delivery businesses capture nearly 50% of the retail price paid by consumers. With that said, why isn’t everyone getting in on the cannabis dispensary business? Let’s break down the cannabis dispensary startup costs and the special consideration you need to make to determine if a cannabis dispensary is the right option for you.
Know Your Cannabis Dispensary Startup Basics
The purpose of cannabis dispensaries is to solve the issue of where and when to provide end consumers with secure and legal transactions to obtain access to quality-tested cannabis flowers and cannabis products. It is the final link in the cannabis supply chain and the closest connection to patients and customers who value safety, quality, and consistent supply.
There are two main types of cannabis dispensary businesses with very different startup costs and fees
and a third potential dispensary option that may be on the horizon. Cannabis dispensary licenses in
California (and in a growing number of states) are divided into:
- Retail Cannabis Dispensaries
Brick and mortar storefronts with secure receiving, inventory storage, and sales floor areas. If the proper licensure is obtained retail businesses may also include a delivery component.
- Delivery Cannabis Businesses
Direct to consumer sales with a fleet of drivers and inventory storage typically held in a warehouse that is off-limits to consumers.
- Retail Dispensary with the option of a drive-through window
While not yet legal in California and other states, dispensaries are actively working towards approval for this business model which would provide convenience and ease to both the dispensaries and end consumers.
Retail Dispensary Startup Costs and Fees
The startup costs for retail dispensary operations can vary widely based on the numerous factors that go into establishing the business. Three of the greatest factors to consider are local market size, competition, and the cost of real estate buildout:
- Local Market Size
Retail dispensaries face a double-edged sword in the marketplace—they need to be in populated areas to reach the consumers they serve, however the better the area the stricter the regulatory environment can be around if cannabis dispensaries can even operate and what local regulations they need to meet to do so. The number of cannabis dispensary licenses issued within a particular county or state may be incredibly limited. Schools, residential neighborhoods, and churches may all present obstacles to opening. For example, in New York State dispensaries must be located at least 500 feet from any school establishment. Even factors like the political affiliation of an area and the timing of local elections may impact your ability to get approved.
Depending on your state’s political climate and regulatory requirements, entering the market as a new cannabis dispensary may be additionally challenging if there are already large and more well-established retailers in the area. The cost of obtaining a retail dispensary license can vary widely given the limited availability and number of retailers competing to get such a license. In Florida, for example, the cannabis dispensary market is primarily controlled by five main retailers who continue to expand. At the same time, the state has nearly frozen the release of retail dispensary licenses to smaller newcomers. In any state, these larger establishments are able to offer more consistent supply and at a lower cost than what most smaller retail dispensaries can provide. And, with any brick-and-mortar business, even if you do set up a successful location, you are always subjected to competitors that enter your market at a later time.
- Dispensary Buildout Costs
Facility requirements can vary greatly depending on the availability of approved retail space and the size of your consumer base. Some facilities can operate within 1,000 square feet, while other operations stretch into the 20,000 square foot range. It is important to understand that security and climate control are two significant costs to factor into your dispensary startup budget. Dispensaries must operate at the security level of what you’d find at a jeweler, with security cameras, reinforced storage, and secure cases for product display. Cannabis products must be protected from environmental factors that could degrade their quality.
General Dispensary Startup Cost Estimates
Based on our years of industry experience, we estimate that the startup costs of opening a cannabis dispensary range from $500,000 on the low end to close to $2,000,000 in California.
- For 12 to 24 months, lease costs can be $200,000 to $400,000 or significantly higher if the property is purchased outright.
- General application and fee costs can stretch upwards of $150,000 depending on the local market requirements and demand.
- Buildout costs are the most widely varied and dependent on the size and type of dispensary operation you’re interested in. They range from $150,000 to over $1,000,000 typically.
- Starting operations and marketing costs are estimated at $100,000 to $250,000 to build a brand and employ personnel.
Other Dispensary Cost Considerations
As you plan your cannabis dispensary business, it’s important to have a thorough understanding of all of the regulatory requirements you will need to address as part of your business and budget for those accordingly. For example, in California there is a requisite Type 10 Retail License to operate a cannabis storefront. The yearly fee associated with this license is based on your anticipated annual revenue.
With that license also comes the potential request for documentation surrounding:
- Transportation procedures (DCC-LIC-015)
- Inventory procedures (DCC-LIC-016)
- Non-laboratory quality control procedures (DCC-LIC-017)
- Security procedures (DCC-LIC-018)
For inventory procedures, for example, you will need to have systems in place to address record keeping, inventory tracking and reconciliation, quality preservation methods, and security procedures. Your payroll costs should factor in the multiple positions needed with a retail cannabis dispensary, including a General Manager, supervisor, budtenders, and administrative personnel. If you have a delivery component to your business. In that case, there will be an additional layer of licensing requirements, costs, and personnel needed.
Retail Dispensary Revenue
Cannabis storefront operations (with the option of ancillary delivery services) can be a lucrative business if in the right market. In our experience, annual revenue numbers in California are around the following:
Operating a cannabis dispensary gives you the power over suppliers to control what appears on your shelves. Scaling your business appropriately to expand into more retail spaces, and potentially sell the total business down the road, can yield a tremendous return on your investment. But to achieve such success, you need to be a savvy investor with a clear understanding of the cannabis market.
Retail Delivery Startup Costs and Fees
In the scheme of cannabis dispensary businesses, operating a delivery service is a far more accessible,
scalable, and cost-effective way to enter the market. Your business can range from just a few drivers to a fleet of 40+ delivery vehicles operating in shifts during all permitted delivery hours (yes, state and local requirements may limit your hours of operation as a dispensary).
Buildout is simplified as many retail delivery businesses operate out of a warehouse space and do not need to be centrally located where their customers are or designed to meet the aesthetic needs of the neighborhood. It’s important to note that if you are licenses as a delivery dispensary, then customers are not permitted to purchase from your location. Your buildout space should include the following:
- Transport space for delivery drivers to transfer orders safely to their vehicle.
- Dispatch space for operators to receive orders, prepare inventory for delivery, and coordinate driving routes.
- A secure and quality-controlled area to store your inventory.
- Parking for the delivery vehicles in your fleet.
Additional Delivery Startup Cost Considerations
Expenses related to a cannabis delivery startup are not limited to just building out a warehouse space
and stocking it with inventory. For example, in addition to applying for California’s Type 9 Retail License for non-storefront (delivery only) retailers, the state may request any of the applicable documents from the retail section above, plus the Delivery procedures (DCC-LIC-020) form. Cannabis delivery businesses must be able to provide their Vehicle Identification Numbers (VIN), license and driver information, whether the vehicles have an alarm system, training given to the drivers, inventory audit procedures, and more.
With transactions being handles off-site, safety and inventory control become critical points of consideration. Delivery businesses must figure out how their valuable inventory can be securely transported and what procedures can be put in place to ensure that the full amount of inventory that leaves the warehouse facility is delivered to the correct customers and accounted for. California limits hours of delivery operation from 6:00am to 10:00pm, though those hours may be even more stringent depending on your city or county. Delivery operations must also verify the age of the purchasers as 21+ for adult-use customers and 18+ for medicinal patients with a physician’s recommendation. The purchaser must provide a valid form of ID as specified by state law. Delivery services must have well-documented procedures in place to ensure that they are meeting all state and local requirement, and to facilitate future cannabis dispensary license renewal.
One final factor to plan for is the consumer education and service piece. Because delivery services lack the retail space with budtenders to answer consumer questions and connect them with the best products, savvy delivery services are employing digital budtending tools to offer a similar level of service to their delivery clients. This may require a more sophisticated website or app and staff to manage customer communications. Offering this service, however, can be an effective way to boost sales and improve customer loyalty.
Delivery Dispensary Revenue
The cost to open a delivery business is significantly less than a retail operation, both with a savings in the rental expense of a warehouse over a storefront location and a significantly reduced buildout cost. The only area where there may be a larger expenditure is in terms of marketing to build the face of your brand without the presence of the physical location.
With that said, the revenue potential of a thoughtfully-planned and efficiently-run delivery service can have a far better ROI. In our experience, a delivery business with 3-10 drivers may earn between $500,000 to $3,000,000 annually in revenue. For fleets with over 10 drivers, annual revenue may range from $8,000,000 to $30,000,000. As the quantity of dispensary licenses issued for delivery businesses is typically unlimited (as compared to storefront licenses which are typically in short supply), a delivery service may be the most strategic way to enter the cannabis dispensary market
Becoming a Savvy Cannabis Dispensary Owner
Operating within the cannabis industry takes a high level of drive, knowledge, and passion to be successful. The risks can be high as state and local governments are still navigating the regulatory waters. In fact, the licensing, compliance, and tax burdens within the cannabis industry are currently unlike any other industry out there. However, if you know what you’re doing (or have experienced professionals to guide you) the potential profitability can be well-worth the effort.
We’ve established the BeGreenLegal Academy courses to help aspiring cannabis business owners and investors understand the often-overlooked aspects that it takes to succeed in the market, including our recommended strategies for entering each section of the cannabis supply chain. These self-paced courses include both a high-level overview of the many ways to make money in the industry, with drilled-down examples of specific business operations, licensure requirements, potential costs, and possible revenue. Click here to continue your journey into cannabis dispensary ownership and contact us for more ways in which BeGreenLegal can set you on the path to success.