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On a high: Making dosh from legalising dope

New Zealand loves marijuana. While estimates vary, somewhere between 11%-15% of New Zealanders have consumed the drug in the last twelve months. It’s the most-used illegal drug in the country, and number three most popular drug overall, behind alcohol and tobacco. 

According to the 2014 United Nations’ World Drug Report, New Zealand is the world’s third largest consumer of marijuana per head of population, behind Iceland and the United States. 

And guess what’s projected to be the fastest-growing business in the US? Apps? The ‘sharing’ economy? The internet of things? Big data? It’s actually…(imagine you hadn’t read the headline or seen the accompanying images)…marijuana.

Four US states (Colorado, Washington, Alaska and Oregon), plus Washington DC, have legalised marijuana for recreational use, not by turning a blind eye, as in Amsterdam, but through a highly regulated commercial market. 

A further fifteen states have decriminalised marijuana to varying degrees, and 23 states have legalised it for medical use. In total, 59% of states, plus DC, allow marijuana use in some form.

While using cannabis remains illegal under federal law, the Obama administration has instructed federal law enforcement agencies not to intervene in states with laws that contradict the federal law.

Legislation has been achieved through private ballot (similar to citizens-initiated referendums), and has been promoted as a way to bolster struggling economies by creating new business opportunities, increasing tax revenue and cutting law enforcement costs. 

It’s early days, but it looks like it’s working. 

In 2014, legal marijuana sales in the US totalled $US2.7 billion, up 74% from $US1.5bn in 2013. ArcView Group, a marijuana-orientated research and investment network, reckons sales will rise to $US3.5bn in 2015, and $US10bn in 2018.

Meanwhile six more states are due to vote in 2016, and an article in Time magazine suggested 18 states (36%) will have fully legalised recreational marijuana use by 2020. 

ArcView reckons legalisation in all 50 US states would result in annual retail sales of $US36.8bn.

But the economic benefits of the “green rush” aren’t restricted to cultivation and sale. As demand for legal marijuana has grown, a new industry of infrastructure and service providers has sprouted alongside it. 

Take the Marijuana Investor News site, with stories geared solely at entrepreneurs and investors wanting to put their money into cannabis. Then there was the three-day Marijuana Investors Summit in April in Denver, which attracted 1,000 attendees, a mix of investment groups/venture capitalists looking for places to invest millions of dollars, plus lawyers, accountants, human resources, and security services all hawking marijuana-related services. 

ArcView has invested $US41 million into 54 marijuana related companies. And billionaire Peter Thiel (the guy who put money early into Facebook, LinkedIn and Yelp and thereby made a name for himself as the investor that funds ideas that sound crazy to almost everyone else) has also jumped onto the cannabis bandwagon. His investment firm Founders Fund has put millions into Privateer Holdings, a private equity firm which launched the Marley Natural brand of legal marijuana in partnership with Bob Marley’s family.

One of the pioneers in the industry is Christian Hageseth, CEO of consultants American Cannabis Partners, president and chairman of Colorado-based producer Green Man Cannabis, and author of Big weed: An entrepreneur’s high-stakes adventures in the budding legal marijuana business

Hageseth began by cultivating medical marijuana and has been a long time advocate of marijuana law reform. He’s as bullish as they come when it comes to the effect legalisation has had on the Colorado economy: “We’re a job creation machine,” he says with deep, American enthusiasm. “Colorado is enjoying a great economic boom and marijuana is one of the key drivers.”

“We’re a job creation machine. Colorado is enjoying a great economic boom and marijuana is one of the key drivers. The introduction of a new legal vice opens up a world of opportunity for entrepreneurs beyond just growing and selling the plant.”  

Once again, he says the benefits aren’t limited to growers or manufacturers. “Entrepreneurs and small business owners are asking how they can use marijuana to their benefit,” he says. “That goes for accountants, web designers, masseuses, hotel operators, restaurant and bar operators. Could they open a marijuana-friendly restaurant? Maybe you serve a kale and cannabis salad, actually using it in the food preparation rather than just letting people smoke a joint. 

“The introduction of a new legal vice opens up a world of opportunity for entrepreneurs beyond just growing and selling the plant.”

So what about New Zealand?

Once upon a time, dreadlocked Green MP Nándor Tánczos was pretty much a lone voice in the wilderness calling for the legalisation of marijuana in New Zealand. 

Not any more. 

Associate Health Minister Peter Dunne’s decision in June to approve the use of California-produced cannabinoid oil product Elixinol for the first time in New Zealand to help a teenage boy suffering from seizures was one sign changes may not be out of the question. 

And the move by retiring Waikato Police District Commander Win van der Velde to speak out in favour of decriminalising cannabis is another indication.

The National Government has been at pains to stress there are no active legislative efforts to legalise or decriminalise marijuana in New Zealand, but if legislation continues to spread in the States, and other nations follow its lead, New Zealand is likely to get swept up in the rising tide of reform. As we’ve seen with gay marriage, things can change quickly these days, even after years of stagnation.

The idea that taking a tough stance on drugs has largely failed to reduce harm is now gaining credence in New Zealand. As Ross Bell, CEO of the Drug Foundation, told stuff.co.nz in July: “We followed the US into the war on drugs and I think we are going to join them in the peace movement as well.” 

Would Kiwi entrepreneurs be interested in cannabis as a commercial proposition? It’s hard to know, as people Idealog contacted were very reluctant to get involved in the debate.

But TradeMe founder and former boss Sam Morgan did believe legalisation should go ahead. 

“The bigger issue is that, like alcohol prohibition before it, the war on drugs has failed. Marijuana and other recreational drugs should be legalised, controlled and taxed. This will leave criminals to focus their attention on much more profitable areas such as cyber-crime, and reduce significant cost and social harm.”

Image: TradeMe founder Sam Morgan

Matt Bowden, the infamous party pills innovator, was instrumental in the development of the Psychoactive Substances Act, which regulates legal highs and which many believe could be easily used in the legalisation of marijuana. 

“I expect here the recreational users will have to go to the back of the queue and let the medical products come first,” he says. “After the medical is out there, I guess we will see gradual release through quite restrictive, tightly monitored, systems for recreational consumers.”

If marijuana’s legal status in New Zealand changes, it’s the third option, full legalisation for adult use, that will provide opportunities for local entrepreneurs to make money. 

“It will be big business,” says the owner of a retailer holding a legal high licence, who’s been in the industry for years. “Like in the States, people are realising there’s this huge potential, both recreational and medical.”

Huge potential

Colorado’s experience gives some idea of what might happen if New Zealand had a fully-open market. Colorado has a similar population to New Zealand (5.36m versus 4.47m in 2014). And two years after marijuana was legalised in Colorado, total sales reached almost $US700 million, with the state reaping $US76m in tax.

It’s hard to know exactly how much weed New Zealanders would consume if it was legal, but the figures we have show that 9% of Colorado residents used marijuana at least once a month in 2014, versus 14.6% New Zealanders who said they had used the drug in the last 12 months (this latter according to the latest UN Drug report). 

Dr Chris Wilkins, who heads Massey University’s Centre for Social and Health Outcomes and Research, studied the illegal marijuana market in 2001 and estimated it to be worth between $131 m and $249 m annually, with his best guess at $190 m, though he cautions that the calculations may not be much use in estimating the potential legal market. 

“The size of the market as we calculated it is the size of the illegal market and because it is illegal, the price is higher than it would be under a legal market. So the size of the market may be smaller than the existing illegal market, even if there are more users and buyers.”

Image: Dr Chris Wilkins, head of Massey University’s The SHORE and Wh?riki Research Centre

He also warns about reading too much into Colorado’s experiences so far. 

“It’s quite early days, so I think you have to be a bit cautious about looking at Colorado now and saying that that’s what it’s going to be like. There are still a lot of things to happen there in terms of developing the commercial market, the kinds of costs saving you might get over time and whether the user base is going to grow.”

Social costs

“The other thing to keep in mind is sure you’re going to create a big legal market, but what we know from alcohol and tobacco is that they’re responsible for a huge amount of social cost: driving accidents, poor health, poor educational achievement, crime, poverty, social welfare dependence. 

“So you might get an initial financial boost in terms of taxation but there could be a whole raft of social costs that you’re eventually going to have to pay for. 

“[In addition] you could argue that if you had a legal cannabis market, maybe you would have smaller alcohol and tobacco markets. But that’s not a question anyone has the answer to.”

The legal high retailer, who spoke to Idealog only on condition of anonymity, says the popularity of synthetic cannabis in New Zealand during the period when it was legal, showed people don’t want to break the law.

“They’d prefer not to be criminals.”

Creative opportunities

Brand strategist Jill Brinsdon, who heads marketing and advertising agency Radiation, says legalising marijuana would create significant opportunities for creative marketing and branding – as it has for the craft beer market. 

“If it sits in the same realm as alcohol, the opportunities will be enormous. The business of legalised escapism from the human condition, there’ll always be a big market for that. 

“We would expect spectacular branding and design. They’ll follow in the footsteps of all the independent craft beers who are marketing themselves beautifully.”

Image: Brand strategist Jill Brinsdon, Radiation

The legal high retailer agrees: “I don’t think this is a tobacco industry model. In the States and Amsterdam, you don’t see big business that involved. What you see is a lot of small business. 

“I don’t think Marlboro is going to be able to put out a packet of joints and sell them at a dairy. I would guess that most people who are marijuana smokers wouldn’t want to deal with those type of companies. They want something local, not something grown somewhere random and sprayed with God-knows-what.”

When it comes to making money off legal marijuana, US consultant Christian Hageseth advocates an holistic approach.

“I’ve often looked at the gold rush in the United States of the 1860s, and the people who made the most from the gold rush weren’t the gold miners,” he says. “They were the people who sold the picks and the shovels to the gold miners, the people who had hotels for gold miners. Levi Strauss, the blue jeans maker, is probably the guy who made the most.

“So if marijuana were legalised in New Zealand, as an entrepreneur, look at everything. You don’t have to just get in and grow the plant. You don’t just have to sell it at retail. Create a better vape pen [a hand-held vaporiser for “smoking” pot]. Supply all the packaging for the product. Provide outsourced services for staffing temporary labour. 

“There are a lot of ways to profit in the marijuana business where you’re not involved in the cultivation or sale of it, but rather supporting the industry in some significant way. Entrepreneurs should know that wealth creation, the opportunity to innovate, and the ability to be creative in a business sense is not relegated to growing and selling marijuana.”

Colorado versus New Zealand

Colorado legalised marijuana sales in 2012. Adults over 21 can legally possess 1oz (28g), and grow up to six cannabis plants in a private, locked space. Residents can buy 1oz at licensed retail stores, with non-residents allowed ¼oz (7g). It can’t be consumed openly or in public.

This infographic gives a good idea of the value of that legalised trade:

Meanwhile, the illicit marijuana market in New Zealand is worth $131m – $190m, according to Dr Chris WIlkins at Massey University. Wilkins, who based his figures on interviews with frequent drug users – the most recent in 2013, came up with some interesting findings:

  •  A ‘tinny’ (1.5g) costs $20, no matter which of the main centres you are in. But if you buy by the ounce, you are better off getting your marijuana in Wellington, where it’s $296/oz, as opposed to Auckland ($326) or Christchurch ($342) .
  •  It’s getting easier to get hold of. 82% of frequent drug users said they can buy marijuana in one hour or less, up from 75% in 2006. 45% said it takes less than 20 minutes.
  •  Most people still buy cannabis from a private house (82%) or a tinny house (49%). But access is growing from other places too. 27% of people got it from a public place like a park, up from 12% in 2009, 17% bought it at a pub or club (10% in 2009), and 8% at their school or tertiary institution (2%). 9% bought it from work, but only 3% went online.
  •  Most frequent drug users got their cannabis from friends (71%) or acquaintances (57%), though buying from drug dealers and gang members is also popular (61% and 35% respectively). Just over 20% bought from family members.
  •  The police seized over 155,000 cannabis plants in 2013, up 30% on 2012.
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