Who will be the first “Wal-Mart of weed”?

How pot and paraphernalia shops are adopting the techniques of modern retail

Corporations, franchises and mega-dispensaries have been cashing in on medical marijuana for years. Now, with recreational marijuana legal in Colorado, businesses are vying for an even larger slice of the pot pie. The cannabis industry is poised to grow 64 percent to $2.34 billion nationwide by the end of this year, according to research by ArcView Group, an angel investor network in San Francisco. If other states continue the push toward pot legalization, the industry could reach $10.2 billion in the next five years. Retailers that previously catered to medical marijuana patients and growers are competing to become the first big-box store of recreational weed. In the process, they’re using the science of modern retail — from behavioral economics, to product pricing and positioning and real-time data analysis — to grow business. For example, Denver-based Medicine Man, one of the state’s largest medical marijuana dispensaries, is doubling growing capacity and investing millions in a bid to become the Costco of marijuana. Rocky Mountain Pure Retail Marijuana recently proposed a $5 million facility that would include a 6,000-square-foot retail operation in the town of Eagle, Colorado. WeGrow, a franchise of indoor gardening stores, has locations in California and Arizona and plans to expand into Colorado, Michigan and New Jersey soon. It was the first business of its kind to openly cater to medical marijuana cultivators, though it does not sell the plant itself in-store. The company has been called the “Wal-Mart of Weed.” Retail analyst Jeff Green doesn’t quite buy that analogy. “Because the category is small…even if they were to add marijuana, once it becomes legalized in the California stores, they’re still only carving out maybe 5,000 square feet,” he says of WeGrow. “A typical Wal-Mart is 120,000 square feet, because it sells so many different things.” But, from a depth-of-product perspective, he adds, stores that sell a little bit of everything in the cannabis category are similar to the discount superstore. The real opportunity for retail profit may come from paraphernalia and peripheral products. Derek Peterson, founder and CEO of Terra Tech Corp, an urban agriculture business that recently became the first publicly traded company to apply for a marijuana growing permit, has compared the modern-day “green rush” to the California Gold Rush of the mid-1800s. “Everybody thinks the guys coming out of the hills with giant nuggets of gold in their hands were getting rich,” Peterson said in an interview with HDNet’s “World Report.” “Ultimately it was the Sears catalog, Levi-Strauss [and the companies] that provided the equipment necessary for the gold miner,” Peterson added. “We’re seeing a lot of parallels in the market today.” Green agrees. While many dispensaries remain not-for-profit, “there’s still plenty of profit potential in the peripheral products,” he says. Marijuana is a retail category and just like any other category, it’s going to need branding. Diego Pellicer, co-founded by Microsoft executive turned marijuana entrepreneur Jamen Shively, is the first legal, premium brand of marijuana in the United States. Shively has said he intends to eventually capture 40 percent of the market worldwide. That market share may not happen anytime soon. Green says we’re still on an “acceptance curve,” which will limit expansion in the immediate future. For example, explains Green,“It’s not mainstream accepted among retail real-estate developers and shopping center owners. They feel that having a marijuana store in their center devalues that center, which means then that those operators have got to find what I would call ‘distressed real estate’ to locate.” He is quick to add, however, that marijuana retail is a destination — stores don’t need the convenience factor of a supermarket or gas station. Green envisions a future where pot retailers will use customer loyalty programs as sophisticated as those currently employed by drug stores and grocery chains. By having a frequent shopper system that records all of an individual’s purchase history, likes and dislikes, Green says the recreational marijuana industry will be able to market their product effectively. “Sophisticated retailers know exactly who is buying their merchandise, and what they’re buying,” he adds.