Attorney Joel Russman, a guest speaker at the 2011 HempCon medical marijuana convention in Denver — held during the first weekend of October — had some daunting advice for young entrepreneurs hoping to break into Colorado’s lucrative medical marijuana industry. Speaking to a small crowd of forty or so attendees, Russman explained that the best marketing campaign for a new marijuana business is no marketing campaign at all. “Don’t have a high profile,” Russman said, “because you don’t want to attract a bunch of extra attention.” His reasoning, which is difficult to argue with, is that it’s probably not the best idea to brag publicly about your successful business if you’re breaking federal law.
The timing of his warning was oddly prophetic. Exactly a week later, California’s four U.S. attorneys appeared together at a news conference in Sacramento to announce a crackdown on several medical marijuana dispensaries in the state suspected of being involved in illegal activity. “The law has been hijacked by profiteers who are motivated not by compassion but by money,” said San Francisco U.S. Attorney Melinda Haag. “Where there’s marijuana, there’s money and lots of it.” It was a ominous message to anybody in the medical marijuana trade, but especially for owners of any of the 800-plus dispensaries in Colorado. There are currently 16 states that allow some form of legalized medical marijuana, but only Colorado allows marijuana businesses to operate as, well, businesses. It’s the first (and for the moment, sole) for-profit marijuana commercial marketplace in the United States. California may be bigger — there are almost 1000 dispensaries in Los Angeles alone — but Colorado’s industry more closely matches the profile of “profiteers” that Haag warned were in the federal government’s crosshairs.
At least on paper, Colorado is in the midst of a marijuana economic boom. Between 2000 — when Colorado voters legalized marijuana for medicinal purposes with Amendment 20 — and 2008, Colorado issued roughly 2,000 medical marijuana cards to patients living in the state. By 2011, that number had jumped to over 127,000 paying customers, according to the Colorado Medical Marijuana Registry, and at least 25,000 more have applications pending. In uncertain economic times, medical marijuana would appear to be a risk-free financial investment. But while the customer base is undeniable, the challenge for would-be marijuana tycoons is finding a way to market a product that is, at least on a national level, illegal. How does a marijuana company stay competitive in an increasingly competitive business, luring customers away from the newest dispensary that’s opened down the block, when all wisdom suggests that the key to long-term survival in the cannabis trade, even the “for profit” cannabis trade, means being as inconspicuous as possible?
Despite being “for-profit,” medical marijuana in Colorado isn’t churning out any millionaires, at least not yet. Most dispensary owners will laugh when asked about their profits. Michael Bellingham, who worked at a London marketing firm, a New York ad agency and in sales for Playboy magazine before getting into the Colorado cannabis business, is the co-owner of one of Boulder’s oldest and most respected medical marijuana suppliers, MM Dispensary, and he claims he has yet to make a dime, even after investing almost two years and around $120,000 into his company. “One day I’d like to be on the payroll,” he laughs. But Bellingham isn’t discouraged, as medical marijuana is far from a conventional business. For one thing, he says, you have to be 100% self-financed. “You can’t go to a bank and say, ‘I have a business plan and I need to borrow money.’ Banks are federally-regulated and marijuana is against federal law, so they won’t touch you.” There are also complicated and expensive state regulations, like the 70/30 rule, which requires dispensaries to produce no less than 70% of their own cannabis inventory. “Some people got into this business growing in their basements,” Bellingham says. “Now they’ve got to run 15,000 foot warehouses. It’s basically farming. And farming is expensive and mostly unprofitable.” Which leaves little capital left over for a marketing campaign.
However, even if money is no object, opinions are mixed on how medical marijuana should or shouldn’t be marketed. Russman, a business lawyer who lives and works in Denver, claims there is plenty of evidence to suggest that being too vocal can lead to early retirement. He points to Chris Bartkowicz, the fully-licensed owner of the Highland Ranch dispensary in Denver who was arrested in 2010 for, as Russman sees it, making himself an easy target. “He went on the 10 o’clock news,” Russman laughs. “He bragged about the $500,000 worth of marijuana he was growing in his basement a block away from an elementary school. That’s not marketing, that’s just stupid.”
Mike Smith, one of the five co-owners of Riverside, California-based marketing firm 420 Studios, has a very different philosophy when it comes to promoting marijuana businesses, legal or otherwise. “You have to go balls out,” he says. He’s seen countless dispensaries fail, he insists, because of timidity and fear. “You’re already starting our with your hands tied behind your back because of the law,” he says. “If you’re too secretive about your product and the message you’re trying to get out there, then you’re going to go bankrupt.” He suggests selling marijuana in much the same way that beer companies sell beer, or cigarette companies sell cigarettes; with sex. “If you’re not using sexy girls to market your product, you’re handicapping yourself and you’re an idiot,” he says. He claims that he’s learned everything he ever needed to know about selling marijuana from pornography. “They’re geniuses when it comes to marketing,” he says.
2011‘s HempCon, where there was no shortage of sexuality on display, certainly followed that business model. A classified ad for HempCon models posted in Denver’s Craigslist gives a sense of the mood: “Women with tattoos most welcome,” the ad read. “Kinky women to the top of list.” Intermixed with the convention’s business-minded panel discussions about medical marijuana, with names like “Banking Solutions for the Cannabis Industry” and “Dispensary Management,” there were far less serious and more provocative events planned, like “Hot Ass” and “Best Orgasm” contests, both of which were cancelled when William Breathes, a marijuana reviewer for Denver’s alternative weekly newspaper Westworld, criticized the convention’s overt sexualizing of marijuana in his column. Only the Miss HempCon competition stayed on the schedule.
“In all the advertising for HempCon, they were blatantly bragging, ‘We’re a medical marijuana convention! Medical! Medical!’ The word medical was used in everything,” Breathes says. “I don’t understand what hot asses have to do with medical marijuana.” And HempCon isn’t the only one, he says. At other marijuana events like KushCon and the Colorado Cannabis Convention, there has been no shortage of “sexy girls dressed up like sexy nurses handing out coupons for local dispensaries, or sexy girls sitting on choppers.” Bob Selan, the co-founder and CEO of DBDotCom, LLC, the Calabasas, CA-based media company that produces KushCon, agrees that bikini models have overrun many cannabis conventions, and he went so far as to instigate a dress code at last December’s KushCon event. But, he says, he understands why marijuana businesses market themselves with sex. According to the Colorado Medical Marijuana Registry, he says, 68 percent of medical marijuana card-holders are male, and the average age is 41. “If you’re going after a young male demographic, you’re going to do the same thing that Budweiser or Miller or anyone else does,” the 57-year-old Selan says. “You try to make your product as attractive as you can to your target audience.”
Outside of conventions, most Colorado medical marijuana dispensaries are hesitant about self-promotion. They avoid television commercials or billboards, and even websites are a rarity. The main source of marketing tends to be print ads in local newspapers — some of which, like the Colorado Springs Independent and Denver’s Westworld, have entire supplements devoted to medical marijuana, where dispensaries with un-medical sounding names like Daddy Fat Sacks, Cannamart and Mr. Stinky’s compete for attention. And then there are the sidewalk sign flippers. Denver city attorney David Broadwell says that he used to laugh when hearing stories about the sign flippers in Los Angeles. “One of our councilmen came back from Venice Beach and told us about all the girls in bikinis down on the boardwalk, holding up signs for the city’s marijuana dispensaries,” he says. “We just thought it was so outrageous.” But eventually those sign flippers started turning up on Denver street corners, he says, advertising dispensaries with names that seemed to poke fun at the medical pretense, like the Health Joint, Grateful Meds, and Chronic Wellness. “Those who defend medical marijuana always say, ‘Well it’s really no different from percocet,” Broadwell says. “Well you don’t see percocet advertised with sign flippers out on the corner.”
Boulder, Colorado councilwoman KC Becker noticed the same thing, and she lobbied the Boulder City Council for stricter regulations on the types of images and messages that could be used to advertise local dispensaries. “They have ads offering 2-for-1 specials or freaky fridays,” Becker says. “It was clearly being marketed in a way that was appealing to recreational interests.” A new ordinance was unanimously passed this September, banning dispensaries in the Boulder area from using language inconsistent with legal medicinal use, whether in newspaper ads or signs flashed on sidewalks. The difference between medicinal and recreational language, says Becker, is obvious. “If an ad brags about having ‘the sweetest bud this side of the border,’ I don’t see how that helps me determine its medical application,” she laughs. “Is that really what I’m looking for in medicine, the sweetest bud?”
It isn’t just politicians looking to change the way medical marijuana markets itself. Selan, who also runs the marijuana lifestyle magazine Kush, is constantly advising aspiring and veteran dispensary owners to steer clear of what he calls “T&A advertising.” He tells them to put out an image of a true medical center. “Advertise with pictures of professional-looking people in your shop,” he says. “People who aren’t scary. Get away from that black market mentality. It should look and feel like a pharmacy.” Nobody thinks twice about walking into a Rite Aid or a CVS pharmacy, he says. “And that’s how dispensaries are going to survive, by putting out the message: We are legit. Look at us, we’re normal people.”
“Legitimacy” is the first word that Norton Arbelaez wants customers to think when they hear the name River Rock Wellness, the dispensary business he owns with locations in Denver and Telluride, Colorado. Although River Rock’s cannabis menu features names that sound like street slang (Grape Trainwreck, Buddha’s Sister, Jack Frost and Jilly Bean #4, among others), Arbelaez doesn’t think this is grounds for criticism. “Certainly we can agree that neither the pharmaceutical industry with its near ubiquitous erectile dysfunction and mood enhancer ads, nor the beer and liquor sector with its blatant sexuality hold the high ground when it comes to tasteful publicity,” he says. He believes medical marijuana is slowly evolving beyond its counter-culture past, and patients are beginning to “gravitate towards businesses that are more high-end health food store than head shop.”
Other than the colorful cannabis terminology, River Rock has little else in common with other medical marijuana operations in the area. Arbelaez and his partners have taken big strides to be the poster children of regulation obedience, following state guidelines for medical marijuana to an almost fanatical degree. “Compliance, compliance, compliance,” Arbelaez says. “That’s it. That’s why I’m still here. That’s why I’m still standing.” He’s invested over $45,000 in surveillance equipment alone, allowing Colorado regulators to watch every move at River Rock “from seed to sale.” And he wants the competition held to the same standards, not just in terms of technology — “RF-ID chips, 360 HD cameras, eye in the sky, that’s the way to go,” Arbelaez says — but also profiling new entrepreneurs trying to get a foothold in the industry. “I’d like to see it that you can’t own a dispensary in the state of Colorado unless you’re a person of good moral character,” Arbelaez says. “If you had a drug felony ever, you may not be an owner. If you haven’t paid your taxes, you may not be an owner. Even if you’re behind on your child support, you should be kept out.”
Arbelaez isn’t fazed by criticism that his anti-marketing is actually more competitive than the dispensary newspaper ads offering “naughty nurses.” He’s heard complaints that he’s essentially hobbling his competition by encouraging overly strict guidelines and exorbitant compliance costs. In his defense, Arbelaez points out that “regulated Colorado medical marijuana is not yet a free-market in any real sense, as the State plays a fundamental role in harnessing both the demand and supply side of the equation.” But he’s also happy to provide evidence that his strategy is working. “I’ve seen 50% attrition in the last few years,” Arbelaez says. “There are half as many people in this business as there were when I got into it.”
Wanda James and Scott Durrah, the husband-and-wife owners of Simply Pure, a Denver-based manufacturer of gourmet cannabis edibles launched earlier this year, have taken a more media-savvy approach to attracting customers. They’ve got a slick company website that doesn’t feature semi-naked women or marijuana puns — their menu includes such un-psychedelic-sounding items like “mango salsa,” “apple butter,” and “marinara” — and they’ve received more national exposure than any of their medical marijuana peers, with coverage on Comedy Central’s The Daily Show, the Wall Street Journal and CNBC. Even in casual conversation, James and Durrah talk in media-ready sound bytes. “It’s the evolution of medicated edibles,” says James. “It’s a product that’s not only good for you, it makes you feel better,” says Durrah. But despite their ambitious efforts to appeal to mainstream middle-of-the-road America, they’ve still repeatedly hit the glass ceiling of their industry. “We’re limited in terms of the publications and places that allow us to advertise,” says James. “It’s interesting, because our restaurant” — they also operate a Caribbean-cuisine 8 Rivers eatery in Denver with non-cannabis entrees — “serves 86 different types of rum, and I can advertise that anywhere. With marijuana, our options are much more limited. I’m not knocking rum by any stretch of the imagination, but it is funny how that works.”
Depending on who you talk to, the future of medical marijuana as a for-profit industry in Colorado is either destined for greatness or disaster. More than a few insiders make bold predictions that some unknown dispensary on the verge of bankruptcy today could become the Coca-Cola or Starbucks of marijuana tomorrow. “I wouldn’t be surprised if marijuana becomes a branded product like California wines,” says KushCon’s Bob Selan. Not so fast, says Michelle LaMay, the Chair of Willie Nelson’s TeaPOT Party in Colorado and a long-time marijuana legalization advocate. She would rather the for-profit side of marijuana disappear completely. “You’re not talking to a pro-dispensary person,” LaMay says. “I’ve never met so many greedy slugs in my whole life. I’ve taken calls from over 3000 people who want to start their own cannabis business, and they’re all out-of-towners convinced there’s a fortune to be made here. I’d rather they went somewhere else and left us alone.” There’s not much more optimism from Tom Raynes, the executive director of the Colorado District Attorneys Council. “I like to call it an assumption-of-risk business,” he says. “Nothing the state does can insulate them from federal prosecution. No matter what (Colorado’s) legislative structure is, at any moment in time the federal government can exercise it’s power of preemption and do what they want.” In other words, he says, the best a marijuana businessperson can hope for is to make as much money as they can while making as little noise as they can until the inevitable federal hammer comes crashing down.
He might be right, but not everybody in Colorado’s medical marijuana industry is shaking in their boots. When Wanda James is told about the news conference with San Francisco U.S. Attorney Melinda Haag, in which she explained that the federal government isn’t targeting the true providers in medical marijuana, only the “profiteers… motivated not by compassion but by money,” James just laughs. “I’m kind of blown away right now,” she says. “I didn’t know that (pharmaceutical company) Pfizer was a non-profit organization. That’s amazing. I’m glad that they have all those compassionate people not making any money.”
(This story originally appeared, in a slightly different form, in the November 18th, 2011 issue of Bloomberg Businessweek.)