How can cannabis consumption lounges turn a profit?

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On paper, the idea seems sound: Customers spending time and gobs of money at a welcoming and exciting place to congregate that’s centered around cannabis instead of alcohol.

But as illustrated by the recent closure of Las Vegas’ first marijuana consumption lounge after just a year in business, market conditions and onerous regulations mean it’s still challenging for cannabis social spaces to turn a profit, industry observers told MJBizDaily.

Though entrepreneurs nationwide are still willing to jump into the lounge act, some experts caution that the open-and-shut case at Thrive Cannabis Marketplace’s Smoke and Mirrors consumption lounge in Las Vegas should serve as a warning.

“For years, lounges have always been talked about as some kind of game change for dispensaries, but it just hasn’t come to pass,” Alex Freedman, the president of the California Cannabis Operators Association, told MJBizDaily.

While successful stores sometimes appreciate the additional allure of a lounge, “businesses that have made it their core are struggling,” he added.

“The hype that surrounded lounges six years ago hasn’t matched the reality that’s set in.”

‘Regulators are overthinking it’

That “reality” should serve as a wake-up call for regulators and policymakers still tweaking rules, as they are in Massachusetts.

Slapping strict limits on what lounges can sell – or, more common, what they can’t – as well as stiff licensing fees and expensive build-out requirements help set up lounges to fail, critics say.

“Regulators are overthinking it, treating these things as major public health issues when they’re really not,” Freedman added.

“We’ve yet to understand the best way to permit cannabis retail lounges to make money.”

Despite early struggles, consumption lounges remain a key part of the post-recreational marijuana legalization vision for many advocates and industry consultants.

Experts point to lounges’ social benefits as well as the practical solution they offer to problems posed by laws banning smoking in public or rental housing.

Some observers contend lounges could become even more vital if a growing backlash against smoking marijuana in public in recently legalized states such as New York results in a scaling back of where cannabis can be consumed.

For some, lounges signal a welcoming return to a more permissive era.

In the medical marijuana era, dispensaries in California also offered on-site consumption – sometimes limited to vaporizer devices, other times including indoor smoking.

But industrywide, consumption lounges have been slow to follow retail in the adult-use legalization era.

Twelve states, or just about half the markets with adult-use legalization, allow marijuana consumption lounges.

That includes Maryland, where Gov. Wes Moore recently signed a bill into law that allows cannabis regulators to license up to 15 lounges statewide.

Local buy-in to marijuana consumption lounges is key

More markets are poised to follow, but marijuana consumption lounges still need local buy-in.

Many cities in California, including otherwise-cannabis-friendly locales such as Berkeley and San Jose, forbid lounges.

And as the situations in Maryland and Massachusetts illustrate, what policymakers end up offering isn’t always realistic.

The Massachusetts Cannabis Control Commission is still fine-tuning marijuana consumption rules in a process that began years ago.

The state might eventually allow existing licensees to add on-site consumption and could offer non-cannabis businesses, such as a coffee shop or an art gallery, a so-called “hospitality license” that permits patrons to consume marijuana.

For now, regulators are continuing to balance input from operators, who are seeking a sustainable business model, with leery local officials concerned about strict clean-air laws and keen to discourage marijuana-intoxicated driving.

But as Kyle Moon, the chief operating officer of The Summit Lounge, a members-only lounge in Worcester, Massachusetts, recently warned, it’s easy to make lounges cost-prohibitive, with:

“If the (Massachusetts) regulations follow the trend (in the) cannabis (industry), which in my opinion is way overregulated, you’re going to end up in a situation where no one wants to be there,” Moon told the Boston University Statehouse Program.

“The products are too expensive.”

Consumption lounge limitations could be undoing

“The compliance is an absolute nightmare,” Moon said, “and then you’re trying to run a hospitality business where the margins are super slim as is.”

That’s been the overall experience in California, where it took several years for a law allowing marijuana lounges to sell additional items – such as a bottle of water or a sandwich – to pass the state Legislature and be signed by Gov. Gavin Newsom.

Operators in Nevada appear to grasp the situation.

Regulators have issued 21 conditional-use permits to would-be lounge operators who so far have declined to move forward.

And Maryland might have already set up lounges to struggle.

Under that state’s new law, smoking and vaping are prohibited outright at lounges.

That limits operators to offering edibles or, under the new state rules, marijuana beverages with no more than 5 milligrams of THC.

And, in what many observers say is the defeating limiting factor, alcohol consumption is strictly forbidden.

That puts marijuana consumption lounges in competition with existing businesses such as bars, restaurants and nightclubs where cannabis use is already condoned, if not expressly allowed.

Lounges might need to focus on offering ‘experience’

They also must figure out a way to demonstrate that visiting a consumption lounge is a value-add.

To do that, lounges must offer something that might feel nebulous for some entrepreneurs: an “experience.”

“When it comes to cannabis consumption spaces/lounges and whether they’re ‘worth the investment,’” the answer is a strong yes – if they are approached through the lens of the experience economy rather than as commodity retail,” consultant Brian Applegarth told MJBizDaily via email.

“Unlike traditional cannabis retail, which follows a ‘product sale/time saved’ model (focused on speed, convenience, and product), the experience economy model is built on ‘time well spent,’” he added.

“That means unlocking multiple revenue streams – on-site purchases, events, tourism tie-ins, extended dwell time, content creation, data collection, and brand activations – all of which drive higher engagement and long-term value.”

But that also means doing a lot more than setting up a space for customers to use marijuana.

And that will prompt serious consideration for the retailer or license-seeker wondering if a lounge will add anything to a business’ bottom line.

“Very few people will pay to simply sit in a bland room and consume cannabis, which is the most that is allowed in most places in the country that allow lounges,” said Hirsh Jain, a Los Angeles-based consultant and lecturer in policy at the University of Nevada, Las Vegas.

And even if customers do choose to pay to sit and consume, most simply won’t consume enough for the lounge to generate adequate revenue.

“It’s hard to make the case that opening a cannabis lounge – under the existing regulatory frameworks being adopted across the country – is worth it if one’s goal is to actually make money,” Jain added.

“It’s clear that in order for cannabis lounges to become a sustainable business, the regulatory frameworks being adopted across the country must change.”

Chris Roberts can be reached at chris.roberts@mjbizdaily.com.

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How can cannabis consumption lounges turn a profit?