Inspired by the Cannabis Intelligence Briefing Series Report:
California: Lessons from the World’s Largest Cannabis Market
Analysis of the emerging California adult-use market, detailed in the new Cannabis Intelligence Briefing by Arcview Market Research and BDS Analytics: “California: Lessons from the World’s Largest Cannabis Market”, tells the story of the Golden State’s transition from a massive unregulated medical market to a comprehensively regulated adult-use market after the launch of adult-use sales on Jan. 1, 2018. The report covers the first years of legal sales numbers, the development of the market under the new regulated supply chain, trends in investment, as well as a thorough county-by-county breakdown of the world’s largest cannabis market.
While the early legal industry had its share of struggles, there are also segments of California’s market that were able to succeed in the early days.
While California’s first year of legal sales failed to meet the expectations that many had for the world’s largest cannabis market, it is clear that the disruptions from the changeover to a regulated supply chain are over.
Further evaluation of market trends in 2018 found a small upside for legal operators even with the lower sales total, as the much lower total number of licensees and brands spelled out higher revenue for those who got into the market early and capitalized on first-mover advantage. In 2019, California’s market is on track to overtake the previous highest annual sales total set in 2017.
The decline in the sales total from 2017 to 2018 was due to a multitude of factors, including a more robust illicit market than any other state has in play; but a primary cause for the precipitous drop in sales following transition was the burdensome regulatory and tax load that came with the move to adult-use sales. Legal cannabis in California is subject to a tax load higher than most other legal markets, with a state excise tax, cultivation tax, sales tax and as local taxes and fees inflating the retail cost of cannabis since the implementation of comprehensive regulation.
The launch of California’s legal market signaled huge opportunity for investors, many of whom have begun to refocus on the Golden State. While many of the big-money deals in the cannabis industry were set in stone in the run-up to the adult-use launch, there has been an increasing interest in the California market since the dive that multi-state operator stocks took earlier in 2019.
Investment strategies run the gamut from existing in-state businesses using capital raises and IPOs to expand their reach, to multi-state and Canadian operators using the acquisition of existing brands and entities to find a sizable foothold in the state. The report covers the top investment partnerships and deals, whether the players are looking to take the lion’s share of the California market or use the state as a springboard to launch their brand into future legal markets.
With a lower per capita consumption rate than many other adult-use markets, California’s market potential is mostly due to the state’s large population—nearly 30 million adults over the age of 21 in 2019. Despite this massive consumer base, market growth has been limited by a lack of retailer coverage, with local bans and sluggish license approval limiting the growth of retailer numbers.
The ability for counties and cities to ban commercial cannabis was a feature of the Adult Use of Marijuana Act meant to appease voters hesitant to see the industry spread into their communities unchecked and has resulted in many of California’s municipalities banning or limiting commercial activity. Still, the potential economic development, and tax revenue, that the industry offers is a powerful draw that has been leading many cities to override county bans, creating space for industry growth where its prospects previously seemed limited. Currently, the restriction on access to legal cannabis has a silver lining for some already in the industry, as the number of consumers per retailer is much higher in the state than in many other markets, allowing the retailers with first-mover advantage to capitalize off their larger market share.
California’s road to becoming an adult-use market certainly had its bumps, but some early operators still stood to reap unexpected benefits from the shaky roll-out. Still, the market has adjusted to the new regulated supply chain, and the stage is set for California to grow into the powerhouse of legal cannabis that many have expected it to be.
Insights featured in the new report and this blog post were produced by BDS Analytics Industry Intelligence group.