Our “Cannabis Market Lifecycles: What Drives (or Kills) Growth” webinar was hosted by Roy Bingham, Co-Founder & CEO; Tom Adams, Managing Director & Principal Analyst, Industry Intelligence; and, Antonette Goroch, Senior Analyst, Industry Intelligence.
Not all markets are created equal. Some like Arizona have had a steady climb. Some like Oregon exploded right out of the gate. And, some like California have initially disappointed, especially impacting those who made significant early investments in the market.
Watch the webinar or read the presentation to gain insights into the factors that affect the success of new and existing markets.
Thank you very much everyone for joining us, we hope we’re going to explain something that has immediate and valuable benefits for you.
So we’re going to start talking about, initially, the three phases of market growth that we have observed in the cannabis industry, in the legal cannabis industry, in the United States. And you’ll see that there are generalizable conclusions that can be made from what we have seen so far.
So here is a classic example, a market about which most of us have heard a lot, and we have the good fortune of having very comprehensive data at BDS Analytics about the Colorado market, together with the other big western states like California, Oregon, Arizona and Nevada.
So here, of course, we see in Colorado you had the inception phase, where we had a medical only market. It was relatively small. In 2011, about 200 million dollars in sales. And it was growing steadily at 45% to 2012, and then just 12% in 2013. And then, of course, 2014 was the launch of the legal adult use market in Colorado, the first of its kind in the nation. And we saw this dramatic growth in the overall market. We actually saw continuing growth in the medical market, as you saw going from 333 million to 385.
But suddenly, this big new thing started off the adult use market at 313million. And so over 100% growth in that phase. The phase of hyper growth,where you saw continued growth in the 30%’s to 40% range, and very staggering compound growth rates. This, of course, we’re seeing in many other markets. It’s a generalizable phenomenon of the growth of the cannabis industry, as adult use takes off or as medical use with relatively broad criteria takes off.
Now, of course, it’s a bit sad, but it’s a fact of every market, you know, what goes up eventually has to come down. And so we’re seeing a maturity phase in Colorado with growth in 2018 of only about 2% versus 2017. And in fact, for the first time, we’re seeing the occasional month where there are actually lower sales in the equivalent month of the prior year.
So this is how a new state market grows. And we could look at the next slide, we’ll have a look at some of the factors in the inception phase. You have this relative lack of regulatory framework. That all has to be established by the state authorities, of course. It’s predominantly medical use. And consumer attitudes are fairly cautious. Most people embracing the idea that legal cannabis is beneficial, but only a small proportion of the population actually going to the trouble of getting a medical license and purchasing product.
Then we got into the hyper growth phase, typically with adult use, but not always. Arizona is in a hyper growth phase right now with only medical use.A shift in the nature of the products that are available, so becoming more convenient, more consumer friendly products, such as concentrates and ingestibles. And as we all know from experiences in places like Oregon, and toa lesser extent Colorado, but also in California, there could be short term supply chain issues. And those can be both self created among the brands, and among the dispensaries. But also imposed by the regulatory authorities.
For example, requiring certain laboratory tests without enough laboratories actually being licensed yet in order to implement those tests. Big bottlenecks can occur during this phase. And then, of course, in a maturity phase, which we’re seeing in a number of states, especially Colorado at the present time, we see the development of brands and the importance of brands becoming relatively well known and well adopted and trusted.
We also see more of these retail friendly products like vapes and pre-rolls. And the emergence of market leaders who are driving both their own sales and driving overall category and market growth. Another aspect of this phase is typically a decline in average prices, as well. And of course, more and more consumers choosing to purchase in the stores, because it’s an every day opportunity for people.
Now, what we have seen, of course, is that this pattern repeats itself state by state. And as you can see here in the charts we put together, in purple California, a little bit different, because it got started very, very early and continued with its medical market that was relatively lightly regulated for a long period of time.
As I mentioned, Colorado went into this hyper growth phase in 2014, ’15, ’16. And then of course, Oregon and Washington joined in 2015, ’16, ’17. Then we saw Nevada, Washington continuing. And Arizona taking off. And now we’re still seeing Oregon, Nevada and Arizona in this hyper growth phase. And of course what we’re also seeing is increasing diversification.
As you can see, the dark or the top there, “other”, other states is getting bigger and bigger and bigger, as more and more states have medical use, and a few smaller states have significant adult use, as well. So we’re seeing, it’s no longer this western state phenomenon. There are many other states now that have markets that are in the inception phase, and a few entering hyper growth. And this is why one could be so confident about the overall market projections and our overall 27% compound growth projection for the legal cannabis market by 2022.
Now, one aspect of this is the change in behavior by consumers. We define the total population, they self define into consumers, acceptors and rejecters. So this based on our consumer insights work. And in those states, level one US states, where there is adult use legalization, 32% of adults 21+ have consumed cannabis within the past six months.
About 32% are what we call acceptors. Those are people who have not consumed in the last six months, but say “I don’t see a reason why I wouldn’t become a consumer at some point in the future.” And then 36% of the people who say “No, I’m not going to be a consumer.” And interestingly, as we’ve mentioned before, many of those are positively inclined, they just say “It’s not right for me.”
So that’s how the situation is in a level one state. Now what we see is an evolution of consumer behavior and attitude through the different three phases of growth. In the inception phase, a small percentage of the population are consumers. And of course, a significant number of those, that 15% highlighted here as an example, are consuming in the illicit market, as well as those that are consuming in the typically medical market only.
About 40% are acceptors, positively inclined, but not consuming. And then we see this rapid transition through hyper growth, bringing in about another 10 points of consumers in this phase. And then about another 10 points of consumers, until you have more than one-third of the total population that are consumers. Not necessarily frequent consumers, but have consumed in the last six months.
And of course, the large majority of them by then are consuming in the legal licensed markets, rather than in the illicit market. So this is one aspect of the evolution of markets.
Another aspect that we have seen very, very graphically in every state is the emergence of brands. So if you go back to 2014 in Colorado, 81% of product being sold was not branded, it was essentially a bag of flower. And only about 19% of the products fell into the concentrates and ingestibles categories that are typically well branded.
By 2018, as you can see, it’s getting up to 50%. And in those categories such as ingestibles, virtually every product, 98% of products are branded, and similarly in concentrates, as well. And this of course is part of the very rapid growth of brands and the emergence of leading brands.
Now, Colorado is actually behind California. California has 76% of sales are of branded products. So we’ve seen this phenomenon very consistent, and very important, because the brands are what the average consumer … not the early adopter … but the consumer that adopts through hyper growth and in the maturity phase, is recognizing. And they’re trusting those brands because theyare not expert, and they know that they are not expert, in making selections and they like the brands to help them.
So this is the market share shifts. Many of you will be familiar with this pattern, where you can see that flower has reduced to about 45% of the market, from that 69%, all the way down to 41% now in Q4 of 2018. While concentrates have now grown to 30% of the market. Ingestibles, about 15% of the market. And pre-roll product, about 8% of the market. Again, a very predictable trend that we have seen at a very consistent across all states during the three phases of maturation of the markets.
It’s an interesting subject matter, to be sure. We’re going to talk about these markets a little bit more in depth here.
So what you’re looking at are six of the seven states that are tracked by our retail tracking service, with the CAGR, between 2014 and 2018. So three of these went adult use in 2014, 2015. Those being Oregon, Washington, and Colorado.
And then California, obviously, very newly adult use. As well as Nevada,very newly adult use. And Arizona, still medical use. The growth rates do not correspond to these things. Clearly, there’s more going on than just the phases of growth. There’s different aspects at the local levels to all of these markets that have very far reaching impacts.
So let’s look a little more closely at those. So when we went and looked at these local markets more in depth, to try to see what was going on with these differences, why we couldn’t just take the model from one state, Colorado, and place it on say California, and come out with the same results.
And what we were able to see were six broad categories of how the regulatory and business landscape played out, that we could really see an impact on growth when we looked at the specificity of these different areas.
So let’s go to the first one, licensing and taxation. So what we looked at here were the total costs of licensing and taxation. So there’s so many different levels and so many different ways legalization is playing out in practice in these different markets, that the combined tax rate is hard to see at first glance.
You may have, on the one hand, a very simple scenario where there is just a sales tax and maybe an excise tax. On the other hand, you might have a bunch of different levels of taxes. Retail, medicinal, excise tax, wholesale tax. Perhaps a tax based on weight. So that was the first area that we looked at, to go and just see what is the total cost implication to the specific situation in this market.
The next area was dispensaries. So we ran some basic ratios on dispensaries, as they’re related to just the adult population. And so we were able to definitely see a span of markets where there were fewer dispensaries to the number of adults, versus ones that were very few dispensaries per capita or per adult user. So in markets like Colorado or Oregon, it was way down around 5,000 adults per dispensary. And at the other end, a state like New York, we’re seeing a ratio of I think around 300,000 to the adults, a single adult.
So, there’s a lot of implications from that. Fewer dispensaries generally mean higher prices. You find a slower top line growth overall, even though you may have higher growth on a per dispensary level. We find that the higher prices keep those overall revenues up, but they depress sales. They depress the number of consumers.
They depress the amount of activity going on. In the more mature markets, we see more dispensaries, so, in one sense, you can see evidence of a more saturated market in a place like Colorado. However, it can also be an indicator of how much there is left to grow.
So, Roy touched on this already a little bit. And basically this is looking at what percentage of the population has consumed before, what is the general public sentiment for legalizing on what basis, is there a favorable opinion towards legalizing on the basis of medical use versus recreational use?
Because these are factors that are a good indication of where the market is at, in terms of the speed with which it will be growing. So, in a state like Massachusetts where, right now, there are lots of different moratoriums, it’s sort of a slow out-of-the-gate start. You can see that in the public acceptance, as well, in the consumers, the acceptors, the rejecters.
Another are we looked at was the, what we’re calling “The Extra Legal Market”. And so this is obviously the illicit market is part of the extra legal but because of this peculiar and unique evolution of legal cannabis markets, we have a much more sophisticated extra legal market, there’s more levels of gray area.
So you do have the illicit market on the one hand, but then on the other hand, you have a situation like California’s, where there’s a very well developed gray market that began to exist in the time in between when the supply chain was truly regulated with the adult use, recreational use.
However, because of the regulations, there have been many reasons to keep that very sophisticated extra legal market alive, despite the fact that there is a regulated supply chain now. And in between that, you have more gray areas. So, the situation of, say, caregivers and a gifting economy, a little bit less so high personal cultivation limits. So these are all different aspects of the extra legal market that can impact that legal supply chain.
So this is actually two different factors of regulation. One, focusing in on that supply chain, and so those are gonna be laws on product restrictions and requirements. For instance, in the cases where maybe a flower is legal, but concentrates are not, or vice versa. This is also gonna be vertical integration, either requirements or bans, zoning complications when you get to that level of actually trying to open the store and there’s the local regulations at the county level that are holding things up. So those are all those supply chain regulation factors.
On the other hand, we also have consumption regulations. The most basic of those would be the medical versus the adult distinction, that’s one type of consumption regulation. Possession limits, purchase limits, criminal penalties or fines, obviously a big spread there. Condition lists, as well, that go along with medical. Again, it’s a whole scale of different types of regulations that are very different from market to market.
Okay, so, what we did was after we looked at all these areas and we were able to grid these on a scale, we get a wonderful chart that looks like this. So you can see a market like California, which is having difficulties based on the implementations of its regulatory supply chain and adult use supply chain. We have very low score in licensing and taxation, so it’s very expensive in California to do business.
Dispensary counts, consequently, are very low. And so there’s fewer of them, some places there are none at all, in different counties. The extra legal market actually is quite large in California because the system has been such that there’s actually dis-incentive for the extra legal framework to become part of the legal supply chain. Consumption restrictions, not so bad. In other places, say Arizona, we see more consumption restrictions, obviously medical market.
So this begins to give us a scale with which we can gauge the different states. So we can look at these different stages of growth, these phases of growth that Roy talked about, but then we can look at another level of analysis to this, based on these factors, and weight the different markets in that way.
So, you can start to see that in this chart here. So we have … This is actually the … Because we just took GreenEdge® states here that we had a real complete set of data for … Nevada kinda came in a little bit late and complicated factors, so that’s left off here. So, what we see is that, for the most part, is that the CAGR pretty much follows the growth indicator scale here, so found these charted up pretty well.
The one case where this isn’t the case is Colorado. And so I think that that is where we begin to see these phases of the market play out a little bit more, that Colorado is a very mature market, it is very much a pioneer and has kind of moved through that growth cycle and is really exhibiting those signs of maturity.
So, this is kind of a top-level. What we’ve looked at are these different categories and how they can impact those top-level lines of growth so we can begin to weigh these states against each other.
But within those, there’s even more questions that Tom is gonna address, where it gets to how attracted, how profitable is this market? It may be growing, but is it a market where you want to be doing business?
It is interesting that there is both this life cycle trend interacting with all these regulatory and market conditions trends to create really radically different results across the country.
And that’s true, first of all, at the revenue growth level, one of the key things to figure into your calculations about where you wanna be doing business in the cannabis industry. But as Antonette just pointed out, too, it’s then sometimes very different when you consider profitability and all the other important factors about where you might wanna do business across the USA and beyond.
US post election legal cannabis status
So here’s a map showing what the status is post-election in the United States, as far as legalization goes, with the 9 adult use legal states plus D.C. and the 33 medical states. And what’s very interesting to take this theoretical thinking about market maturity level and the factors that impact growth, and take a lot at specifically some of the states.
So, Nevada’s an interesting one. It is perhaps one of the highest rating states by the schema that Antonette outlined there. And it’s also, of course, very far from maturity, it’s just hitting its stride with adult use launching partway through 2017, and really exploding in the market in 2018. And really it’s sort of a model of cooperation between regulators and the industry to make an adult use market happen in a positive way.
I love the fact that when the supplies were short in the first week of adult use legalization, the governor stepped in and declared a State of Emergency to try and take some steps to make that situation better and really get the market rolling, and it’s hard to imagine a lot of governors around the country taking that kind of step, so Nevada’s seen really solid growth so far, and we expect it to continue as adult use rolls out over the next couple of years. So they’re one great example.
One of the counter examples is Florida, at this point. And of course held back to some degree by the fact that it’s medical only, it’ll always be the major limiting factor on market growth, where when adult use kicks in, of course, you see often a 10x of the number of customers that can come into a story, from something like 2% that might have a medical card to, as Roy pointed, to 20%+ that are actually consumers of cannabis, and will start looking at the store option when adult use legalization kicks in.
But it’s interesting to look at, the state here was 7x the population, 21 million versus 3 million of Nevada, but the market, really, in five years, we think, is just 2x the size of the Nevada market, which is much more loosely regulated.
So, the key problems in Florida, among those factors Antonette had discussed, are just the very few number of licenses requirement that everything be vertically integrated, therefore each of those licensees is facing having to build out its own chain of stores into a medical-only market, where just 2% of the population can come into the stores, it’s really, in a way, tied their hands to being able to develop that market in a way that more generously regulated states have been able to do.
So then there’s California, much on everybody’s mind, as an investment opportunity. Here’s our retail tracking history from last year, the first year of adult use sales, where sales in January were a fraction of December sales, we had 3000+ dispensaries and delivery services operating on December 31st of 2018, and less than 200 on January 1st, a day later.
So, to Antonette’s point, that’s great for profitability for those who have license and saw their sales go through the roof, generally, but it’s been a real hamper on the overall growth of the market. And this July event, you know, a day that everybody knew is coming and saluted the idea that testing would be required, but there was a whole slew of other requirements imposed that day, July 1st of last year. The packaging factor, that it had to come from the wholesaler packaged up and sealed in childproof packaging, and that really put a damper on supply. And we saw the market actually shrink substantially that month, and it’s really never quite recovered.
So, California retailers are still struggling along under really negative scores, frankly, on all those six categories that we looked at. The most onerous really being the cost of regulation and taxation, where in our California report April of last year, we calculated that the average gram in a dispensary has a 77% tax and regulatory cost load on its price, compared to the same gram sold through the illicit channels. So that makes it a very tough situation for legal retailers in California.
So, you saw the CAGR we are tracking through a team, and really not suggesting it’s gonna become dramatically different going forward, although this down year in 2018, of course, negatively impacts historical compound annual growth rate, but we do expect growth ahead. These issues are kind of getting worked out and the brands and the retailers in California are skillfully going about their business as best they can under this onerous tax and regulatory load they’re carrying.
And we think this will continue to keep California the largest single cannabis market in the world, but at a much lower growth rate than it could be with a better regulatory situation and more stores. That being the municipal, the ability of local jurisdictions just to block retail activity completely.
So here we are looking ahead at Colorado, and this really takes us back to the life cycle issue. Colorado scored well on all of the six factors that we rate markets by. But it’s simply reaching its natural maturation point, and we’re talking about a lot of single digit growth rates, going forward. So, it’s really just a lesson of how these two factors, the regulatory and marketing conditions rating system we’ve developed and the issue of the life cycle of the markets play together in driving the view of any given market, going forward.
So that leaves a whole bunch of other states we’re working on now for our upcoming State of Legal Marijuana Markets, 7th Edition. It’ll be out in May. And really feel like we’ve got an excellent tool that brings our light years from our first crack at this in the 5th edition two years ago, as far as accurately forecasting the future of these markets.
And in fact, we’ve been able to use the tools, preliminarily, in a even more imminent report. We’re publishing in two weeks time the very first province by province forecast of the Canadian market, and that was enabled by the Ottawa government releasing a slug of very valuable data on 2018 results across Canada as they rolled out adult use legalization on October 17th.
And this really kinda goes exactly through this rating system we’ve developed. When you look at sort of the differences in the provinces, in terms of their percentage of the overall population versus the percentage of the cannabis market of 2018 that they captured, you see very vividly some of the impacts of regulatory issues, the number of stores. Consumer percentage, for example, very low in Quebec, so despite it having 23% of the population, only 12% of the cannabis sales in those first three months.
But then you look over at Alberta, a very friendly regulatory environment, lots of availability of the product, and captured the hugely inordinate share of the early market, because of that. And the British Columbia, another one of the key factors of the extra legal market of which British Columbia has one of the more developed in the world, and that seems to have depressed cannabis sales as a percentage of the national numbers, as opposed to the 14% of the population that lives in British Columbia.
So having developed this matrix for analyzing markets, we’re already seeing it proving true in the markets we’re tracking, where there is real data to look at, and that’s helping us enormously at estimating markets where there is no such a hard data yet both to estimate the current size and the growth trends as we look at the markets around the world. So that completes our take at both the lifecycle and the factors driving growth issue.
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