[aesop_video width=”720px” align=”center” src=”youtube” id=”NP8C6uQfLuM” caption=”Moderated By: Aaron Smith, Executive Director, National Cannabis Industry Association. Panelists: Jill Lamoureux, Regulatory Consultant, Botec Analysis; James Slatic, CEO, Med-West; Aaron Justis, President, Buds and Roses; Matt Karnes, Founder and Managing Partner, Green Wave Advisors; John Kagia, Director Industry Analytics, Frontier Financials Group.” loop=”on” autoplay=”on” controls=”on” viewstart=”on” viewend=”on”]
Medical cannabis is legal in 23 states, while recreational cannabis is legal in four. The current market size is estimated to be $5 – $6 billion in 2015, growing to $17.5 – $35 billion by 2020. Growth is based on more states legalizing both medical and recreational cannabis in the coming years and demand projections for patients and consumers within those states.
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Revenue Projection Assumptions
Matt Karnes, of Greenwave Advisors, developed the above market size estimate, which includes recreational and medical sales. For the medical market, he started by determining the addressable market by qualifying conditions (glaucoma, PTSD, cancer, etc) in each state, estimating a percentage of those people consuming cannabis, and determining average spend per patient based on available data.
To build his overall growth forecast, he determined when various states are expected to legalize. For example, if a state has a ballot initiative for 2016, it will probably legalize marijuana in 2018.
To determine recreational sales Matt also looked at historical data from alcohol sales post prohibition. What percentage of disposable income did the average American family spend on alcohol in the years immediately following the end of prohibition? He also assumed that average spend per person in a Red State would be less than average spend per person in a Blue State.
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Markets operate on a state-by-state basis and every market is different, based on the legislation and regulations adopted by each state.
In terms of revenue growth, major revenue drivers in each state start with the patients. What is the condition list for which doctors can prescribe medical cannabis, such as chronic pain and PTSD? How hard is it for patients to obtain a card? Are there many doctors who are able to prescribe in a given state? In Illinois patients have to agree to be fingerprinted, which limits the number of patients coming forward who want to subject themselves to fingerprinting.
Limited licenses dictates the size of a market and competition. In Connecticut only four operators are licensed. What happens to patients if one fails? Can the three remaining operators meet demand and get medicine to patients who were served by the failed operator?
On the supply side for legal cannabis, how much will it cost operators to grow? Are there plant limits and canopy limits in a given state, which determine whether operators can achieve economies of scale? Do regulations drive up the cost of production, such as cannabinoid limits (in Florida, for example, THC has to be under 8%). What are the quality assurance, testing and compliance requirements for dispensaries?
What are the excise and VAT taxes?
Are there batch limits for testing? Every 5 pounds or 20 pounds? Are the tests required $20 tests or $1,000 tests?
What are the accounting and record keeping requirements? As an example, a requirement to store camera footage for 90 days increases storage costs.
Are there limits to the amount a patient can buy?
Costs incurred by growers and dispensaries, of course, are, as with all goods and services, passed on to consumers. Most experts agree that Marijuana is price elastic, meaning that the higher the retail price, the more people shift spending to alternatives. And given the robust black market developed over the past 50 years (which is still alive and well), the alternative is people moving their dollars to the unregulated, untaxed, black market.
Given the black market alternative, most experts agree that lower taxes will actually lead to greater tax revenue for states. As a case study, in Minnesota, many people are still buying on the black market because the costs for legal cannabis are too high.
According to John Kagia of New Frontier Group, Colorado’s average monthly tax revenue from marijuana sales grew by $2.5 million between the second half of 2014 and the first half of 2015.
The strong growth in sales has been fueled by falling marijuana prices. By one estimate, retail prices in Colorado have fallen by as much as 40% since June 2014. The falling prices have made the legal market more competitive against the black market, leading more consumers to purchase their marijuana from legal sources.
As a result, even though the lower prices may result in stores earning less revenue per customer, total revenue is higher because the number of consumers buying from the stores has increased.
Despite Cannabis being a large and growing market, there is still a lot of fragmentation in the industry. Weed Maps is possibly the biggest company in the space and it generates probably under $50 million in revenue per year. No brand is dominating the space. Brands like Bhang and Dixie may be known within the industry, but not outside the industry, and aren’t accessible in markets they don’t operate in.
Millennials are the biggest spenders and biggest growth market and the ones that everyone is fighting over with higher and higher doses. Stoner Millennials comprise 10 million people
But growth will be in low dose in part because regulation is outlawing high dose edibles in various states, and in part because the market for non-hardcore users is probably about 30 million people.