In June, ConvergEx's Nick Colas sized up the legal recreational marijuana market in Colorado by surveying several storeowners and their employees. Today he offers an update after circling back with these sources to get a grasp on the business 10 months into its legal tenure. On the whole, Colas notes that the marijuana business continues to be robust: stores are still seeing about 100-300 customers a day, who are still spending $50 to $100 per transaction. With stable pricing at about $40-$50 for an eighth ounce, and $300-$400 for an ounce, we estimate the 200 state-licensed marijuana stores in Colorado have raked in $252 million from January 1st through September; factoring the newly licensed 46 stores as of October 1st, we estimate revenue for 2014 totaling $355 million. Why should the rest of us care? Between excise and retail taxes, marijuana businesses in Colorado should generate upwards of $100 million in taxes for the year; the state alone should reap $35.5 million from the 10% sales tax. This Colorado experiment is growing into a mature market that offers a handsome stream of revenue to both businesses and the state. Sure, there are a few headwinds like any startup industry endures, but this continues to be a fascinating case study of a new – and quite profitable – business.
Via ConvergEx's Nick Colas,
Note from Nick: It’s not often that you get to witness a new industry take shape, so we are paying close attention to the legalization of marijuana in states like Colorado. Today Jessica updates her first note on the topic with fresh channel checks and shows the industry is growing in a number of novel ways.
As I was listening to the radio on my way to work this week, the hosts highlighted a new study that found September is the second “fattest” month of the year behind December: dieters gain an average of 2 pounds in September and 4 lbs. in December. One such reason provided by the hosts was early buying of Halloween candy and the propensity to sneak into the secret stash stowed away for October 31st. Seems a little early, but month aside, it’s hard to deny fall as the “fattest” season, and Halloween certainly kicks off the subsequent couple months of treats and feasting.
In the spirit of All Hallows’ Eve now that it’s just around the corner, how does a dark chocolate bar with Oreo crumbles and vanilla bone candies sound? While considered a largely child’s holiday, this “Graveyard bar” will certainly not be available for the pillowcases of trick-or-treaters, at least I’d hope not. This is just one cannabis infused product being offered this month in a recreational marijuana store in none other than Colorado. And if you’re more of a Casper the friendly ghost type, they’re offering a Candy Corn bar as well.
All “treats” aside, these cannabis infused edibles represent unique product offerings that differentiates the budding business of recreational marijuana from the illegal black market. In June, soon after sales of recreational marijuana were legalized in the state of Colorado, we interviewed several stores to ascertain this newly legal market. We recently circled back to our contacts and found that while smokeables remain most popular, edibles are another growing and important part of their product mix, and one that is hard to come by from dealers on the street. A few points here:
Some stores buy edibles from vendors, and others make baked goods in-house. The benefit of buying from vendors is that they are tested for potency. With the increased scrutiny and impending new regulations on edibles, it’s the safer and easier route.
Products span from chocolate, cookies, and chews, to elixirs, chill pills, and concentrates. Our contacts noted brownies as most popular, of course, with gummies close behind.
One trend gaining swift traction, also according to our contacts, is the use of vaporizers. These typically come in the form of vape pens that are used with wax, oil, or dry flowers for example—mostly odorless, they provide a more discreet means of experiencing the effects of cannabis.
While interest in edibles and vaporizers continues to develop in Colorado, how is the recreational marijuana business faring as a whole since legalization took effect on January 1st? Our surveys of storeowners and employees demonstrate that this novel business is growing into a mature industry.
Pricing has remained stable since our interviews in June at about $40-$50 for an 1/8 ounce, and $300-$400 for an ounce (plus tax). The consumer base and their spending habits have also remained steady: stores still report seeing between 100 to 300 customers per day, who spend $50-$100 dollars per visit on average. And of course, each shop continues to sell top shelf and connoisseur products which helps support their price premiums over the black market—the average street price for high quality marijuana in Colorado on the crowdsourcing site, priceofweed.com, stands at $238. Evidently, business has not dissipated since the flurry of excitement regarding legalization last January.
Recreational marijuana stores were able to maintain stable and high pricing, in part, due to the 9-month period in which they were afforded exclusive state licenses. This grandfathering period expired this week, and 46 state-licenses were granted to marijuana stores in addition to the 200 already in business. These new entrants will create pricing pressure, so marijuana businesses will need to adjust to a more competitive marketplace.
Some survey respondents are looking to expand, with one receiving a second license to open a new store this week, and others entertaining additional grow facilities. Regulations, however, continue to contain expansion efforts by many of the marijuana stores we interviewed.
The general consensus among our contacts is that business is steady or rising from when sales of recreational marijuana were first legalized. While lines may not be out the door as they were in January, storeowners and their employees reported improved efficiency in processes and better flow. It seems these stores are hitting their stride.
We size the recreational marijuana market in Colorado at $252 million from January 1st through September. To reach this number, we factored in the 200 licensed recreational marijuana stores during that time period, the reported number of average customers and transaction sizes from our survey respondents, and the fact that most stores are open 7 days a week. When accounting for the 46 recreational shops granted licenses this week, we estimate revenues will total $355 million in 2014.
These estimates may seem steep, but let’s work our way backwards from some public figures. The Colorado Department of Revenue reported collecting $2.97 million in taxes on recreational cannabis sales in July. The state taxes these sales at a rate of 10%, so this would suggest $29.7 million in revenue for the month of July. If sales are as consistent as our survey respondents suggest, simple math would add up to $356 million in revenue for the year. And this calculation does not factor in the 46 new shops now in business for the remaining quarter.
No doubt recreational marijuana dispensaries are raking in the proceeds, but where are they putting all the cash? In most other businesses, one would not hesitate to hazard “A bank”. Yet under the Federal government’s Controlled Substances Act, manufacturing, distributing, or dispensing marijuana remains illegal. Thus, a bank servicing a dispensary knowingly could be charged with money laundering, conspiring to distribute marijuana, or acting as an accessory, to name a few charges. These criminal penalties prompt hefty fines and years of prison time. Given the legalization of medical marijuana in 23 states and the District of Columbia, and legalization of recreational marijuana in Colorado and Washington, how is the industry addressing this important issue?
In short, the lack of bank services to marijuana dispensaries continues to act as a strong headwind for the marijuana industry, despite attempts towards solutions by the government. The Justice Department responded last year by sending a memo to all U.S. attorneys that identified eight guidelines for which prosecutions of marijuana offenses in states where sales of cannabis are legal should follow. Some of these “Federal law enforcement priorities” include preventing sales to minors, revenue from going to criminals, diversion of the drug to states where it is not legal, and drugged driving or “adverse public health consequences”. (Please find the other priorities in the link at the end of this note).
Despite the existence of a set of standards, they prove largely meaningless in real-world conditions: “This memorandum is not intended to, does not, and may not be relied upon to create any rights, substantive or procedural, enforceable at law by any party in any matter civil or criminal. It applies prospectively to the exercise of prosecutorial discretion in future cases and does not provide defendants or subjects enforcement action with a basis for reconsideration of any pending civil action or criminal prosecution.” This memo leaves banks in precarious relationships, whereby they serve dispensaries at their own peril. More questions were created than answered, in addition to more ground for prosecution and burdensome compliance implications.
The Financial Crimes Enforcement Network (FinCEN) also gave some guidelines that mandated banks to file a Suspicious Activity Report (SAR) if a customer violates any of its “red flags”. These red flags include interstate activity, criminal records, efforts to mask involvement in the cannabis business, or a failure to provide sufficient documentation (other red flags are in the link following this note). By identifying these violations, banks can classify dispensaries as “marijuana limited” or “marijuana priority”. “Marijuana priority” are those who have violated one of the eight priorities listed by the DOJ.
In August, the Director of FinCEN noted an inflow of 502 SARs identified as “Marijuana Limited” and 123 SARs as “Marijuana Priority”. Overall, “there are currently 105 individual financial institutions from states in more than one third of the country engaged in banking relationships.” With that said, 475 SARs were marked with “Marijuana Termination”. In other words, many banks are distancing themselves from servicing marijuana businesses.
Given this information and our survey work, we know that some banks and credit unions are providing their services to marijuana-related businesses. Respondents to our survey said there are local banks and credit unions that offer accounts to dispensaries. However, other interviewees mentioned the caveat that this relationship does not last long…or until the bank figures out it is servicing a dispensary. Many contacts were unable to even broach the subject given its touchy nature.
Consequently, a weighty share of dispensaries is forced to hold stacks of cash in safes, putting storeowners, and employees at heightened risk for robberies. Accounts of theft have included both the stealing of cash and cannabis. Therefore, survey respondents emphasized the significant security used at shops to protect the cash and cannabis, including safes and video surveillance. We were not able to interview one store we called because the employee who answered couldn’t be on the phone as he watched the door. Every shop is always on high alert.
On a lighter and societal level, legalization of recreational marijuana has broadened consumer demographics. The typical customer does not fit the young burnout stereotype you may have seen in Dazed and Confused, or dozing off in the back of your former high school classroom for that matter. In fact, one store employee stated emphatically: “We have no average customer.”
While this was a clever response from a marketing angle, it touches upon a broader theme: legal recreational marijuana businesses in Colorado have attracted a base of consumers who most likely wouldn’t have ventured into the black market prior to legalization.
Survey respondents said the age of customers spanned from 21 all the way to one’s 90s, with some stores citing concentration among those in their 20s to 40s. Legalization opened up a whole new base of those purchasing the drug, and our contacts said these individuals come from all walks of life and from all over the world. One employee even described some customers who are middle-aged men as “a kid in a candy store”—hence the Halloween themed edibles.
And for stores that only sold medical marijuana prior to legalization of its recreational counterpart, they have received a new batch of customers and means to diversify their business.
In terms of fiscal policy, sales of recreational marijuana have generated a generous revenue stream to the government by way of taxes. Retail taxes add up to 12.9%, while a 15% excise tax is applied at the wholesale level. In fact, the first $40 million collected by the excise tax is devoted to the Colorado state school construction fund on an annual basis. Given these sales and excise taxes and our revenue estimates, we believe tax revenue could total just shy of $100 million through year-end.
This tax revenue estimate may seem steep, but remember, the Colorado Department of Revenue reported the state collected $2.97 million in taxes at the 10% rate for July. Again, steady sales and simple math suggests total sales taxes for this year totaling $35.6 million. If we parse our revenue estimate to just factoring in the 10% sales tax to the state, we get about $35.5 million for the year as well. When accounting for recreational marijuana’s contribution of $5.2 million in sales and excise taxes (less the contribution of sales taxes from medical marijuana), tax revenue adds to $62 million—a bit under our estimate, but not too far off the mark.
Overall, the people we spoke to working at recreational marijuana stores in Colorado felt they were on the “cutting edge”. We zeroed in on the Colorado market because it is more developed than Washington’s, but both are on the brink of a promising growth industry in its preliminary stages. Come November 4th, other states will vote to legalize marijuana for either medical or recreational uses as well, including Alaska, the District of Columbia, Florida, Guam, and Oregon. Thus far, recreational marijuana stores in Colorado have proved lucrative investments. Even still, we’ll have to stay tuned to see how regulatory hurtles are overcome and how the marketplace expands and welcomes new competition—we’ll keep you posted.
I’ll sum up using the words of our contacts spoken on at least two occasions: “We’re just really happy it’s legalized here in Colorado”. That’s all well and good, but just keep an eye on the scale this fall with all those themed edible marijuana treats.