Q1 2016 Marijuana Industry Survey & Outlook

Via ConvergEx's Nick Colas,

Our latest quarterly report on the recreational marijuana business shows a vibrant and growing industry as more states legalize the drug.


We survey numerous stores in Colorado, Washington, and Oregon to track how a newly legalized market develops its cost structure and product mix. Our Colorado contacts reported steady pricing and customer traffic compared to three months ago, and brought in $576 million in retail marijuana sales last year – 84% more than in 2014.


Washington dispensaries, on the other hand, are where Colorado stores were a few quarters ago, facing falling prices partly due to new entrants. Demand remains strong, however, with about 150 to 300 customers still visiting stores each day.


Oregon marijuana stores are in an even earlier stage, with only medical dispensaries allowed to sell recreational marijuana in the form of flower until later this year. Even still, Washington dispensaries posted $486 million in total sales last year, not too far behind Colorado even with fewer months to mature. The state of Oregon also brought in $3.5 million in tax revenue during the first month cannabis sales were taxed in January. That’s more than Colorado or Washington earned during their first month runs. Read on for the details of each developing market.

In less than a month, tens of thousands of people will gather at festivals to celebrate a national holiday: “420”. Never heard of it? It’s like Oktoberfest, but centers on the consumption of marijuana instead of beer. As for where the designation 420 started, there are many origin stories but one in particular seems to carry the most credence:

  • It supposedly all started back in 1971 at San Rafael high school in northern California with a group of five teenagers and a map. Known as the “Waldos” because they met by a wall after school at 4:20pm, they sought out what was their version of treasure in Point Reyes forest: marijuana plants.
  • They never found the plants, but “420” became a code word, synonymous with the prospect of smoking cannabis but suggesting so discreetly. Then the Grateful Dead moved into town, elevating the term to another level. The Waldos started hanging around the band’s rehearsals and parties. One of the member’s older brother “managed a Dead sideband and was good friends with bassist Phil Lesh” according to the Huffington Post, while another member’s Dad handled the band’s real estate. The term eventually made its way through the Dead Head community as the band toured in the 80s and 90s.
  • In 1990, a reporter at High Times saw an explanation of “420” on a Grateful Dead Concert flyer. This gave the term international recognition as the magazine started basing events around it, even buying 420.com. And the rest is history. Every year on April 20th, people pay homage to the drug, ideally smoking at 4:20pm.

High Times magazine’s annual U.S. Cannabis Cup remains the most highly anticipated event for the 4/20 holiday. The festival holds a contest that judges and awards companies for the best flower, concentrates, and edibles, for example. It also features educational seminars, expositions, concerts, and product showcases. More than 35,000 people attended the five-day event every day last year in Denver. Not this year, however, as county governments in Colorado prevented High Times from obtaining a permit in Denver and subsequently in Pueblo. The magazine will host a one-day Colorado Cannabis Cup award show in Denver, but the main event will occur over three days in San Bernardino, California.

This is not a welcomed development at Colorado retail marijuana dispensaries, which would have benefitted from the extra foot traffic. According to our latest quarterly survey on the legal recreational marijuana market, our interviews of managers and employees at several Colorado retail dispensaries expressed their disappointment that the event was moved out of state. They expect fewer customers than last year due to lost tourist activity, and they miss out on an opportunity to network. One respondent, for example, found a seed company he continues to use at one of these rallies in the past. But ever since marijuana was legalized in the state, they’ve experienced a crackdown on events surrounding 420.

Nevertheless, these dispensaries still expect some rallies and a spike in sales during the holiday.They are already preparing by planning specials for that week, adding staff, and placing early orders with vendors for concentrates and edibles, for example. Based on our usual analysis including price, units, and mix, here’s a snapshot of our most recent findings on retail marijuana businesses in Colorado:

#1 – Price: Competition continues to put pressure on prices as stores still try to find an equilibrium, but they’ve remained relatively steady over the past couple of quarters. Customers can still find an ounce for $150 to $350, and an eighth for $25 to $45 – especially with frequent specials and discounts. One contact said he sees a more pronounced tier structure developing on the recreational side of business. People can choose to pay less for lower quality or accept higher prices for better quality strains. Overall, prices have mostly stabilized after declining significantly from when we first started our surveys in June 2014 ($400/ounce and $50-$70/eighth) to September 2015 ($300/ounce and $30-$45/eighth).


#2 – Units/Traffic: About 150 to 350 customers still visit our contacts stores each day, spending $50 to $60 on average. Fridays and holidays also remain the busiest periods, similar to all retail stores. Tourists account for about 50% of their customers, so they are also expecting greater business this spring and summer as the weather warms. You may guess they received a slight boost in sales on St. Patrick’s Day, but most survey respondents said snow actually offset any holiday bump.


#3 – Mix: Most stores report a 50/50 split between purchases of flower and concentrates/edibles. Some dispensaries claimed flower sells the most, while one manager said sour gummies outsell all of his store’s other products. Our contacts reported an improvement in the quality of edibles as more vendors come to market. Dispensaries also have a greater appreciation for what sells best. The most interesting product we heard about was gluten free chocolate, which shows just how far these vendors have come. Lastly, vaporizer pens and cartridges continue to gain popularity as a cleaner and odorless means of smoking.

All in all, recreational marijuana stores in Colorado received $575.8 million in 2015 revenue based on tax data from the Colorado Department of Revenue. That’s an 84% comp to 2014, showing robust growth in the industry. Turn to other states in which retail marijuana is legal and you’ll see they have posted impressive growth figures as well, even with less time to mature. We’ve expanded our survey to include marijuana dispensaries in Washington and Oregon, which started selling retail cannabis in July 2014 and October 2015 respectively. Here are our takeaways for both markets:

The price for an eighth carried a wide range of between $25 to $60, depending on the strain, at dispensaries in Washington and Oregon. Washington, however, continues to experience more downward pressure in pricing, whereas prices have remained steady in Oregon. Only medical marijuana stores in Oregon can sell recreational cannabis until later this year, so they won’t feel the competition of those new entrants until then. In the meantime, the ability to sell recreational marijuana in addition to medical marijuana has been a huge boon to business. One store manager said retail cannabis now accounts for as much as 85% of her overall sales.


There are two reasons Washington’s prices continue to fall: more awarding of licenses to retailers and lower wholesale prices after the tax structure was changed from 25% levied on producers, processors, and retailers to 37% on only retailers. The Washington State Liquor and Cannabis Board (WSLCB) raised the former retail store cap of 334 to 556 to help in the process of merging the medical and recreational markets on July 1st.


One contact, for example, noted the Vancouver City Council recently approved 3 more marijuana stores, increasing the cap from 6 to 9. He also said he sees a couple of price drops once every other week. This forces stores to lower their prices and offer more discounts to stay competitive. Consequently, the WSLCB reported that the average statewide price per gram of marijuana neared $10 at the beginning of this year compared to upwards of $25 when it was first sold legally in July 2014.


Washington continues to experience similar product trends to Colorado, with flower accounting for half of sales and edibles/concentrates making up the balance. Vaporizer pens and cartridges are also their most sought after product of late. They also run daily and weekly specials.


Stores in Southern Washington experienced competition with dispensaries in Oregon during the fourth quarter, as Oregon did not have a sales tax. Since January, recreational marijuana sold in Oregon medical dispensaries have been subject to a 25% sales tax, which will drop to 17% at the state level when retail stores open in the fall. These rates are lower than Washington’s sales tax of 37%, but some of our Washington contacts said they are taking business from Oregon because they are allowed to sell edibles and concentrates. Oregon dispensaries can only sell flower to those without a medical card, but hope they will be allowed to sell edibles and extracts when retail stores open in the second half of this year. They can also only sell up to 7 grams, whereas customers can buy up to an ounce in Washington.


Last year, Washington dispensaries posted $486.2 million in total sales (excluding the excise tax), about $90 million less than recreational sales alone in Colorado. With that said, Washington stores brought in $63.3 million in January compared to $52.1 million in Colorado retail sales.


Oregon’s Department of Revenue reported the state collected $3.5 million in taxes for recreational marijuana sales in January. That suggests $14 million in retail revenue during the first month the tax took effect. It also exceeded the $2.9 million in taxes collected for both medical and retail marijuana sales in Colorado when stores were first able to sell the drug recreationally in January 2014. Washington also received less, only $1 million in August 2014.

Despite the success of recreational marijuana stores in Colorado, Washington, and Oregon, the drug remains illegal on a Federal level and banking is limited as a result. Marijuana business residency ownership requirements also act as a roadblock to outside investment. The U.S. Department of Justice frowns upon outside money flowing into the marijuana industry as well. In order to invest in a marijuana business, you must have been a resident for two years in Colorado. Cannabis businesses can raise funds by issuing convertible notes to out of state individuals, with the exception of foreigners, but the holders of debt can only purchase equity when they meet the requirements for ownership of a licensed marijuana business.  

The residency requirement used to be six months in Washington, but the WSLCB recently applied new rules that allow an investor from out of state to loan money to a marijuana business. It’s still murky as to whether an investor can receive profits in exchange for financing, however. Moreover, the governor of Oregon recently signed House Bill 4014 into law, which removes a 2-year residency requirement for recreational marijuana producers, processors and retailers. This will make it easier for marijuana business owners to access capital. 

In sum, keep paying attention to the developments in this growth industry and we’ll provide updates along the way. Investing in current marijuana markets remains risky, but states where cannabis is legal continue to push for changes that are friendlier to outside investment. Colorado, Washington, and Oregon serve as informative experiments, with Alaska joining the mix once stores open later this year. Progress in these states and greater legalization elsewhere will continue to unfold within the next few years. The next major ballot initiative for legalizing marijuana occurs in California this fall. Hopefully changes in regulations that support marijuana businesses and investment will continue to follow suit.

We’ll leave you with this: ever wonder about the 419.99 mile marker on I-70 in Colorado? That’s because people kept stealing the original 420 sign for reasons you now know.