Just How Good are the Investment Opportunities in the US Cannabis Market?

Just How Good are the Investment Opportunities in the US Cannabis Market?
Medicinal.News by John Dyrek
Recently, cannabis investors attended the Institutional Capital and Cannabis Conference in San Jose, California. Organized by cannabis investment company MedMen, this sold out event attracted some very influential mainstream investors. They came to learn about the State of the Industry, How Consumers are Driving Forward the Cannabis Industry, the Shift in Consumer Spend, and other investment topics relating to cannabis as reviewed below.
State of the Industry
Adam Bierman, CEO of MedMen, outlined how the cannabis market actually benefits from the “noise” that’s inaccurately proffered by government officials. Their naive comments are seen as fake news. He noted that “60% of Americans support pot legalization and 2/3 of Americans live in states where pot is legal.” This obviously bodes well for potential cannabis investment opportunities.
Growth of US Cannabis Market Has Considerable Upside 
One of the more interesting discussions was led by Roy Bingham, CEO of BDS Analytics (BDS), a cannabis market research and consumer data firm, who reviewed “How Consumers are Driving Forward the Cannabis Industry.” In sharing the BDS findings, he made a compelling argument on the market size and consumer demographics, motives, and buying trends.
According to data from BDS Analytics and ArcView Market Research, US Cannabis retail sales were $5.8 billion in 2016 and have grown 40% CAGR. This comprises both recreational (Adult Use) and medical sales with medical accounting for about two-thirds of the total sales thus far. In 2016, CO, OR, and WA comprised 40% of these sales while CA was 36%, making cannabis the fastest growing market in the US.
On a long-term basis, “legal cannabis sales are expected to reach $22 billion by 2021” by BDS estimates. He noted that “little of this expected growth depends on further law changes; these estimates are based on laws already passed.” So, legislation allowing more states to sell cannabis will only increase sales estimates and growth.
Moreover, cannabis as an industry compares very favorably when evaluating expected growth of past high growth industries like Basic Cable (1986), Home Video (1988), and Broadband Access (2002). Only the growth in 5 years of Broadband (after reaching $5 billion) exceeded the comparable growth of cannabis.
CA Cannabis Market is Expected to be Next Big Play
Another way to evaluate the growth potential of the cannabis market, especially in CA, is to extrapolate the success realized in CO. With a population of about 5.5 million, CO now realizes total cannabis sales of more than $100 million monthly per CO Tax Data (https://www.colorado.gov/pacific/revenue/colorado-marijuana-tax-data). Similarly, with a population in CA of about 39 million (7 times CO), you can assume that total cannabis sales will correspondingly result in total sales of at least $700 million per month in CA. This argues that total legal cannabis sales will easily exceed $8.4 billion in CA for 2018 when Adult use becomes legal (Prop 64 is implemented).
If the CA market continues its growth trajectory, then cannabis sales should exceed $16 billion by 2021 in CA. This would put marijuana at the top of the state’s crop production, and would account for the majority of market activity compared to the next five agricultural commodities combined (milk, almonds, grapes, cattle, and lettuce in CA account for $22.2 billion annually).
What Products are Driving this Growth Trend?
In the beginning, sales growth came mostly from cannabis flowers. More recently, sales of concentrates have gained traction with vape becoming the more popular way to consume cannabis in the Adult market. With flowers initially the fastest growing segment but concentrates and edibles now growing faster in CO, its expected that CA will realize the same growth except on a much larger scale.
More recently in CO, consumers are purchasing concentrates and edibles over flowers because they are less conspicuous and easier to consume. This shift also results from new consumers preferring to not smoke. Regarding the edibles market in CO, sales of candy represents the largest sub-category (up 78%) with pills (up 136%) and tinctures (up 101%) showing the fastest growth.
Similarly, the growing number of newer cannabis consumers that come on board in CA in 2018 (Adult use becomes legal) are more likely to seek cannabis medicine as a concentrate or edible over flowers. I also think that sales will increase as newbies explore cannabis products that are without any psychoactive effects (CBD instead of THC) and as brands develop more of a following. The massive growth (up 260% from late 2014 to early 2016) of branded products thus far partly supports this belief.
Which Consumers are Driving this Growth?
According to BDS data, the fastest growing cannabis segment in the US are the Millennials (21-35 year olds). In CA, they are predominately male, have income in the middle-to-upper income level ($75K – $150K) and graduate degrees, and are married or living with partner and a parent. Roy of BDS also noted that “their motives for consuming cannabis (among past 6 month consumers in CA) are to relax, sleep better, relieve pain, feel peaceful, and reduce stress/anxiety. And 20% of these same consumers use cannabis to avoid prescription meds, avoid over-the-counter meds, and reduce alcohol use.”
As seen in CO, OR, and WA, these consumers are the early adopters who prefer smoking flowers (unprocessed plant) and vaporizing concentrates over eating edibles. Based on a recent survey by BDS of 1000 consumers, over 23% have consumed cannabis in the last 6 months and more than 50% of all surveyed consumers have consumed cannabis at some point. And the frequency of consumption is very high among those 23% consuming in the last 6 months. Usage daily was 24%, weekly was above 26%, monthly was 15% , and less than once a month was the remainder.
How are sales of Cannabis Impacting Beer Sales?
Vivien Azer, beverage analyst with Cowen, spoke about how cannabis has been gaining traction among young adult men at the expense of alcohol (especially beer and whiskey) over the past decade and that legalization will accelerate that trend. However, state tax revenues do not clearly show cannabis cannibalizing on alcohol sales (yet). After a few years into legalization, alcohol sales are actually up in CO. She also noted that the percentage of Americans over the age of 50 in favor of legalization has doubled since 2000. So, the demand for cannabis products (which Cowen projects reaching $50 billion is sales by 2026) will come not just from Millennials but also Seniors.
Chris Leavey, General Partner of MedMen, suggested that the industry is unique and cannot be compared to the micro-brew boom or the tech boom. He said that “it’s a unique industry that is transitioning from a black market business to a white market business.”
With the considerable insight uncovered at this inaugural cannabis investment conference, investors seemed very enthusiastic about the long-term prospects of the cannabis industry. This excitement was especially prevalent in the happy hour conversations at the end of day one. Long after drinks and food were no longer available, investors and entrepreneurs remained to share their thoughts and make contacts.

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