Update: We’ve gone deeper into the cannabis industry in our original report: The Cannabis Industry: A Report for Entrepreneurs and Investors.
How this primer is organized:
- Introduction to the cannabis industry: Learn about the history of cannabis, the science behind it, and why cannabis represents a huge opportunity for business.
- Cannabis market figures: We’ve collected high-level figures that illustrate details of the market and how it’s changing.
- Potential industries affected: The biggest trends in cannabis are yet to surface as corporations sit on the sidelines awaiting the end of federal prohibition. Explore the existing industries that will be most affected by the change.
- Political and legal considerations: Cannabis still faces huge political and legal barriers. We’ve outlined key legislation and political trends to better understand how the industry will evolve.
- Barriers to entry: The political and legal considerations, outlined above, have led to massive hurdles for anyone wanting to enter this market.
- Industry trends: Cannabis has gone from being a cottage industry in the US to a sophisticated and robust international industry. Here’s what’s happening in areas that have legalized cannabis.
- Tech and cannabis: This industry has quickly adopted cutting edge technology. We’ve investigated the intersection of cannabis and tech, including cryptocurrency, IoT, and more.
An introduction to the cannabis industry
Cannabis is currently the fastest growing industry in the United States, and one of the fastest growing in modern times.
“The legal cannabis industry is booming. The expansion and growth has recently been compared to the way broadband internet spread in the 2000s, or even the dot-com boom. One of the latest predictions is that more jobs will be created in legal marijuana than in manufacturing by 2020.” – 5 high-paying marijuana jobs in the legal cannabis industry https://www.cnbc.com/2017/04/20/5-high-paying-marijuana-jobs-in-the-legal-cannabis-industry.html
Cannabis industry think tank, Arcview Group’s State of Legal Marijuana Markets:
“Very few consumer industry categories reach $5 billion in annual spending and then post anything like 25% compound annual growth across the following five years. Cable television came close, growing 19% annually in the late 1980s as national networks like CNN and HBO proved to be wildly popular. Broadband internet subscription spending grew 29% per annum in the early 2000s as it became almost as much of a “must-have” utility as electricity or television for the modern home. What became the ubiquitous home video business that birthed the great Blockbuster success story only grew at a 12% CAGR after reaching $5 billion in revenue in 1988” – Arcview Group, The State of Legal Marijuana Markets 5th Edition, https://www.arcviewmarketresearch.com/5th-edition/
“That 20+% annual growth rate is likely to continue for many years past 2021 as more states and countries legalize cannabis. … It’s also likely that US federal prohibition will be repealed during that period, which would fuel explosive growth.” – Arcview Group, The State of Legal Marijuana Markets 5th Edition, https://www.arcviewmarketresearch.com/5th-edition/
A large part of the reason that the state-regulated cannabis markets are so successful is that, unlike the home computer boom, or the cells phone boom, or the dot com boom, a market for cannabis already existed long before the boom. The money flow is just changing course. Legal marijuana programs are designed to bring cannabis sales out of the black market and into state economies.
Meanwhile, cannabis is still illegal and considered a schedule 1 drug by the US Federal government along with heroin, cocaine, LSD, etc.
“The illicit market grew steadily throughout the last 40 years of the War on Drugs to what Arcview estimates was a North American total of $46.8 billion when adult-use sales first began in 2014 in Colorado and Washington. Illicit sales are now being rolled back at the fastest rates in those states with the most mature legal adult use markets (see graph, below). Most dramatically, what Arcview estimates was a $1-billion illicit market in Colorado is now less than $500 million, which represents just 27% of a $1.8-billion overall market.” – Arcview Group, The State of Legal Marijuana Markets 5th Edition, https://www.arcviewmarketresearch.com/5th-edition/
The Federal Government has articulated via the Cole Memorandum that if a state passes a law to decriminalize cannabis for recreational or medical use, it can do so, under the condition that a regulation system for cannabis is in place. The incredible pace of growth has led to a wide variety of rules and regulations from state to state.
Here are the states that have adopted legal cannabis so far:
- Source: Marijuana Policy Project via Vox, 2018
Momentum has been building over the past two decades, but 2016 was a watershed year for state cannabis legislation. 2016 marked the most consequential year for the expansion of access to legal cannabis in the two decades since California embraced medical cannabis in 1996.
“The November 2016 election cycle represented a watershed achievement for the cannabis industry. Legalization initiatives passed in eight of the nine states which had them on the ballot, exceeding the expectations of even the most optimistic industry insiders. The significance lay not just in the number of states which passed measures, but also in which states they passed.” – New Frontier Data, 2017 Cannabis Industry Annual Report https://newfrontierdata.com/annualreport2017/
Arguably, marijuana laws are making a positive difference in states where it has become legal.
“Adult use states are finding that the health of citizens and the impacted regions’ economies are improving even as some social problems like opioid addiction and crime drop, contrary to the warnings of anti-adult use groups.” – New Frontier Data, 2017 Cannabis Industry Annual Report https://newfrontierdata.com/annualreport2017/
Cannabis is making similar progress around the globe, with an especially robust cannabis industry to our north in Canada. Here are 10 countries that may become the next to fully legalize cannabis.
Are you thinking about starting a cannabis business? West can help you develop a strategy to enter this exciting new market tailored to your skills and region. Contact West to set up a conversation.
The Science of Cannabis, a Quick Lesson
Cannabinoids and the ECS
Cannabis’ effects can be accredited to two types of compounds found in the plant – cannabinoids, and terpenes.
- Source: Kalapa Clinic
Plant-derived cannabinoids are called phytocannabinoids. Phytocannabinoids mimic the effects of endocannabinoids, those created naturally by the human body. The endocannabinoid system, or ECS, is a vast network of cannabinoid receptors located throughout the body. The ECS plays a role in the regulation of a variety of physiological functions including pain and inflammation, sleep patterns, neuroprotection, cellular homeostasis, immune system function, and more. Cannabinoids also offer more powerful antioxidant properties than vitamin C.
Terpenes and the Entourage Effect
Terpenes are a diverse class of organic compounds, produced by a variety of plants. Terpenes often have a strong odor and may protect plants by deterring pests. The levels and balance of terpenes in a particular cannabis strain determine its scent and flavor.
Infographic: What Are Cannabis Terpenes and How Do They Affect You? https://www.leafly.com/news/cannabis-101/infographic-what-are-cannabis-terpenes-and-how-do-they-affect-you
It’s challenging to study the health effects of marijuana because of legal restrictions. However, recently the Federal Government eased some research restrictions. To date, over 140 gold-standard clinical trials exist examining the safety and efficacy of cannabis or individual cannabinoids in some 8,000 patients.
In early 2017, a review of over 10,000 recent studies by the National Academies of Sciences, Engineering, and Medicine concluded there exists “conclusive or substantial evidence” in support of the clinical use of cannabis for the treatment of chronic pain and other conditions.
According to ProCon.org cannabis is being used to treat the following ailments:
- AIDS (HIV) & AIDS Wasting
- Alzheimer’s Disease
- Asthma / Breathing Disorders
- Cancer / Nausea
- Crohn’s / Gastrointestinal Disorders
- Epilepsy / Seizures
- Hepatitis C
- Multiple Sclerosis / Muscle Spasms
- Pain / Analgesia
- Psychological Conditions
- Tourette Syndrome
“According to the findings of a 2015 study published by the National Bureau of Economic Research, a non-partisan think-tank, ‘States permitting medical marijuana dispensaries experience a relative decrease in both opioid addictions and opioid overdose deaths compared to states that do not.’ The NBER findings are similar to those published in 2014 in the Journal of the American Medical Association (JAMA) Internal Medicine… Specifically, they determined that overdose deaths from opioids decreased by an average of 20 percent one year after the law’s implementation, 25 percent by two years, and up to 33 percent by years five and six.” NORML Recent Research on Medical Marijuana http://norml.org/component/zoo/category/recent-research-on-medical-marijuana
See also: A list of 60 Peer-Reviewed Studies on Medical Marijuana https://medicalmarijuana.procon.org/view.resource.php?resourceID=000884
Cannabis Market Figures
According to Arcview Group’s report, The State of Legal Marijuana Markets 5th Edition, https://www.arcviewmarketresearch.com/5th-edition/, the legal cannabis market was worth an estimated $7.2 billion in 2016 and is projected to grow at a compound annual growth rate (CAGR) of 15% to more than $24 billion by 2025. (By comparison, liquor sales for 2016 were $25.2 billion.)
Adult Use Market
Adult use sales are projected to grow at an 18% CAGR through 2025, from $2.6 billion in 2016 to an estimated $11.2 billion in 2025.
Legal marijuana in North America is expected to reach $22.6 billion in revenue in 2021…
“Recreational cannabis spending is expected to outpace medical marijuana sales for the first time in 2019… It means new users will likely flood the recreational market in the next few years, with some switching over from medical marijuana programs in their states. California and Canada, which could legalize marijuana outright as early as July 1, 2018, are projected to drive major growth because of their population sizes.” – Business Insider, The way people buy legal marijuana will change in 2019 — here’s what to expect http://www.businessinsider.com/recreational-vs-medical-marijuana-sales-forecast-2017-3
Medical cannabis therapies and treatments are speeding toward the market as new federal and state policies encourage a rise in public and private research funding.
The medical market is projected to grow at 12% CAGR through 2025, from $4.7 billion in 2016 to an estimated $13.2 billion in 2025.
“The first month of legal sales of recreational marijuana in Nevada significantly outpaced the opening month of sales in other states where it’s legal for adult use. The state Department of Taxation says Nevada dispensaries sold $27.1 million worth of pot in July. That compares with about $14 million in each of Oregon and Colorado, and $3.8 million in Washington in the first month of legalized recreational sales in those states.” – The Cannabist, Nevada sells a lot more weed in its adult-use rollout than other states http://www.thecannabist.co/2017/09/29/nevada-recreational-marijuana-rollout-outpaces-other-states/89108/
Marijuana and hemp, although of the same species, are completely different strains of cannabis. Marijuana is desired for its THC content, while hemp contains only trace amounts of THC and is bred for its fiber, seed, and extracts.
“Taking into account that there was already a black market demand for marijuana before it started to become legal, comparatively, global demand for hemp is growing far faster than demand for marijuana.” – Cannabiz News, CBD Is Approaching Critical Mass, https://cannabiznews.com/featured-cannabis-news-articles/cbd-approaching-critical-mass/
Although the hemp market is a completely distinct entity from the marijuana market, there is a medicinal aspect to the hemp economy which is projected to explode onto the over-the-counter consumer market over the coming decade.
CBD is a non-psychotropic cannabinoid derived from hemp that has medical benefits very similar to that of THC, except without the high. CBD is typically used as a dietary supplement for health purposes, and can also be used in edibles, vapables, topicals, pills, etc. Due to some gray area between federal hemp food regulations and cannabis regulations, CBD can currently be easily purchased online without a doctor’s recommendation.
“Hemp-derived cannabidiol (CBD) is projected to be a billion-dollar market in just three years, according to a new report by Brightfield Group. The data company estimates that hemp CBD sales have already hit $170 million in 2016 and a 55% compound annual growth rate over the next five years will cause the market to crack the billion-dollar mark.” – Forbes, Hemp Cannabis Product Sales Projected To Hit $1 Billion In 3 Years https://www.forbes.com/sites/debraborchardt/2017/08/23/hemp-cannabis-product-sales-projected-to-hit-a-billion-dollars-in-3-years/#3bca616d474c
Projected Shortfalls & Surpluses
Because products cannot be transported across state lines, some states are building up surpluses while other experience shortages. It will be difficult to find solutions to these issues.
California, for example, is expected to produce a massive surplus.
“Hezekiah Allen, executive director of the California Growers’ Association… estimates growers in the Golden State are producing eight times as much cannabis as the state is expected to consume. Some experts give much higher estimates, claiming that the state is on track to produce 14 to 16 million tons annually, while buyers are unlikely to consume more than two million tons.” – Cannabiz News, Are Golden State growers on track to produce a colossal surplus? https://cannabiznews.com/featured-cannabis-news-articles/just-big-projected-california-cannabis-surplus/
Meanwhile, Massachusetts is expecting a shortage.
Due to the lack of growers in the New England region, industry experts believe that stores will likely run out of marijuana almost immediately after opening… According to Peter Bernard, the president of the Massachusetts Grower Advocacy Council.” – Merry Jane, Experts Warn That Massachusetts Will Likely Face Recreational Marijuana Supply Shortage https://merryjane.com/news/massachusetts-recreational-cannabis-supply-shortage
According to a new study by Miner and Co. Studio, today’s Cannabis Consumer looks decidedly different than the traditional ‘stoner’ stereotype.
Based on survey responses, they are:
- 30 years old on average
- 65% male; 35% female
- 65% have a household income of $75K or more
- 84% employed full-time
- 63% married or living with a significant other
- 42% parents of children <18
- 49% Democrat; 45% Republican
- 88% consider themselves part of a new cannabis culture
88% of cannabis users identify as sophisticated and professional individuals rather than the stereotypical lazy loners.
The biggest trends in cannabis are yet to surface as mega corporations sit on the sidelines awaiting the end of federal prohibition. There’s just too much at risk to get involved now and too much at stake to not get involved when the time is right.
Across the board, in states which have legal marijuana programs, use of prescription and over-the-counter drugs has fallen. A 2016 study by the University of Georgia found an 11% reduction in annual drug prescriptions in states legalizing medical cannabis as compared to those which prohibit it.
This trend has leading experts concluding that big pharma has no other choices but to lobby against legalization of cannabis to avoid losing billions in revenue, or get in the game. It’s not at all clear how this will play out.
Preliminary research suggests that pain patients in medical cannabis states use 11% fewer opioids. …. Nationwide, prescriptions of opioid pain relievers jumped 272% in 22 years, from 76 million in 1991 to 207 million in 2013. The three most commonly prescribed pain medications covered through Medicare (i.e., OxyContin, Hydrocodone, Fentanyl) cost the government $1.96 billion. If medical cannabis was available nationally, the decreased Medicare expenditures on those three drugs alone would result in $220 million in savings for American taxpayers.” – Can Medical Cannabis Reduce Opioid Use? http://us10.campaign-archive2.com/?u=e779e5d3e9069a662ece76264&id=c9d34a673c
“Legalization of medical marijuana has been one of the most controversial areas of state policy change over the past twenty years. However, little is known about whether medical marijuana is being used clinically to any significant degree. Using data on all prescriptions filled by Medicare Part D enrollees from 2010 to 2013, we found that the use of prescription drugs for which marijuana could serve as a clinical alternative fell significantly, once a medical marijuana law was implemented.” – Medical Marijuana Laws Reduce Prescription Medication Use In Medicare – http://content.healthaffairs.org/content/35/7/1230.abstract
Furthermore, the current US administration recently declared a state of emergency in an effort to reverse a devastating opioid epidemic. For the first time in American history, prescription drug-related deaths exceeded the number of nationwide fatalities from automobile accidents.
“A review of the scientific literature indicates marijuana is far less addictive than prescription painkillers. A 2016 survey from University of Michigan researchers, published in the The Journal of Pain, found that chronic pain suffers who used cannabis reported a 64 percent drop in opioid use as well as fewer negative side effects and a better quality of life than they experienced under opioids. In a 2014 study reported in JAMA The Journal of the American Medical Association, the authors found that annual opioid overdose deaths were about 25 percent lower on average in states that allowed medical cannabis compared with those that did not.” Scientific American, Science Calls Out Jeff Sessions on Medical Marijuana and the “Historic Drug Epidemic” https://www.scientificamerican.com/article/science-calls-out-jeff-sessions-on-medical-marijuana-and-the-historic-drug-epidemic/
The legal U.S. marijuana products industry “is so sizable now that consumer products companies can’t ignore it,” claims Ken Shea, a food, beverage and tobacco analyst for Bloomberg Intelligence. Many marijuana growers and retailers fear Big Tobacco is itching to enter the market.
“It’s such a compelling opportunity for the tobacco companies to look at closely,’ [analyst, Ken Shea] said. And in fact, they have — roughly 40 years ago. Documents from the 1970s revealed that former executives at companies such as Philip Morris began looking into both the threat of and opportunity in cannabis in anticipation of it becoming legalized by the U.S. government.” – Bloomberg, Big Tobacco’s Pot of Gold https://www.bloomberg.com/gadfly/articles/2016-04-20/marijuana-could-be-big-tobacco-s-next-pot-of-gold
“Big Tobacco companies face intense scrutiny, and won’t put a dime directly into marijuana production until Congress makes it as legal as tobacco. The legal ramifications for the company if it backfires on their scale would lose them billions… Because the market is being paved by risk takers both small and large, it is possible that by the time Big Tobacco deems it safe to move into the market, it will already be saturated, making the investment and competition unprofitable. Only a sudden change in the laws in the near future could give them the time to get a foothold before there isn’t room left. Tobacco companies are poised to quickly dominate the field in marijuana production, for good reason” – HERB.co http://herb.co/2016/02/26/will-legal-weed-become-subsidiary-big-tobacco/
“…many fear that tobacco companies, with their deep pockets, longstanding experience dealing with heavy government regulation, and relationships with generations of farmers will jump into the burgeoning marijuana market.” – USA Today, Will Big Tobacco become Big Marijuana? https://www.usatoday.com/story/money/business/2015/04/11/cigarettes-and-marijuana/70746772/
Alcohol is another big industry which is losing ground in states which have legalized marijuana. And like big tobacco, big alcohol distributors are quite familiar with navigating adult-use product regulations.
“In three of the first four states to start legal recreational pot sales, an increasing number of consumers are choosing bud over Budweiser. That conclusion comes from a study by New York-based investment and research firm Cowen and Co. In Colorado, Oregon and Washington, domestic beer sales for Budweiser, Coors and Miller were down 4.4 percent from January 2015 to the end of 2016, while purchases of craft beer fell 2.4 percent…. The average American alcohol consumer spent about $645 annually on booze last year, including beer, wine and liquor, while an average pot consumer spends $643 annually on weed, according to separate studies from Cowen and Seattle-based Headset Inc. Cowen’s research notes the drop in beer sales experienced by Gaines and other vendors in pot-legal states mirrored nationwide trends of decline for beer. But those states significantly underperformed compared to states where recreational pot is not legal.” – Las Vegas Sun, https://lasvegassun.com/news/2017/aug/23/why-weed-could-cut-into-liquor-sales-across-nevada/
Canna-tourism and hospitality
One of the largest trends within the industry is cannabis-focused hospitality and tourism, along the lines of wine tourism in California’s Napa and Sonoma valleys. Entrepreneurs in newly legal states are seeking ways to capitalize on their states’ existing tourism infrastructure to develop unique tourism offerings.
Cannabis is in a unique position to capitalize on tourism because of these factors:
- Cannabis consumption in public is prohibited everywhere
- Unlike wine, cannabis is not legal in every state
- Unlike alcohol, cannabis generally cannot be served in bars
- Number of consumers interested in the recreational and medical cannabis lifestyles is far greater than for products like wine and fine dining
- Many celebrities focus on the cannabis lifestyle and can attract large audiences
“With cannabis reform sweeping the world, canna-friendly vacations are becoming possible in many different scenic and exciting locations.” – Leafly, Cannabis Tourism 101: What to Know and Where to Go https://www.leafly.com/news/food-travel-sex/cannabis-tourism-101-what-to-know-and-where-to-go
“An early inkling of the commercial potential of marijuana tourism came on a day with a mythical significance for many marijuana users: April 20, 2014, when one travel booking site saw searches for Denver jump nearly 75% year-over-year months after recreational marijuana use was legalized in Colorado. It happened again this year, according to online hotel booking service Hotels.com, with April 20 searches — “420,” a slang term for marijuana, is linked to 1970s youth and drug culture in northern California — increasing in Colorado but also Washington, where recreational marijuana was legalized in July 2014, and Oregon, where it became legal this July.” – Marketwatch, Marijuana tourism is a budding industry http://www.marketwatch.com/story/marijuana-tourism-is-a-budding-industry-2015-08-25
Political and Legal Issues
The majority of the public now supports full legalization of adult use marijuana. Pressure will continue to build for either Congress or the White House to adopt a federal policy more in line with public opinion.
“A majority (55%) believe that it should be legalized, regulated, and taxed like cigarettes and alcohol, while one-quarter (26%) feel it should only be legal for medical use. Meanwhile, 7% believe it should be decriminalized – eliminating not only the criminal penalties for possession and use, but also any regulation by the government. Nearly two-thirds (63%) believe that the federal government should legalize cannabis–a striking contrast to the strong continued resistance within the executive branch and among many Congressional lawmakers against federal legalization of cannabis. Meanwhile, only 17% agree that cannabis prohibition enforcement should be a priority for the federal government, with 13% believing that the federal war on drugs has been effective toward preventing cannabis use. Nearly nine among 10 respondents (86%) believe that cannabis has valid medical uses, underscoring how medical cannabis has become a national consensus issue…. However, there remain concerns associated with cannabis that could undermine public support for expanded legal access. Roughly one-third (34%) of respondents believe that cannabis is highly addictive, and 28% consider it a dangerous drug.” – New Frontier Data, 2017 Cannabis Industry Annual Report https://newfrontierdata.com/annualreport2017/
“Six out of ten voters believe that states, not the federal government, should authorize and enforce marijuana policy, according to national polling data reported this week by the Washington, DC think-tank Third Way… When presented with the option, 60 percent of respondents said that state officials ought to possess the authority to ‘control and decide whether to legalize marijuana.’ Only 34 percent of those polled said that the federal government ought to enforce marijuana laws… Similarly, a super-majority of voters (67 percent) agreed, ‘Congress should pass a bill giving states that have legalized marijuana a safe haven from federal marijuana laws, so long as they have a strong regulatory system.’ – NORML, Poll: 60 Percent Of Americans Say States, Not Feds, Ought To Decide Marijuana Question http://blog.norml.org/tag/demographics/
Despite important legalization victories at the state level, the election of President Donald Trump and his appointment of Jeff Sessions to the post of attorney general have raised concerns within the industry that interference from federal government crime agencies will slow the industry’s growth.
“While the president went on record during the 2016 campaign saying he was ‘in favor of medical marijuana 100%,’ and also in favor of leaving legalization up to the states despite his personal skepticism about cannabis, the first public comments made by his newly appointed Attorney General Jeff Sessions raised reflexive concerns to speculators… Sessions, a former prosecutor, went on to notably opine that it was important for the federal government to adopt a position that made clear that cannabis ‘is dangerous, you cannot play with it, it is not funny, it’s not something to laugh about . . . and to send that message with clarity that good people don’t smoke marijuana… if the administration adopts an aggressive stance against the industry, with real threats of raids and confiscation, growth will be more muted as entrepreneurs, investors, big businesses and financial institutions will naturally become more hesitant to enter or expand in the industry.” – New Frontier Data, 2017 Cannabis Industry Annual Report https://newfrontierdata.com/annualreport2017/ t
The Rohrabacher-Farr amendment was written to protect states medical marijuana laws by preventing the DEA from using any of its budget to investigate or prosecute individuals and businesses in that state as long as they are following state rules.
“The DEA’s stance makes the RohrabacherFarr budget amendment protecting medical marijuana states from federal intervention even more important to the industry’s suitability for investment. The amendment, a piece of legislation first introduced in 2003 and finally passed on December 16, 2014, was renewed in December of 2015 when the US House of Representatives approved a continuing resolution that funds the federal government until April 28, 2017 and includes the Rohrabacher-Farr language.” – Arcview Group, The State of Legal Marijuana Markets 5th Edition, https://www.arcviewmarketresearch.com/5th-edition/
(The Rohrabacher-Farr amendment was recently given another 3-month extension.)
The Cole Memorandum
Another federal protection is the Cole Memorandum. The Cole Memo applies to all of the DOJ’s federal enforcement activity, including civil enforcement, and criminal investigations and prosecutions, concerning marijuana in all states.
“The Cole Memo essentially provides a series of guiding principles that businesses must address to avoid federal intervention. If businesses follow the laws of the state, do not divert product out of state, keep product out of the hands of children, do not support cartels, and do not launder monies, then the federal government will take a hands-off approach to cannabis law enforcement. With more states expanding their medical programs into adult use, the question remains whether the DOJ will continue to be tolerant as the cannabis industry continues to grow.” – Arcview Group, The State of Legal Marijuana Markets 5th Edition, https://www.arcviewmarketresearch.com/5th-edition/
The Ending Federal Marijuana Prohibition Act is a series of federal marijuana decriminalization bills that have been introduced multiple times in the United States Congress.
“Ending Federal Marijuana Prohibition Act of 2013… Eliminates marijuana as: (1) a controlled substance for purposes of the Controlled Substances Import and Export Act or the National Forest System Drug Control Act of 1986, (2) a dangerous drug for purposes of federal criminal code provisions authorizing interception of communications, and (3) a targeted drug for purposes of provisions of the national youth anti-drug media campaign under the Office of National Drug Control Policy Reauthorization Act of 1998… Subjects marijuana to the provisions that apply to: (1) intoxicating liquors under the Original Packages Act, the Webb-Kenyon Act, and the Victims of Trafficking and Violence Protection Act of 2000; and (2) distilled spirits under the Federal Alcohol Administration Act… Grants the Food and Drug Administration (FDA) the same authorities with respect to marijuana as it has for alcohol. Transfers functions of the Administrator of the Drug Enforcement Administration (DEA) relating to marijuana enforcement to the Director of the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF). Renames: (1) ATF as the Bureau of Alcohol, Tobacco, Marijuana, Firearms and Explosives; and (2) the Alcohol and Tobacco Tax and Trade Bureau as the Alcohol, Tobacco, and Marijuana Tax and Trade Bureau… Directs the Comptroller General to review federal laws, regulations, and policies to determine if changes are desirable in light of this Act.” – H.R.499 – Ending Federal Marijuana Prohibition Act of 2013 https://www.congress.gov/bill/113th-congress/house-bill/499
“There were 71 cannabis-related bills introduced during the 2015-2016 congressional session representing a 78% increase from the 40 cannabis-related bills during the previous session… Of the 71 cannabis-related bills in the 2015-2016 session, 50 were considered industry-friendly, 13 were industry-hostile, and the remaining eight were deemed industry-neutral or only loosely affiliated with cannabis.” – New Frontier Data: Congressional Trend Demonstrates Momentum for Marijuana Reform
- An Argument Against Legalizing Marijuana http://hecaod.osu.edu/an-argument-against-legalizing-marijuana/
- Read more: States Keep Saying Yes to Marijuana Use. Now Comes the Federal No. https://www.nytimes.com/2017/07/15/us/politics/marijuana-laws-state-federal.html?mcubz=1
- Patent No. 6,630,507: Why the U.S. government holds a patent on cannabis plant compounds http://www.thecannabist.co/2016/08/22/marijuana-patents-6630507-research-dea-nih-fda-kannalife/61255/
Federal Tax Code Section 280E
Section 280E of federal tax code prevents cannabis-touching businesses from deducting the usual business expenses from their income. This is causing a great deal of concern among big players in the industry who risk IRS scrutiny.
“Since 1982, Section 280E of the tax code has denied business tax deductions and credits to companies that traffic controlled substances. Penalized businesses find themselves barred from valuable asset deductions and other expenses. If in violation, companies increased their chances for intense IRS scrutiny in the years ahead. Such scrutiny includes meticulous questioning such as delving into how it arrived at pricing its products… Section 280E stemmed from a 1981 case that barred a convicted cocaine dealer, Jeffrey Edmondson, from using deductions and write offs for his business. Today, experts argue over the validity of the rule and the government’s policy making process when it comes to narcotics. Those in opposition to Section 280E believe that political pressure gives drugs bills an easy pass through legislation.” – How the IRS Cash-in on Cannabis Prohibition http://www.cannabisculture.com/content/2017/08/06/irs-cash-cannabis-prohibition
Banks and credit unions are required to inform federal authorities if they suspect a customer might be engaged in illegal activity. When it comes to following those rules, the stakes are high leaving federally insured banks with no choice but to not do business with the cannabis industry.
“‘The FDIC could step in and shut down a bank, and it can do that with very little notice,’ said Julie Hill, a law professor at the University of Alabama and former finance industry attorney who has studied cannabis banking. ‘Nobody’s ever gotten their bank brought back to life after it’s been closed by regulators.’ Because of that, many banks won’t even take the risk.” – LA Times, Why some pot businesses hide their cash — and others truck it straight to a federal vault http://www.latimes.com/business/la-fi-cannabis-banking-20170707-story.html
“Banks are regulated by the feds; most will not touch cannabis cash. (Neither will most armored car companies.) As a result, an estimated 70% of cannabis businesses have no bank accounts. ‘We are talking about an industry expected to come short of $7 billion beginning in 2018, with expected tax revenues of approximately $1 billion… This is trouble waiting to happen.’ Your business is legal, but you can’t use banks. Welcome to the cannabis all-cash nightmare.” – LA Times http://www.latimes.com/local/abcarian/la-me-abcarian-cannabis-cash-20170129-story.html
See also: Top 5 Banking Changes Coming to the Cannabis Industry in 2017 https://www.marijuanatimes.org/top-5-banking-changes-coming-to-the-cannabis-industry-in-2017/
Regulation & Oversight
The cannabis industry is one of the most highly regulated industries on earth. Regulations cover everything from growing practices, to which products are allowed, and how they can be advertised and sold. There are regulations at state as well as county, city, and even district levels.
“The cannabis industry represents one of the most highly regulated business environments in the world, on par with financial services, gaming, and healthcare in terms of depth and complexity within regulatory frameworks. However, the overwhelming majority of cannabis companies continue to struggle to achieve full regulatory compliance.” – Leafly’s State-by-State Guide to Cannabis Testing Regulations https://www.leafly.com/news/industry/leaflys-state-by-state-guide-to-cannabis-testing-regulations
See also: Leafly: A State-by-State Guide to Cannabis Packaging and Labeling Laws https://www.leafly.com/news/industry/a-state-by-state-guide-to-cannabis-packaging-and-labeling-laws
See also: Leafly: State-by-State Guide to Cannabis Advertising Regulations https://www.leafly.com/news/industry/state-by-state-guide-to-cannabis-advertising-regulations
According to a new report from New Frontier Data, states with legalized marijuana are on track to generate approximately $655 million in state taxes on retail sales in 2017, far more than come from alcohol taxes. The report also forecasts that tax revenues in states with legalized marijuana will reach $1.8 billion.
“In Colorado, the state saw a 57.2% increase in the total marijuana taxes collected from FY 2015-16 to FY 2016-17 year-to-date as of January. The retail sales tax alone increased 51.4% for the same period. The state collected $119 million in taxes as of January for its year-to-date fiscal year. Compare this to only $38 million collected on alcohol of at least 11 months in 2016. The money is being put to good use by the state. For example, Colorado was able to put $16 million towards Affordable Housing Grants and Loans in 2016 from cannabis tax collections.” – Forbes, $1 Billion In Marijuana Taxes Is Addictive To State Governors https://www.forbes.com/sites/debraborchardt/2017/04/11/1-billion-in-marijuana-taxes-is-addicting-to-state-governors/#373aeca42c3b
See also: Tax Guide for Cannabis Businesses http://www.cdtfa.ca.gov/industry/cannabis.htm
See also: Leafly, Cannabis Tax Rates: A State-By-State Guide https://www.leafly.com/news/industry/marijuana-tax-rates-by-state
US cannabis jobs market is one of the fastest growing sectors in the country and is projected to create over 280,000 jobs by 2020.
“A new report from New Frontier Data projects that by 2020 the legal cannabis market will create more than a quarter of a million jobs. This is more than the expected jobs from manufacturing, utilities or even government jobs, according to the Bureau of Labor Statistics. The BLS says that by 2024 manufacturing jobs are expected to decline by 814,000, utilities will lose 47,000 jobs and government jobs will decline by 383,000. This dovetails with data that suggests the fastest-growing industries are all healthcare related” – Business Insider, Legal marijuana could overtake manufacturing in job creation by 2020 http://www.businessinsider.com/legal-marijuana-job-creation-projections-2017-3
“In Colorado alone, the cannabis industry has created approximately 18,000 jobs since adult use was legalized there in 2014, according to analysis by the Marijuana Policy Group (MPG). Of those, nearly 13,000 were direct, full-time employment (FTE) positions within the industry, with the rest being indirectly added through sectors peripheral to the industry, or induced jobs created through the economic activity spurred by legalization. Furthermore, due to the highly diversified nature of the legal cannabis industry, those created jobs span a range of sectors: MPG estimated that more than one-third of the jobs (35%) were created in the retail sector, with 22% in administrative roles, 16% in manufacturing, and 12% in agriculture.” – New Frontier Data, 2017 Report
See also: Marijuana Industry Projected To Create More Jobs Than Manufacturing By 2020 https://www.forbes.com/sites/debraborchardt/2017/02/22/marijuana-industry-projected-to-create-more-jobs-than-manufacturing-by-2020/
Even in states which have been proactive in easing cannabis enforcement, decades of prohibition have resulted in wide racial discrepancies in the numbers of people arrested and incarcerated for cannabis offenses.
“Although rates of drug use and selling are comparable across racial lines, people of color are far more likely to be stopped, searched, arrested, prosecuted, convicted and incarcerated for drug law violations than are whites.” – Race and the Drug War http://www.drugpolicy.org/issues/race-and-drug-war
Barriers To Entry
The main barriers to entry in the cannabis industry are legal, political, and regulatory in nature.
The disparity between state and federal laws creates unique dilemmas encountered by those in the cannabis industry. While they may be completely compliant under state laws, there’s a high risk that federal agencies will interfere in critical industry mechanisms and infrastructure.
“The Bureau of Reclamation can block federally-regulated water from cannabis growers. The US Patent and Trademark office often won’t allow cannabis businesses to trademark their products. The FDA has attacked the industry for making what they consider to be ‘unsubstantiated claims’ about the medical benefits of their products. Federal courts won’t allow cannabis business to file for bankruptcy relief. Need I go on?” – Cannabiz News, 6 Ways to lose your shirt in cannabis (and how to prevent it) https://cannabiznews.com/featured-cannabis-news-articles/ways-to-lose-your-shirt-in-the-cannabis-industry-and-how-to-prevent-it/
Navigating regulatory waters can be perilous. Although regulatory compliance adds expense to running a legitimate cannabis business, failure to meet regulatory requirements can be quite costly.
“Since adult use legalization in 2014, Colorado has levied more than $1.9 million in fines for operator violations in the medical and adult use industries. Additionally, in 2016, a total of 70 operators, or 3% of licensed businesses in the state, had their licenses suspended for non-compliance. The imperative to achieve full compliance has taken on new urgency as statements by the Trump administration have indicated there may be increased enforcement of federal prohibition in legal adult use markets. Businesses which are least compliant now face the highest risk of federal enforcement action, in addition to increased state-level enforcement activity as states become more aggressive in ensuring licensed operators meet the letter of the law.” – New Frontier Data, 2017 Cannabis Industry Annual Report https://newfrontierdata.com/annualreport2017/
Financial Requirements and Costs
Cannabis licensing requirements and applications can be very complex and restricting, and fees can run in the thousands of dollars per year.
“The meticulous application process is designed to separate the serious applicants from those who aren’t fully committed to the business… In states where medical cannabis businesses are legal, the general upfront cost for an application is $5,000 (non-refundable). Licensing fees vary, depending on your location (for example, in Colorado the initial licensing fee is $3,000, while in Louisiana it’s $150, and in New Jersey it’s a whopping $20,000)… When applying for a permit, individuals must prove that they have substantial amounts of cash on hand. Again, this varies from state to state. In Arizona, $150,000 is needed for startup capital; and in Nevada, $250,000 in liquid assets is the prerequisite. However, for most dispensaries, the actual capitalization costs are higher than the minimum threshold set by the state… Growers must pay for an application fee and a license that is to be renewed annually. Some states, like Nevada, charge cultivators a yearly growing fee, which for producers residing in the state is $3,000. By comparison, Connecticut demands $25,000 for the grower’s application fee and a staggering $75,000 annual license maintenance fee.” – Mass Roots, How Much Does it Cost to Open a Dispensary? https://www.massroots.com/learn/how-much-does-it-cost-to-open-a-dispensary/
“Among the reasons cited for rejection were failure to incorporate as a non-profit organization and failure to show liquid assets in excess of $500,000… In Arizona, applicants have to prove they have $150,000 in startup capital. If they can prove that, then there is the $5,000 non-refundable application fee to pay… Nevada’s recently-passed dispensary law requires proof of $250,000 in liquid assets before you can even apply for the permit. If you’ve got that covered, you then drop another $5,000 in a non-refundable application fee, then if you’re approved, another $30,000 for your initial license. By law, it’s possible for about 60 dispensaries to open in Nevada, bringing in at least $2.1 million for the state.” – The Weed Blog, The High Cost Of A Marijuana Dispensary https://archive.theweedblog.com/the-high-cost-of-a-marijuana-dispensary/
Some states offer a limited number of licenses creating fierce competition amongst companies vying for a piece of the action. This competition has already resulted in costly and time-consuming legal battles.
Although some states attempt to award licenses in proportion to racial demographics, there is still a large disparity which results in a disproportionately low number of minority license holders.
“Although people of color have been (and continue to be) disproportionately afflicted by federal prohibition, these groups are still struggling to find their rightful place in the legal market. For instance, a recent study showed that only 17% of the country’s legal weed businesses are led by minority executives, despite various organizations and activists are fighting to fix this glaring exclusion.” – Merry Jane, New Lawsuit Alleges Discrimination in Florida’s Medical Cannabis Licensing Laws https://merryjane.com/news/florida-medical-marijuana-license-lawsuit-black-farmers
Cannabis Industry Trends
Cannabis has gone from being a cottage industry in the US to a sophisticated and robust international industry. Marijuana is now legally sold in state-of-the-art retail dispensaries with computer-based inventory and sales tracking, fully regulated and taxed by their state governments just like any other product category.
The major demographic trend is the increase in consumers over the age of 50. (It’s also worth noting that cannabis use among teens has fallen in recent years.)
“The authors found a 71% increase in marijuana use among adults aged 50 and older between 2006 and 2013. Adults ages 65 and older had a significantly lower prevalence of marijuana use compared to those ages 50-64, but prevalence of use increased two and a half times over eight years. Overall, prevalence was higher among men than women through all years.” – NYU, Baby Boomers on Dope: Recreational Marijuana Use is on the Rise Among Adults Over 50 https://www.nyu.edu/about/news-publications/news/2016/november/-baby-boomers-on-dope–recreational-marijuana-use–is-on-the-ris.html
New Retail Models
The cannabis industry, with its regulatory and legal quirks, is spawning a variety of retail strategies. Beyond the usual brick and mortar retail outlets, online delivery services and drive-throughs have been sprouting up in many states.
“Maine, one of a handful of states that have approved adult-use marijuana, is set to make buying cannabis that much easier for consumers. A legislative bill under consideration allows for creation of drive-through dispensaries in the Granite State. Much like buying beer or a burger and fries, customers could simply pull up to a window and conduct their cannabis business on the go. The bill allows for marijuana purchase over the Internet, too. The product would be delivered directly to a person’s home. It’s a convenient idea for consumers. It’s a controversial idea among state politicians.” Entrepreneur, Maine Might Legalize Drive-Through and Internet Cannabis Sales https://www.entrepreneur.com/article/300815
California’s EAZE delivery service is model example of the opportunities in online ordering and delivery of marijuana products.
“Tech company Eaze and others are banking on marijuana delivery expanding at an ‘explosive’ rate in California as cities across state prepare for recreational cannabis sales… CGA estimates that there are more than 7,500 cannabis delivery companies statewide that conduct up to 55 percent of current medical marijuana transactions. Expanding delivery has been the group’s highest priority since July 2015, said Allen, and L.A. is their top target… While Eaze is ‘laser-focused on California,’ company officials are shooting some glances in the direction of Nevada, Oregon, Washington, medical-only states such as New York and Florida, and even beyond.” – The Cannabist, The future of buying weed: California eyed as epicenter for delivery, e-commerce http://www.thecannabist.co/2017/09/14/marijuana-delivery-e-commerce-california-eaze/87562/
Social consumption clubs are another trend waiting to happen while regulators develop social use rules.
“After months of negotiating following years of debating the merits, two different initiatives (both assisted by additional new statewide laws) will allow adult consumers to bring their own flowers, concentrates and edibles to enjoy with others. The development begins an essential chapter in the North American cannabis movement: the cannabis consumer’s freedom from having to hide.” – Cannabiz News, Denver & Vegas cannabis clubs on track for autumn launch https://cannabiznews.com/featured-cannabis-news-articles/denver-vegas-on-track-for-fall-social-clubs/
From Flowers to Extracts
In recent years there has been a trend toward sales of non-smokable cannabis. A vast majority of cannabis consumed in the 20th century went up in smoke. Today marijuana products sold include edibles, vapables, topicals, cosmetics, and other products which contain cannabis extracts. In Colorado, traditional dried flowers account for less than 56% of the market.
See also: For detailed data on consumer demographics, buying habits, and product popularity check out Eaze Insights: 2016 State of Cannabis Data Report
In recent years, the cannabis industry has seen a massive explosion of technological innovation. A few of the areas of innovation include lighting technology, grow room automation, testing, soil amendments, extraction technology, and seed-to-sale software.
Testing is becoming a crucial piece in the cannabis industry puzzle as states adopt rules and regulations meant to protect the public from toxins such as pesticides, mold, and heavy metals.
“Law-makers, health officials, growers and customers all want a safe supply of cannabis so product testing and quality assurance are of critical importance as state by state, the legal marijuana market expands. This translates to a major business opportunity for well-run, well-capitalized technically advanced laboratories according to Matt Karnes who studies the cannabis market for his company, GreenWave Advisors, LLC.” – Forbes, Top Ten New Technology Opportunities In Legal Cannabis https://www.forbes.com/sites/julieweed/2015/07/19/top-ten-new-technology-opportunities-in-legal-cannabis/
Extraction and Concentrates
Concentrates such as cannabis oils, waxes, and solids make up the fastest growing segment of the legal marijuana market. As the market value shifts towards concentrates, top marijuana companies are in a heated race to develop disruptive cannabis extraction technologies.
“The cannabis extraction business is hot. More than 50% of today’s legal marijuana sales are concentrates and infused products, and extracts constitute the fastest growing segment of the marketplace.” – Ganjapreneur, 10 Steps for Starting a Cannabis Extraction Company https://www.ganjapreneur.com/how-to-start-cannabis-extraction-company/
“The strong demand for concentrates and edibles will create some buoyancy in prices as these value-added products typically retain their premium pricing better than flower, which is much more vulnerable to pricing pressure as supply increases.” – New Frontier Data, 2017 Cannabis Industry Annual Report https://newfrontierdata.com/annualreport2017/
“From a business perspective, the profit margins can be huge, in some cases up to 60%. And demand is growing rapidly as the availability of concentrates increases. In Washington State’s recreational market, concentrates sales grew steadily from 10.4% of overall marijuana revenues in the third quarter of 2014 to 15.3% in the same three-month period last year, according to state data… Customers are also willing to shell out top-dollar for these products. Nationally, patients and consumers who favor concentrates spend an average of $4,800 each year, more than double the average amount spent by cannabis users in general, according to What Cannabis Patients and Consumer Want, a marketing research report published by Marijuana Business Daily” – Industry Snapshot: Concentrates https://mjbizmagazine.com/industry-snapshot-concentrates/
The cannabis industry’s banking issues make it a prime candidate for cashless retail systems. Cryptocurrencies are being carefully considered, and in some cases implemented, to reduce the risk of crime.
“’Most people are unaware that 70% of cannabis companies do not have bank accounts,’ points out Danny Davis, Investment Partner at Convectium, a branding, packaging and equipment solutions company for the legal cannabis industry. ‘It is difficult for many companies in the cannabis market to make or even accept payments due to limitations by federal banks.’ … California Treasurer John Chiang told me Friday, ‘We are talking about an industry expected to come short of $7 billion beginning in 2018, with expected tax revenues of approximately $1 billion. This is trouble waiting to happen.’ This is why the industry is set up for cryptocurrency disruption.” – Inc., These Facts Show The Marijuana Industry Is Impacting Far More Than Your Buzz, https://www.inc.com/peter-gasca/these-facts-show-the-marijuana-industry-is-impacti.html
“Most transactions at marijuana dispensaries are in cash, but Hawaii wants all of its eight licensed dispensaries to go cashless by October, the governor’s office announced earlier this week. Dispensaries will still accept cash, but the governor would like to reduce the amount of cash in cannabis business to prevent robberies, crime, and other burdens associated with physical currency, the Associated Press reports. Banks in Hawaii did not want to serve the industry, so a Colorado-based mobile payment app and a Colorado credit union will help Hawaii’s dispensaries accept payments and move away from cash transactions… CanPay, a mobile payment app specifically made for the cannabis industry, connects to a user’s checking account so customers can make payments with an Automatic Clearing House transfer (ACH) to a dispensary’s bank account. CanPay is helping 60 dispensaries across seven states to accept bank transfers and has partnered with 14 regional and local banks in the U.S.” – Inc., Seattle Startup Helping Hawaii’s Marijuana Dispensaries Go Cashless https://www.inc.com/will-yakowicz/mobile-app-helps-hawaii-marijuana-dispensaries-go-cashless.html
High-end Cannabis Brands
Another trend brewing in the cannabis industry is the rise of high-end brands, along the lines of high-end cigars, liquors, wines, and craft brews.
“You’ve heard of craft beer, craft liquor and even craft mayonnaise. Now, there is also craft cannabis for picky cannabis connoisseurs. Farms and cultivators will hone special strains in limited batches and release them to great fanfare, not unlike a microbrew’s special beer. Similar to how Champagne region in France is home to the only sparkling wine that can use that name, Humboldt county in California will earn a special distinction. In that same vein is celebrity-branded marijuana. The trend has already started with Willie’s Reserve and Marley Natural and is expected to grow.” – Forbes, These Are The Top Five Emerging Trends In The Cannabis Industry https://www.forbes.com/sites/debraborchardt/2017/08/01/these-are-the-top-five-emerging-trends-in-the-cannabis-industry/#43ed205bcb2d
See also: These Facts Show the Marijuana Industry Is Impacting Far More Than Your Buzz
Seed-to-Sale software tracks cannabis production from the beginning of production to the end of the supply chain and through to retail sales.
From Seed-to-Sales leader MJ Freeway:
“Seed-to-sale tracking (STS) is traceability technology implemented by cannabis businesses. Often a requirement in cannabis regulatory models, the technology is called seed-to-sale because it captures data points throughout the cannabis supply chain, from STS tracking inception of an individual plant or crop, through harvest, processing, and distribution, all the way to the point of sale to the patient. When required by law, the seed-to-sale tracking methodology requires cannabis businesses to capture these data elements at each point in the supply chain and record that information in a way that is accessible to regulatory authorities, either through mandated reports, during physical inspections, or through upload to the state’s track and trace system. STS tracking is designed to provide total data visibility from cultivation to processing to manufacturing to the final sale to the patient.” – MJ Freeway, Track and Trace vs. Seed to Sale https://mjfreeway.com/blog/track-and-trace-vs-seed-to-sale
Even Microsoft is getting in on the seed-to-sale software market:
“Microsoft and Kind Financial announced a partnership today to build software for governments that have legalized marijuana to monitor pot commerce, or “seed to sale” tracking as it’s called in the industry… The new program is called Agrisoft Seed to Sale for Government, and it allows governments to regulate all aspects of the industry, including plant management, point-of-sale transactions and financial reporting. The software will be on Microsoft’s Azure Government, a version of its cloud platform designed specifically for government agencies.” – Geekwire, Microsoft teams up with ‘seed to sale’ marijuana company to build government software https://www.geekwire.com/2016/microsoft-teams-seed-sale-marijuana-business-startup/
With its seed-to-sale regulations, the cannabis industry, is a prime candidate for application of the “Internet of Things.” For example:
“Cannabis regulatory bodies are using radio frequency identification technology (RFID) to digitally track cannabis plants from seed to sale to shut out the black market and to ensure product quality and consistency. Each new plant is issued an RFID tag with a unique 24-digit ID number, which is entered into the government’s digital database. When the plant is harvested, the leaves and buds are shipped to cannabis dispensaries with a new RFID tag and a printed label detailing its origins and chemical breakdown. The database is updated at every step – from seed to sale.” – CannaLaw Blog, Marijuana and the Internet of Things, Part 1 http://www.cannalawblog.com/marijuana-and-the-internet-of-things/
Now you know the basic forces at play in the cannabis industry. The resources we’ve included in this primer regularly publish new reports. Follow them to stay up-to-date on what’s changing in this fast-moving industry.
If you’re looking to build a business in the cannabis space, Contact West to get help with developing a strategy.
West Stringfellow spent over 20 years launching products and leading innovation at corporate giants and startups, holding management roles at Target, PayPal, VISA, Rosetta Stone, GraysOnline and Amazon.
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