By most accounts, 2019 was a tough year for the cannabis industry, what with Canadian stocks in freefall, investment capital drying up, and little progress on federal legislation. Still, by year’s end operators were cautiously optimistic about 2020, but it was anybody’s guess what the new year might bring.
Then the coronavirus pandemic struck, delivering a curveball that instilled panic and uncertainty for nearly every business that wasn’t deemed an “essential service.” But when cannabis joined that elite group—right beside hospitals, pharmacies, grocery stores, and hardware stores—companies found long-awaited legitimacy and reassurance.
Indeed, 2020 likely will go down in history as a monumental year for the U.S. cannabis industry and a breakthrough moment for a plant that has been demonized and stifled for the better part of a century. The pandemic also likely will leave a lasting impact on the prevailing business models in the industry, as well as consumer buying habits and product preferences.
With voters in a host of states legalizing medical or recreational use (or both) in November, young markets in the Midwest and on the East Coast maturing, and a burgeoning consumer base nationwide, 2021 is shaping up to be a banner year for cannabis.
After voters in Arizona, Montana, New Jersey, and South Dakota gave a thumbs up to adult-use cannabis, weed is now legal for both medicinal and recreational use in fifteen states and the District of Columbia. Many of them are poised to become billion-dollar markets. Who’s next? All eyes are on New York and Florida to pass adult use to satisfy a combined 40 million residents.
Over the past few years, one of the biggest stories has been the rise of multistate operators (MSOs) that have built vertical operations state by state, slowly but surely creating a brand presence even without access to traditional marketing and advertising channels. Some of these companies are stretched thin and on shaky ground, while others are thriving and methodically expanding into new territories.
With operations in twenty-three states, Curaleaf is one of the largest MSOs. The company plans to increase production in the Midwest and on the East Coast, where business is picking up at a steady pace. Patrik Jonsson, Curaleaf’s regional president for the Northeast, predicted some MSOs will continue to struggle in 2021. Others, he said, are seeking partnerships that can help them expand and enhance their supply chain.
“We believe the large MSOs that have done a good job creating a network with their own cultivation sites and partnerships with other operators to get the product they need are the ones who will succeed,” he said. “There is definitely going to be an ongoing need and want for small operators to continue to produce high-quality products. It’s going to be similar to the craft beer industry, more or less, going forward.”
“There is definitely going to be an ongoing need and want for small operators to continue to produce high-quality products. It’s going to be similar to the craft beer industry, more or less, going forward.”Patrik Jonsson, regional president for the Northeast, Curaleaf
Entourage Effect Capital is a canna-centric private equity investment firm that has invested in dozens of cannabis companies across the spectrum, from cultivation, retail, and manufacturing to research, technology, and real estate. Managing Partner Matt Hawkins said he believes companies will continue to focus on the bottom line and revenue growth in 2021 as investment capital remains in short supply.
“The big players have started to really separate themselves from the pack,” he said. “We’ve seen MSOs that are successful on their own and their stock price indicates it, so that should continue. The larger ones will probably continue to operate independently, but in California, for example, you may start seeing some large, single-state operators creating business combinations between northern and southern California to generate more revenue.”
Hawkins believes 2021, like 2019 and 2020, will present a difficult environment for companies looking for investment. “It’s still very, very hard to raise money in a climate like this,” he said. “And you combine that with the lack of institutional capital, and it’s really just groups like us that are having some success in the market.”
One of the easiest and best ways to measure the health of any industry is by looking at the number of jobs it creates. In this respect, cannabis has weathered the pandemic better than most.
Liesl Bernard is founder and chief executive officer at San Diego, California-based staffing agency CannabizTeam, which annually publishes a salary guide for the top fifty-two jobs in the industry. She said cannabis businesses employed 300,000 people in 2020, and she expects the number of jobs to double over the next few years as the industry matures and new states are added to the mix.
Massachusetts, the East Coast’s first legal adult-use market, saw a 333-percent growth rate and created more than 10,200 jobs in the past twelve months, according to consumer-information-and-education hub Leafly’s annual jobs report, which anticipates about $700 million in sales on the East Coast in 2020. Meanwhile, both Colorado and Washington, the nation’s two oldest rec-legal markets, continued to grow at 8 percent annually while Illinois, Ohio, and Pennsylvania doubled the number of legal jobs in just one year. Oklahoma’s medical market grew by 221 percent in 2019 with medical sales tripling to $350 million, and the industry now supports more than 10,000 jobs across the state.
“I really think 2021 will be the year of the beverage. We’re going to see new beverages take more of a market share than we’ve traditionally seen.”Camille Roistacher, co-founder and CEO, Voyage Distribution
“We’re seeing a huge uptake as each state needs to operate completely independently, and salaries are definitely going up because people with cannabis experience are still very limited,” said Bernard. “As other states legalize, the demand for people with experience in the cannabis industry is getting higher, and because of that salaries are increasing.”
Some of the hottest positions for which her company is recruiting include branding, supply chain logistics, and manufacturing. The new markets she is most bullish on include Arizona, New Jersey, and Oklahoma.
The more established markets in California, Oregon, Washington, and Colorado continue to set the product trends in the market. According to those who play in those realms, in 2021 consumers will be seeking higher-quality flower and extracts, while edibles and beverages are expected to continue to gain market share. The latter two categories grew in popularity during 2020 because users feared respiratory illnesses during the pandemic and therefore hesitated to smoke or vape flower and extracts. A report published by Grand View Research claims the global cannabis beverage market was $902 million in 2018 and is expected to reach $3 billion by 2025.
“I really think 2021 will be the year of the beverage. We’re seeing more spritzers and lighter-dosage drinks hit the market so people can enjoy it at their leisure,” said Camille Roistacher, co-founder and chief executive officer at Voyage Distribution in Los Angeles. “It’s not really those strong edibles that kind of knock you out and you just feel like taking a nap. We’re going to see new beverages take more of a market share than we’ve traditionally seen.”
Raw Garden, a dominant player in the California extract market, steadily drove down the price of sauces and live resin as the company scaled up after California’s Proposition 64 legalized adult use in 2016. While extract retail prices ranged from $60 to $100 per gram a few years ago, Raw Garden currently sells its high-end extracts at wholesale for about $16 per gram, said Chief Commercial Officer Darren Clark.
“One of the things we’ve definitely seen in the second half of the year, and this might be more about COVID[-19] than anything else, is the macro-economic impact has been just more price sensitivity among consumers,” he said. “In the second half, if you look at some of the brands that have taken more share, it looks like consumers are becoming more price-conscious. We’re hearing that from our dispensary partners as well. That is a trend that’s going to continue, especially with some of the suppliers out there offering an amazing value to consumers. With our dabs and vapes, we feel like we’re a fair value, so we probably won’t be touching price too much.”
Although edibles, beverages, and extracts typically win more market share as consumers become more familiar with those products, there also is a push to produce more high-quality flower to satisfy a growing consumer base.
“One thing we saw happen was the climb of flowers, which were on a tear once the market kind of got back into growth mode over the summer,” Clark said. Roistacher agreed. “I think it’ll stay pretty steady, and everyone wants affordable indoor [-grown flower]—which is pretty challenging to either produce or find,” she said. “We are seeing a lot of really large cultivations coming online soon, so that will be fascinating to watch. Also, the high-end [mixed-light greenhouses] that almost look like indoor, there’s a huge demand for those because it’s cheaper than indoor, so those go really, really fast.”
In addition to the popularity of high-end flower, consumers also are beginning to appreciate more balanced strains and extracts that display the full potential of the plants from which they are sourced. “There’s so much in that chemistry, and one of the things we’ve seen is a readjustment or reassessment of the THC arms race in Oregon and California,” said Jeff Gray, co-founder and chief executive officer at SC Laboratories, which operates testing labs in California and Oregon. “I think Oregon got out of hand for quite a while, when 50 percent to 60 percent of the shelf had strains with THC content of 30 percent or more. The distillate market is still strong but is being overshadowed by things like live resin, full-plant extract products that offer a richer terpene profile or a better offering of the full, rich, and complicated chemometric profile of a plant.”
Just as Amazon and DoorDash have become even more dominant players during the pandemic, one of the most immediate impacts in the cannabis industry was the way delivery menus became the de facto shopping experience for most consumers.
“The distillate market is still strong but is being overshadowed by things like live resin, full-plant extract products that offer a richer terpene profile or a better offering of the full, rich, and complicated chemometric profile of a plant.”Jeff Gray, co-founder and CEO, SC Labs
“I definitely think delivery models got accelerated, and we saw them really surge back in March and April and had a big question about how much of that was going to hold on,” said Clark. “The large delivery services in the state have really taken a lot of share through the pandemic. A lot of times people go into a dispensary for the consultative aspect of it, because they want a budtender to help them navigate the product landscape. But once a consumer figures out what products and brands they like, more of them move over to delivery.”
Likewise, consumer buying habits have shifted in ways brands and retailers are only beginning to analyze and understand. If brick-and-mortar retailers want to bring customers back into stores in 2021, they will need to find creative ways to lure consumers off the couch. “The best thing for the retailer is to really figure out how to add value to the shopping experience, whether it’s product knowledge and education, consultation around new offerings and new brands, or new categories,” said Clark.
Licensed retailers will continue to feel the heat from the black market, too. “California has been kind of tough,” said Roistacher, who works with hundreds of farms and brands throughout the state. “If you look at Los Angeles, licensing is about to add 200 retailers, so they’re moving forward. We need more retailers open to hopefully channel customers toward the licensed market versus the unlicensed market.”
Despite all the progress the industry has made on a state-by-state basis, it’s unlikely 2021 will bring any major breakthroughs at the federal level. The combination of a Senate led by Kentucky Republican Mitch McConnell and Democrat Joe Biden in the White House means progressive cannabis legislation may be an uphill battle. That said, there is some optimism that access to banking and other traditional business services are reasonable goals for the near future.
“We are very encouraged and excited about safe banking [the Secure and Fair Enforcement Banking Act of 2019],” said Curaleaf’s Jonsson. “We believe that’s something that could be coming and give our customers access to credit cards or allow equipment purchases and give our operations in different states access to banking and our employees safe banking as well. I think that’s going to be something that’s going to be instrumental to legitimizing this industry. We all want to pay taxes, and we all want to do it the right way. Having reliable banks in all our states, which we still don’t have, is something we are very much looking forward to.”
The Strengthening the Tenth Amendment Through Entrusting States (STATES) Act is another federal legislative reform many people in the industry are optimistic about in the near term. It would amend the Controlled Substances Act to allow companies that comply with state laws to avoid prosecution under money-laundering statutes and similar federal legislation.
“In the second half of 2020, if you look at some of the brands that have taken more share, it looks like consumers are becoming more price-conscious. That is a trend that’s going to continue.”Darren Clark, CCO, Raw Garden
“I think the country finally can take some last steps toward ending the war on drugs,” said Gray. “I think that’s a powerful thing, and expunging some of it is incredibly meaningful. I don’t want to look past that. But at the same time, I just don’t think enough people can get away from their belief that somehow cannabis is bad or harmful. Do you see McConnell voting for that? In my mind, it is going to take the next generation of people to really push for this.”
While legislative victories at the federal level remain elusive, industry operators merely hope the feds will at least stay out of the way and let states determine their own regulations. “It’s critical for the STATES Act to be able to allow each state’s program to operate on its own without federal interference,” said Jonsson. “That is the only way these programs will survive. For a region like the Northeast, if product from California was allowed to come in here, it would hurt the existing operators that are trying to grow product in New York, New Jersey, and Massachusetts, because we can’t necessarily compete with outdoor growers in California and Oregon. But we feel like that’s a long way out.”
Regardless in which state companies operate, competition is heating up fast. MSOs are entering new markets and driving down prices to win over customers, setting up a David-versus-Goliath battle for smaller companies determined to compete. The industry’s steady growth, if it continues apace in 2021, could bode well for companies seeking investment that will allow them to take the next steps to grow their businesses.
“I think competition is going to get more intense, and as more people in the capital markets turn around, people are going to have access to capital again,” said Raw Garden’s Clark. “The closer we get to [federal] legalization, the more investors are going to be willing to throw money in.”
Another trend that bodes well for the industry is the infusion of professionals from other business sectors who have been hesitant to join companies working with a federally illegal substance. They’re becoming more comfortable with the idea now that the vast majority of U.S. states have legalized cannabis in some form.
When she started recruiting professionals for cannabis jobs in 2016, CannabizTeam’s Bernard said she had to “really beg and convince people to take a chance on cannabis. But today it’s sort of the sexy industry. With unemployment rising during COVID and the general acceptance of cannabis, there’s a lot more sophisticated talent out there who are very excited and eager to get into the industry.
“There’s still only 12 percent of the population that uses cannabis, so there’s such a huge opportunity for the industry,” she added. “Just imagine what the market is going to look like five years from now and how sophisticated it’s going to be.”