According to a 2021 Gallup poll, 68 percent of Americans support cannabis legalization, representing a seismic shift toward normalization in the collective mind of American society. This growing sentiment, combined with new adult-use markets coming online, is fueling new opportunities for both established, well-funded multistate operators (MSOs) and independent dispensaries alike.
As medical markets expand into adult use, first-entrant companies are well-positioned to activate adult-use sales quickly. Most states allow medical operators to begin sales in new recreational markets as they navigate the permit and approval process, so many medical retailers can begin operations months before the influx of competitors are ready to open their doors.
Additionally, medical operators generally have well-established infrastructure, a good understanding of the regulatory environment and local market dynamics, and a head start on consumer engagement with medical patients, providing a competitive advantage over new adult-use-only operators. The early-mover advantage of medical licensees is even more pronounced among MSOs, who can draw from experience in multiple markets in producing cannabis, building products, implementing best practices, and optimizing efficiency in a manner few smaller, more resource-constrained operators can rival. These advantages for medical operators are why companies vie so aggressively for early access into medical markets — and why MSOs now command such a strong share of the American medical market.
MSOs dominate many markets
In a recent analysis of twenty-five cannabis markets, New Frontier Data determined MSOs own 50 percent or more of the dispensaries in 45 percent of the states analyzed. They have expanded their collective footprint over the years in part by getting in early; many secured a strong position in key emerging medical markets in anticipation of adult-use cannabis legalization, a strategy that now is paying off.
Disruption drives opportunity for independent operators
While MSOs have the early advantage, the expansion from medical to adult-use sales also presents opportunities for new entrants and independent operators to establish and build their presence in high-value markets. As expansion occurs, licensing restrictions usually loosen and more operators are able to compete, diluting the early market dominance of medical licensees. In many states, medical patients also shift to adult-use status once the opportunity presents itself, leading to an erosion of the medical patient base. Across markets tracked by New Frontier Data, patient participation declined by an average of 35 percent within three years of adult-use sales launching. The transition out of the medical market, coupled with all the consumers in the illicit market who transition into the newly legal market, contribute to adult-use sales quickly outpacing medical-only markets.
New York: a case study
New York state is a perfect example of market disruption during a transition from medical-only to adult-use cannabis sales. As of January 2022, operating as a medical-only market, New York had:
- Ten licensed operators.
- Thirty-eight active dispensaries.
- 125,000 patients.
- $192 million in annual legal medical sales (2021).
However, with a total of 3.2 million addressable consumers and an illicit market estimated at $4.8 billion, the expansion to legal adult use offers significant opportunity, with an estimated $3.9 billion in annual legal adult-use sales forecast by 2025.
In early March, the state made waves when it announced it would award the first 100 retail licenses to applicants with cannabis-related convictions (either personally or in their families). This move was specifically intended to ensure communities that historically have borne the brunt of the inequitable enforcement of cannabis laws would be first in line to benefit from the transition to a legal, regulated market. No other state has taken such a progressive stance in trying to address the exclusion of minority and economically disadvantaged communities. Through its progressive licensing strategy, New York hopes to give smaller businesses a fighting chance against the large, highly capitalized MSOs that have been preparing to enter the market for years. Without these measures, it is unlikely many smaller businesses would be able to compete as the world’s largest cannabis companies jockey for the state’s lucrative market.
Future cannabis industry consolidation
Of course, MSOs and large single-state operators are not limiting their market-entry strategies to medical markets on the precipice of adult-use legalization. They also acquire strategically positioned smaller operators in established adult-use markets to expand reach, acquire strong local brands, neutralize competition in specific geographic areas, or increase capacity. With markets growing increasingly competitive, consolidation driven by mergers and acquisitions could lead to higher market share among the largest players over time. Expect MSOs to target independent dispensaries with acquisition offers as new adult-use markets mature and independents begin to differentiate themselves from the competition.
Independent operators have at least two routes they can consider, each requiring a different mindset. One, they can position and operationalize their business to be an attractive acquisition target. Alternatively, they can build their business infrastructure in preparation for remaining independent, knowing MSOs likely will approach them with tempting acquisition offers and preparing to rebuff them.
While opposite approaches at face value, both are built on tactics of differentiated market positioning and services, highly efficient operations, and exceptional customer experiences. Knowing the demographic makeup of the area around the dispensary and the typical product preferences of those consumers can help tailor the store experience. Additionally, being an active and engaged member of the local community also goes a long way in building strong local loyalty. In short, know your consumers and serve them well.
For MSOs, targeting the right dispensary with a customer base and market presence that closely resemble or strategically complement their own can make the integration process much easier. This requires more research than simply identifying the most successful dispensary in terms of sales. It also means assessing which ones have built a scalable operation with a loyal and committed base of returning customers.
MSOs in medical-only states risk the loss of market share during adult-use expansion, but their size and access to capital can help mitigate this risk through strategic acquisitions. In the battle for customer loyalty and return business, smaller and independent shops often have an inherent advantage when it comes to experience. Many independent shops are managed day to day by an involved, incentivized, and customer-friendly owner and operator. MSOs, on the other hand, often count on traditionally less-vested store managers but can level the playing field by investing in training and incentive programs to ensure managers are rewarded based on consumer-centric performance.
Count on two things. First, as retail consolidation continues and market leaders shift, change will be constant while expanding markets welcome more entrants and mature markets continue to evolve. Second, and perhaps most importantly, consumers will affect this change by voting with their wallets, deciding who deserves their business and positioning their favorite dispensaries for growth. Success awaits those that grow, wow, and retain their customer base.
While MSOs have captured a substantial share of the retail licenses available in the country, there remain very significant opportunities for new, independent operators to claim a share of the growing legal market. With annual legal sales in the United States forecast to more than double from $26 billion in 2021 to more than $57 billion by 2030 — in just the states where cannabis is currently legal — both large and small companies with well-defined strategies, carefully curated products, data-driven consumer insights, and well-trained and aligned teams are strongly positioned for success in this increasingly competitive market.
Marketing technology expert Gary Allen serves as chief executive officer at New Frontier Data. Over the course of his career, he has led the development of technologies that were later acquired by Google, DoubleClick, Kantar Media, and other market leaders. Prior to joining New Frontier, Allen founded ModernMinds, a strategy consulting firm focused on startups in the technology space.
