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Upcoming trends in the California cannabis industry - 2019 - Webinar notes

I] Growth drivers in cannabis

1. Black market to legal: Los Angeles as an example

A. The conversion from black market to legal market will happen with self-policing and fines: in Los Angeles, landowners at a risk of owing $20k per day for renting to an unlicensed cannabis business, the city wants to target property owners who have assets hoping they will in turn police their cannabis tenants.  

B. The unlicensed market is 8 times the size of the licensed market in Los Angeles (based on permit holders and city estimates; 700-800 vs. 170 permitted). The conversion will take time.

C. There are more unlicensed operators than the city or LAPD can handle: a mere 8 have been shut down since January.

2. New cannabis consumer and eroding stigma

A. Seniors and baby boomers: + 25% consumer growth in 2018 — age 50 or older. This makes them one of the fastest growing demographics for cannabis use. This category represents 8.4% of all buyers.

B. Women: the number of women buying cannabis in California nearly doubled in 2018 from the year before, increasing by 92%. They represent 38% of all consumers.

C. Overall: The number of new cannabis buyers also exploded, increasing by 140% from 2017. These new cannabis consumers are attracted by the eroding stigma and purchase cannabis in the legal market only.

Source: report by Eaze, an online market place and technology platform for legal cannabis.

II] Product categories and consumption habits

1. Emerging products

A. A 67% growth rate in the edibles category has been observed in Colorado; these products become more popular with the increase in testing and dosage requirements.

B. Only 6.7% of tobacco smokers roll their own cigarettes: we can expect an increase in the prerolls category as the stigma of smoking joints (even in public) dissipates.

C. Vape pens have also emerged as a new product category, representing 32% of cannabis sales in California in 2018.

2. Consumer habits

A. Over the coming decades, purchases of OTC and prescription drug will decrease as younger and more accepting consumers age: according to Eaze’s report, customers who purchased marijuana reduced OTC purchases by 71%, in 2018, and 35% of them reduced purchases of prescription drugs.

B. Consumption of tobacco and alcohol will change as well: among the youngest of the marijuana consumers, Generation Z, 32% reported reduction in the use of tobacco, and Millennials reported a 63% reduction in alcohol consumption.

C. Cannabis for pets: 75% of pet owners in North America said they are always or often influenced by a pet product’s health and well-being claims

III] California leading the industry growth

1. Biggest, earliest market

A. Brands and culture: With Prop 215 in 1996: California was the first state to legalize medical: the confluence of the Emerald Triangle and progressive thinkers created the heart and soul of the cannabis culture we know today.

B. Later adopters (states or municipalities) often follow the example of earlier adopters. The Los Angeles Social Equity program mirrors that of San Francisco and Oakland, the first cities to define their Prop 64 cannabis regulations. Similarly, 10mg THC has been adopted by several states and even Canada as the standard dosage size for edibles. Another trend that we can observe in California is that the medical market is shrinking in size as the recreational market expands.

C. California is the largest cannabis market: it is the 5th largest economy in the world, the epicenter of cannabis culture, with a $5bn cannabis market size in 2018, 40 million people, and the highest GDP of all the recreational markets.

2. Canadian firms invest in California

A. TSX (Toronto Stock Exchange) Cannabis market cap: $55BN (Oct. 2018), Population: 36.7 million, GDP: $1.65 trillion vs $2.9 trillion for California. Total sales for Canada estimated to be around $1bn for year vs. $5bn cannabis market size in California in 2018.

B. After an initial setback with TSX investments in the US, the Canadian market offers cannabis funding opportunities for companies in California: following a review of publicly listed Canadian companies on the the Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSXV) holding US assets, the TMX Group went ahead and imposed a regulation against it. Any cannabis company with any material interest in the US had to pursue a listing on the CSE instead. The CSE (Canadian Securities Exchange) offers Canadian companies an option to seek business possibilities in the US, as long as it manages to disclose all its risks properly to shareholders.

C. There are now 113 U.S. and Canadian cannabis companies listed on the CSE. In 2018 companies raised $2.4 billion on the CSE in the first nine months, $1.54 billion of which came from cannabis companies. Over half of the exchange is now represented by the cannabis industry.

Kim Geraghty