Meeting of industry players, market researchers examines data
By Becky Garrison
More than a million new jobs by 2025 and over $100 billion in federal tax revenue over eight years should have forecast a bright future for cannabis entrepreneurs, overshadowed by the approval of President Donald Trump’s tax bill.
That was the outlook for members of Oregon’s cannabis business community attending a January meeting in Portland. The report conducted by New Frontier Data — based on full legalization and tax reform — predated the Trump bill, which reorganized the country’s tax structure. Yet New Frontier still predicted changes to accommodate cannabis at the federal level as more states legalize adult use.
Capitalizing on the emerging cannabis industry was the focus of the Oregon Cannabis Association’s Jan. 24 Data and Compliance Event. While well-established demand sets cannabis apart from other emerging markets, Oregon’s industry players were cautioned against investing in excess supply and contributing to a crowded market that is approaching saturation.
Fine-tuning the ratio of stock to sales is key to leveraging growth among various categories of cannabis products, said Cy Scott of Headset. He encouraged retailers to dig into operational data and sales trends, as well as track what their bud-tenders are selling, to determine which items should be on the shelves.
Cannabis-infused edibles have experienced high growth although they constitute a smaller segment of the market, according to Headset. Beverages experienced 200-percent growth in the first two years and three months of Oregon’s legal recreational sales. Sales of concentrates and vape pens, by contrast, have dropped while flower sales remain constant.
Vendors represented in each store are decreasing in number, an indicator that dispensaries are becoming increasingly picky about their vendor choices, according to Headset. As brands emerge, each one generates more products, an average of 11 to 23 items. Savvy producers are diversifying their portfolios to take advantage of high-growth categories. Market data such as Headset’s is gathered to help producers pinpoint segments, pricing and consumer purchasing habits.
The tech company behind Leafly.com, Headset surveyed 10 percent of Oregon-based dispensaries for its OCA presentation but plans to expand its reach. It also compared Oregon’s first two years and three months of Oregon’s legal recreational sales, opened Oct. 1, 2015, to the same duration in Washington, which legally commenced recreational sales July 8, 2014.
The overall growth between the neighboring states remains comparable, according to Headset. The total 2017 cannabis sales in Oregon reached $519 million that generated $131 million so far in tax revenue, New Frontier reported.
Despite these sales, cannabis supply is driving down wholesale prices, commoditizing as the market consolidates, according to New Frontier. The retail price of cannabis, for example, is down 33 percent in the past year, said Beau Whitney, New Frontier senior economist, adding that he wouldn’t be surprised to a see another 33-percent decrease. (These numbers take into account the outdoor market’s seasonality.)
The market is approaching saturation among more than 495 dispensaries reporting sales in Oregon, averaging $92,000 per store from October to December last year. After factoring in 50-percent cost of goods sold, in addition to taxes applied to cannabis, retailers only have $36,300 to cover the rest of their operations. Oregon retailers, said Whitney, need between $125,000 and $150,000 in revenues per month — $1.5 to $1.8 million annually — to remain viable. Similarly, retailers in Washington need to generate between $2 million and $2.2 million per year.
Retailers in distress must either cut costs or drive up revenue to stay in business. Increasing prices and margins, in Whitney’s estimation, increases retailers’ federal tax liability. So they must drive down prices and lower margins, increasing volumes, to minimize tax impacts. One alternative is vertical integration, enabling more pass-through costs and driving down retail taxable profit. In the wake of the Trump tax bill, Whitney urged cannabis businesses to consult their finance and tax planners to determine which adjustments to make.
On the international market, Canada is taking the lead, according to New Frontier. Currently, 59 cannabis companies are listed on the Canadian Securities Exchange with the Canadian market’s size likened to California’s. Canada in July will become the first country in North America to legally permit cannabis at the federal level for medical use. Also, Canadian firms are exporting medical cannabis to more than 10 countries, with more opening up in the near future.
Medical processing in Oregon of up to 20 pounds of cannabis is new in 2018, along with a bump-up canopy for growers. Legislation that will allow micro-processors to make concentrates is anticipated by Jesse Sweet, policy advisor for the Oregon Liquor Control Commission. Sweet says law changes will permit processors to take in hemp from Oregon Department of Agriculture registrants. A lack of resources in the short term, he said, will delay processing of cannabis licenses this year for new applicants.
OLCC has approved a bill before the Oregon State Legislature that would allow for distribution of free samples at cannabis events. Sweet admonished those attending OCA’s event, however, for the poor results of OLCC’s recent minor decoy compliance check. While results are on par with noncompliance for alcohol sales, Sweet noted that the federal government doesn’t care about alcohol sales. But since the largely hands-off stance on state legalization enjoyed under the Obama administration was rescinded, Oregon dispensaries need to do better, he said.
The latest regulations governing cannabis in Oregon can be viewed on the Secretary of State’s website. For additional information about the OCA, go to http://orcannabisassociation.org.