Cannabis Retail Opportunities Abound

Cannabis is perhaps the most exciting retail opportunity to hit U.S. markets in decades. The lucrative combination of rapid sales growth, an ever-expanding customer base and government-enforced protection against mass-retail has resulted in a unique market that is unlikely to be replicated anytime soon.

For more than a decade, State governments have dictated cannabis legalization, production, sale, and use. These efforts, while in defiance of federal strictures, have begun the arduous process of diverting more than $50 billion in annual illicit spending into new legal channels.

Legal Cannabis is Booming

The U.S. legal cannabis market has experienced massive growth since adult-use sales first began in 2014. Legal spending reached $9.8 billion in 2018 and is forecast to grow by 30 percent, reaching $12.8 billion in 2018; and at a compound annual growth rate of more than 20% to $30 billion in 2024. BDS Analytics also predicts by 2024 nationwide legalization for medical markets and at least 23 states offering full adult sales. Even with the onboarding of several new state markets in 2024, only 47 percent of Americans will have access to adult-use stores. In short, the potential for further growth lies beyond 2024.

 Cannabis is a Protected Specialty Market

The sale of cannabis containing THC amounts exceeding .3 percent is limited to adult-use dispensary stores. While competition among cannabis retailers continues to exist and grow, these retailers do enjoy government-enforced protection. Until legalization goes federal, cannabis retailers remain isolated from the competition presented by specialty stores, mass merchants and e-commerce.

Challenges, and Capital, Everywhere

While dispensaries remain temporarily safe against the threats of competition realized by traditional retailers, the industry is not without its challenges. In addition to the expected woes of any start-up retailer, cannabis dispensaries face the added financial burdens associated with strict regulatory compliance, higher costs of capital and banking services, tighter profit margins as a result of IRS Code, Section 280E, well as limitations on conducting business across state lines.

Nevertheless, the capital needed to grow retail businesses and build value was unleased in 2018 when U.S. multi-state operators discovered the route to public equity via the Canadian Securities Exchange. Despite this year’s brutal correction in those public values, the pool of public funding will only increase as the U.S. legal cannabis market evolves.

The Game-Changer on the Horizon

Federal legalization, which could occur as early as 2021, would redefine the cannabis industry landscape in many ways. It would ameliorate many of the issues that are restricting profit margins for retailers today. The greatest facilitator of change, however, will be enabling financial institutions to serve cannabis retailers with the same rates provided to all other consumer product purveyors. This change alone wil create greater opportunities for business scaling and growth.

On the demand side, federal legalization would remove the final barrier to wider consumer acceptance of a product that nearly one-quarter of American adults report consuming in a given six-month period, and another third say they would consider consuming in the future (categorized as Acceptors™). In legal adult-use states, these combined categories amount to 67% of the adult population, a larger percentage than say they consume alcohol.

 The Future of Cannabis Retailing

Cannabis retailing could become one of the most profitable and enduring specialty store categories ever. Several existing, well-established, niche industries including specialty coffee, craft brewing and fine wine provide a glimpse into what the future may hold for cannabis markets. Each of the aforementioned industries started with enthusiastic single-store operators who were able to keep a profitable niche for themselves even as the bulk of total sales for their product category went to mass producers and mass merchants.

Cannabis retailers have an opportunity to do the same in a product category that will be among the fastest-growing in the world economy for many years to come.