Marijuana Store Survey and Industry Outlook Q2 2015

June 22, 2015 By Jessica Rabe
June 22, 2015 By Nicholas Colas

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Summary: The recreational marijuana market in Colorado continues to post impressive growth figures, but pricing fell even more than our last quarterly report in March. We have covered the developments of this novel industry for a year now by regularly surveying numerous owners, managers and employees of Colorado marijuana dispensaries. Since last June, the average price of an 1/8th ounce of recreational cannabis has dropped from $50-$70 to $30-$45 currently; an ounce now sells for between $250 and $300 on average compared to $300-$400 last year. More competition and expansion of grow facilities contributed to this price decline, but it is also a natural result for any maturing industry as dispensaries try to find the market’s equilibrium price. Even still, recreational marijuana sales during the first four months of this year exceeded last year’s comps. For example, sales rose by 98% y/y to $43.9 million in April based on our own estimates of the latest available tax data from the Colorado Department of Revenue. Given our revenue estimates for January through April, we expect stores to gross up to $480 million this year collectively, a +50% comp to 2014. Please read on for the details of what we’re hearing from dispensaries and our own analysis of this burgeoning industry.

Note from Nick: Dramatic growth isn’t just for killer messaging apps and hipster cab services; the Colorado marijuana business is growing, well, like a weed. Today Jessica updates her quarterly survey of this industry – her fourth – with the latest data. Unicorns aren’t just for Silicon Valley – this business would merit a billion dollar valuation in any Sand Hill Road conference room.

As we progress into the heat of summer, there are numerous resorts with fun and cooling activities on offer, but we can assure you there are none like the CannaCamp Mountain Resort in Durango, Colorado. Its pitch is similar to other all-inclusive resorts in the state, but with one distinct value add: guests can hike, zip line, and roast marshmallows, all the while smoking cannabis. It’s like summer camp, but for adults. The resort can’t provide marijuana due to state laws, but they welcome you to bring your own and also have a cannabis concierge on staff to recommend strains and direct you to local dispensaries. Here are the details of this 170-acre getaway, open from July 1st to October 31st:

  • Outdoor activities: There are several trails for guests to hike with available guides. And while most national and state public parks prohibit smoking, CannaCamp is the first property in Colorado to allow cannabis consumption in all public areas according to the company. That’s a green light for smoking on the trails, by the lake or heated outdoor swimming pool, for example. Other ordinary camp activities include canoeing, fishing and horseshoes, in addition to mountain biking, rock climbing, and ziplining for risk takers.
  • Cannabis activities: Although the resort can’t serve cannabis-infused food, it offers a “THC Fusion Cooking” class that teach guests how to infuse meals with THC and CBD (the two main cannabinoids produced in marijuana plants). It also offers educational classes on a range of marijuana-related topics from regulations and different strains to its economic impact and health benefits. Otherwise, enjoy their cannabis-infused massage therapy, watch local artists blow glass, or take a cannabis-friendly yoga or paint class.
  • Food: Don’t worry, this food experience will be nothing like the slop you ate at your childhood summer camp: CannaCamp offers gourmet meals with recommended strain pairings. Aside from lunch and dinner, a “Wake+Bake Breakfast” will await you in the morning in addition to a “4:20 Happy Hour” in the afternoon.
  • Cabin: Guests can choose from nine cabins for a place to stay, but you’ll have to step out onto your balcony to smoke since you aren’t allowed to consume marijuana indoors. This is also no low scale resort: rates start at $395 per person per night.

If you’d rather steal away in an environment that’s a little more subdued and relaxing, the owners of the resort also own a “Bud+Breakfast”. Two actually: One with rooms that rent for as low as $149 on weekdays and $159 on weekends in July, and $299 for the other. Again, this is just like a Bed and Breakfast, but with cannabis in the mix by way of a wake and bake breakfast, 4:20 Happy Hour, and cannabis-infused massage therapy.

These marijuana-friendly businesses are just two examples of entrepreneurial ventures blossoming in the Centennial state since Amendment 64 first allowed licensed stores to sell to anyone over the age of 21 on January 1st, 2014. The big cash cows, however, are recreational marijuana dispensaries – and we mean that literally. The drug is still illegal on the Federal level, causing reluctance among most banks to accept these businesses as customers so they don’t risk money-laundering charges. Consequently, dispensaries heavily invest in security personnel and equipment, and hoard piles of cash in safes and containers.

Even with this significant wrinkle, recreational marijuana stores continue to rake in tens of millions of dollars collectively each month. We have followed this market intensively for over a year now, providing a quarterly update on the industry and our conversations about business and consumer trends with several stores’ owners, managers, and employees. A lot has changed since last year, but it shouldn’t be too much of a surprise. While this Colorado experiment in marijuana legalization is the most unique case study of its kind since prohibition, these dispensaries run just like any other retail business.

Here are our takeaways from our most recent survey, conducted last week:

  • Prices continued to fall from our survey in March. For the first nine months of 2014, only existing medical marijuana dispensaries could enter the recreational market while new entrants had to wait to apply for a license. The limited number of dispensaries were able to maintain high pricing power due to a concentrated market and because shops’ supply could barely keep up with demand. Last June, an 1/8th once of recreational marijuana cost an average of $50-$70 and an ounce sold for between $300 and $400. The former figure settled at a price between $40 and $50 in the fourth quarter of last year and the latter range remained the same.

    This year the average price of an 1/8th ounce has declined to about $30-$45, according to our survey work last week. Likewise, the average price of an ounce fell closer to $300 three months ago, but we are now commonly seeing prices around $250-$300 and some stores are charging even below the $200 threshold. Most stores sell top shelf marijuana, but bear in mind that connoisseur strains, also typically an option, command even higher prices. More saturated areas, such as Denver, tend to have cheaper prices.

    Nevertheless, this overall (and dramatic) drop during the past year partly resulted from more competition as a greater number of dispensaries were awarded licenses to operate. Secondly, our contacts started vertically integrating this year by buying additional warehouses and expanding their grow facilities, increasing supply. This is all a function of a maturing market as dispensaries try to find the market’s equilibrium price.
  • Customer flow kept pace over the last year, although the average transaction size halved. Our contacts still report between 100 to 300 customers entering their stores each day, but they only spend about $50 per visit compared to $100 last June. About half of these customers are tourists in most stores we interviewed.

    In order to retain customers and gain market share, dispensaries have increased promotional activities. One contact said offering deals is particularly important since taxes are high on recreational marijuana; sales taxes total 12.9%. Therefore, some stores keep a signup list so they can alert customers about new specials. Other promotional efforts include magazine ads, postings in online directories, and sporting event ticket raffles for customers who spend a certain amount. Our contacts said the largest drivers of business, however, are rallies and concerts as people stock up before each event.

    For example, “420” has become a term synonymous with celebrating and using the drug on April 20th of each year. Our interviewees said they were so busy leading up to this date that it reminded them of when they first sold cannabis in the beginning of last year. One manager noted he saw tourists who didn’t make the trip when recreational marijuana was first legalized, and reported serving over 1000 customers over a three day period encompassing “420”.
  • Each time we call recreational marijuana dispensaries and inquire about popular product offerings, we always get the same response: “Anything with weed in it sells well”. With that aside, there was a broad consensus among our contacts that hash and concentrates continue to draw huge demand specifically from those in their early to mid twenties. These options are cleaner and more powerful than smoking regular flower. Additionally, marijuana infused edibles such as chocolate bars and gummies are still popular, but companies are starting to make healthier offerings, such as hemp protein bars.

    We focus on the recreational side of marijuana dispensaries in Colorado, but many started out selling medical cannabis before retail was legal. Last year, some stores transitioned their medical shops into solely recreational. We are now hearing from a couple of contacts that they plan to sell medical again and have dual stores in order to regain some of the customer base that they lost. Above all, the owners and managers we spoke to said consistency in quality and price keep their customers coming back.

Overall, business for these dispensaries ebbs and flows similar to other retail stores. For example, our contacts said sales pick up around holidays, fall off after New Year’s, and gain momentum again once people receive the windfall of tax refunds in April. They are currently entering the busy season for marijuana dispensaries when they receive a steady stream of customers, particularly due to a bump in tourism.

A quick look at the latest available state tax data from the Colorado Department of Revenue show these stores in the aggregate beat its 2014 comps from January through April. For example, the state grossed $3.55 million in revenues from the 10% retail sales tax in January, which suggests stores earned $35.5 million in revenue. That’s a 153% increase from the prior year. Revenues in February and March grew by 164% and 126% on the year respectively, while sales rose by 98% y/y to $43.9 million in April. If we use the average of revenues for the first four months of this year – about $40 million – as our monthly run rate for the balance of 2015, total revenues for 2015 could reach $480 million. That would mark a +50% comp to last year’s revenues of $313 million for recreational marijuana sales.

Sales on September 16th will likely meaningfully contribute to that impressive potential comp. The 10% sales tax on recreational cannabis will be repealed only on that day due to a provision included in a bill Colorado Governor John Hickenlooper signed into law earlier this month. The bill also permanently cuts the 10% sales tax on recreational marijuana to 8% in 2017 in an effort to squeeze out the black market.

Keep that September date in mind for those thinking about booking a trip to CannaCamp. If you can’t wait till then, there are still plenty of suites available in July and August, but you’ll want to make your reservation soon. As the site posted about its response to inquiries: “Please be patient – we have become quite busy lately”. Just remember to BYOB (“Bring your own bud”).

For the full PDF version of the Morning Markets Briefing, including summary of yesterday’s market action, go here. See Important Information.

Topics: Convergex Blog, Morning Markets Briefing


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