Legal Marijuana: Waiting For The Man

By admin_45 in Blog Legal Marijuana: Waiting For The Man

For all the hype around the legal marijuana industry and stocks, US online Google searches for “marijuana dispensary” are flat over the last year. Not a great sign for continued adoption and usage rates, but there’s more to this trend:

Search interest for “marijuana dispensary” had been climbing steadily over the past five years, spurred by dispensaries commencing selling recreational marijuana in states that legalized retail use of the drug.
Peak search interest for “marijuana dispensary” was in January 2018, when California dispensaries started selling recreational cannabis. The highest level it reached after that was in December 2018, when dispensaries in Massachusetts first started selling retail cannabis.

Even though online interest in marijuana dispensaries haven’t grown over the last 12 months, they could start climbing higher again as dispensaries in more states start selling recreational cannabis. Here are Google searches for “marijuana dispensary” on an individual state basis over time:

Colorado (chart since 2004): Searches of “marijuana dispensary” here peaked in January 2014 when dispensaries first started selling recreational cannabis. Subsequent highs occurred over the summer of each year, but the level of search interest during these months has fallen over the past few years. Search interest in the current month is also down 30% y/y and lower than each year since 2014.
Washington (chart since 2004): Recreational marijuana sales started here in July 2014. While that brought a big uptick in searches, it didn’t peak until two years later in July 2016 perhaps as more stores received recreational licenses. That said, searches have fallen dramatically since, along with the highs for the year over the summer months. For example, the high last July was down +30% y/y and the high in July 2017 was down +30% y/y from the peak. Current search interest is around levels when dispensaries just sold medical cannabis.
California (chart past 5 years): The search interest chart for “marijuana dispensary” in the US’s most populous state is ugly for reasons we’ll explain below. Searches spiked to an all-time peak in January 2018 when stores started selling recreational cannabis, but fell +70% by mid-February of the same year and has trailed downward since to levels right before recreational sales started.

Nevada’s chart looks similar over the past 5 years. Searches peaked in July 2017 when dispensaries started selling recreational marijuana. They then fell +60% by September 2017 to levels not much higher than before retail sales commenced and has chopped around steadily since.
Oregon (chart since 2004): Again, not a nice looking chart. Searches peaked when retail sales began in October 2015 and has been in a downward trend ever since. Its current level is down +80% since the all-time high and falling towards when stores just sold medical marijuana.
Massachusetts (past 5 years): Searches for “marijuana dispensary” peaked in November 2018 when recreational sales began and fell +60% to a post-low in mid-March. That said, it’s up +80% since. While still down +30% from the peak, it will likely climb higher in the summer months especially with tourism.

Bottom line: there are important lessons within this marijuana online search data for state governments, marijuana dispensaries and investors. Here are three:

#1: Lesson for marijuana dispensaries/companies. The most attention any state’s new recreational marijuana market gets is when retail sales start, with the exception of Washington (happened two years later). That’s when regular/occasional users see if they want to make the switch from the black market, or new/old users want to try marijuana in a legal setting. After a while, locals likely find a dispensary they favor, or know where a few already are as they compare prices and quality.

The adoption curve shows huge interest at first, but it falls closer to pre-legalization levels over the next few years (as in the case of Washington and Oregon) or even within just a few months (i.e. California and Nevada). This is a relatively small window to establish a business and franchise to attract new adopters or pull customers from the black market.

As an aside, search interest in Colorado has fared better than most states where recreational marijuana sales are legal. That’s due to the summer months, likely from tourism. Massachusetts’ marijuana market is still enjoying relatively high levels of search interest since it’s fairly new. It also had a slow rollout of stores selling the drug and cannabis users will potentially want to try new dispensaries offering retail marijuana as they acquire all the necessary licensing.

#2: Lesson for state governments. Recreational marijuana dispensaries’ competition is the black market, which doesn’t have to incur many of legitimate businesses’ costs from retail space to compliance. More importantly, they do not have to pay taxes. Even though California has the largest addressable market given its size, we’re not surprised search interest dropped off so quickly and remains low. The state has dramatically missed marijuana revenue tax projections because the taxes are too high, allowing the black market to remain relevant and competitive.

By way of example, an online crowdsourced pricing website shows the average cost for an ounce of high-quality marijuana on the black market is $250 in California. A scan of marijuana dispensaries from Los Angeles to San Diego shows prices for an ounce of marijuana go from as low as $165 to as high as $420, but that’s before sales, state and local taxes. One store we called in San Diego – which we actually visited when it first opened – said the state tax for marijuana is 15%, the sales tax is 8% and the municipal tax is 5%. Using the black market price of $250 an ounce (lower than the average range of prices we found), shows a 28% tax would bring the total to $320. Why spend an extra $70 if you can get cheaper, high quality marijuana on the black market? Another store we called in Los Angeles had even higher taxes of 29.5%.

Bottom line, as states like New York and New Jersey try to legalize recreational marijuana over the next few years, high tax states like California are cautionary tales. Cannabis taxes that are too high will keep the black market alive.

#3: Lesson for investors. The black market is very efficient and has had years to build its distribution pipelines across the US. It’s especially hard to compete with black market prices since their customers don’t have to pay taxes. This challenge is particularly difficult for western states (i.e. Colorado, Oregon, California, and Nevada) as the online crowdsourced pricing website we referred to shows marijuana on the black market is cheaper there than the rest of the US. If you look at the US map on the homepage of its site, the average price of an ounce of marijuana is $300 or less in the West and $300-$400 an ounce the further East you go past Colorado. Michigan, Florida and Maine are the exceptions at $300 or less an ounce on average (two of which recreational marijuana is legal, but sales are not implemented yet).

The upshot for investors: the way states tax and regulate recreational marijuana sales will in large part determine the cannabis industry’s total addressable market. Higher than reasonable taxes will allow the black market to thrive and hurt growth rates and valuations for public marijuana companies.