Ask Our Experts: Cannabis in Colorado – Part III: Seven Lessons from Six Years of Adult Use Sales

 

[Editor’s Note: In the previous two weeks, New Frontier Data has reviewed the performance of Colorado’s cannabis market since its adult-use sales began in 2014. Over that six-year period, the state has generated $7.8 billion in sales, $1.2 billion in taxes, and grown to include nearly 3,000 businesses employing about 39,000 workers.]

 

Q: Given the likelihood of more states’ embracing legal cannabis programs as economic means to make up for post-pandemic budgetary shortfalls, what guidance might they take from successful programs elsewhere?

A: Based on Colorado’s being the first state in the nation to adopt adult-use cannabis, and its market’s strong performance ever since, one might expect to see the Rocky Mountain State’s lessons learned to be leveraged in important ways for the blueprints of  national and global legalization. Among such takeaways:

 

1. Affirmation that effectively regulated cannabis is an attractive alternative to the illicit market. Over the six years since adult-use sales began, Colorado’s legal market has now captured over 80% of estimated total demand for cannabis in the state. Since most of the activity has been derived from consumers transitioning to the legal market from illicit sources (i.e., rather than new consumers trying cannabis for the first time), Colorado’s market affirms that legalization can be highly disruptive to illicit sales.

 

2. With demand for cannabis deeply entrenched, illicit markets capture significant untaxed revenue. Though it has been over 80 years since the first U.S. laws banning cannabis, the National Survey on Drug Use & Health reports that more than 1 among 10 Americans regularly consume cannabis, with the percentage increasing steadily over the past two decades. With an estimated 264 million cannabis consumers globally, spending nearly $350 billion for it annually, governments stand to see significant revenues from effective taxation and regulation.

 

3. Rapidly shifting market economics make it imperative to plan for acute downward price pressure. Since Colorado legalized, the average market rate for a pound of cannabis has fallen 42%, from $2,007 to $1,164. The drastic decline has made it extremely challenging for growers who had pegged their break-even points at $1,000+/pound to be both profitable and competitive.  As operators in emerging markets consider the future of legal cannabis businesses, it is essential to plan for where the market is going, not where it resides at launch. Likewise, it is critical to assume that s will fall steeply over time; thus, companies should devise aggressive cost-containment measures from the outset.

 

4. Taxes can make or break a program. In keeping the total cannabis tax rates at approximately 27%, Colorado found a proverbial sweet spot of taxes high enough to drive meaningful revenues without being so high as to discourage consumers from paying a premium over illicit market prices. That approach stands in stark contrast to California, which has seen consumer taxes of nearly 50%, the highest in the nation. California’s two-year-old legal market has struggled to gain traction in large part because of consumers’ avoidance of such a heavy premium in a state where high-quality cannabis remains widely available in a long-established unregulated market. As lawmakers in prospective legal markets reconsider their tax rates, they would be wise to carefully weigh the tradeoffs of setting high taxes to maximize near-term revenues, versus what could be collected at a lower threshold where revenues would be drawn from a larger pool of consumers abandoning the illicit market.

 

5. Consumers are willing to pay a (slight) premium for legal cannabis. While consumers may be hesitant to pay a 50% premium for legal cannabis, Colorado has proven that they are willing to pay a moderate premium for the benefits attendant to a legal market, including broader variety among products, convenience of retail stores, testing and quality standards, and the social legitimization in purchasing cannabis from a legal brand rather than an illicit source., Once such benefits are enjoyed, the illicit market loses appeal, thereby achieving another key policy objective.

 

5. Investing in public health and safety can help minimize negative social externalities of legalization. Opponents to legalization often fear negative public health outcomes which may arise. Specific concerns often include underage use, highway safety, and mental-health issues among those predisposed to drug addiction or mental disorders. Yet, Colorado’s approach of appropriating the largest part of program revenues to apply toward public health and social services appears to have largely helped minimize such issues as its legal market has become established. Notably, intent toward improving school-age drug education programs, and supporting criminal justice diversion programs which steer offenders toward social services rather than incarceration, has helped lower the state’s spending on cannabis-related law enforcement.

 

7. Opportunities for product innovation remain significant. Over the past six years, sales of cannabis flower have fallen from their representing the overwhelmingly predominant segment among product sales, to accounting for less than 50% of market share as the popularity of processed and value-added products has risen. As New Frontier Data describes in The Cannabis-Infused Products Report Series: S. Consumer Experience & Demand,, edibles represent a category poised for dramatic growth as technological innovation enables cheaper production, increased consistency, more rapid onset (i.e., reducing time of effects to be felt from 60 or more minutes, to under 10), and a more consistent consumer experience. Further, based on sales performance of well-developed products, consumers are clearly open to, and will positively about, receiving products which deliver more effective, more refined experiences. Continued innovation will expectedly transform the product landscape throughout increased adoption of value-added products.

While Colorado’s adult use experiment has not been devoid of challenges, it has broadly served as a compelling illustration of the potential for increased revenue, job creation, and socioeconomic reform that can follow adult-use cannabis legalization. As the world braces for the impacts from a COVID-19 triggered recession, many more nations and local jurisdictions  will be motivated to consider and understand how legalized cannabis markets may serve as catalysts for much needed capital investment, tax revenues, and economic growth.