Lessons From Illicit Cannabis Markets: Trends and Surprises
By Esteban Rossi I., Ph.D., Analyst, New Frontier Data
Since the early days of cannabis legalization in Uruguay, enthusiasts and entrepreneurs argued that by establishing an adequate legal framework for the nascent cannabis industry, governments could pull consumers from the illicit market by offering quality products at affordable prices. Subsequently, private firms and state agencies sought to collect the dividends from cannabis sales and distribution, while protecting consumers from the hazards of unregulated markets. Here New Frontier Data offers an overview of the interplay between regulated and unregulated markets (with special attention to Mexico and North America) highlighting the most important lessons, trends, and surprises included in the new Global Cannabis Report: Growth & Trends Through 2025, drawing on the latest data and interviews with local experts, community leaders, and industry stakeholders. Due to its position as a regional trade hub, and through ongoing discussions to regulate adult-use programs, cannabis firms, regulators, and the public look forward to the consolidation of the Mexican market.
Market mapping
Most cannabis markets can be divided into three primary segments: medical, adult-use, and illicit. Some jurisdictions (e.g., Uruguay and Canada) regulated both medical and adult-use markets, while most Latin American countries allow only for medical use. Every country’s legal market coexists and competes with the illicit market. In addition, numerous countries including Colombia, Argentina, Peru, and Uruguay, have developed guidelines for at-home cultivation for personal use.
An illicit market can exhibit considerable diversity, depending on the jurisdiction. In Mexico, numerous distributors sell cannabis products to domestic consumers. Local distributors offer various products including flower, tinctures, and edibles, while tending to focus on high-THC products. Distributors rely on direct sales to consumers, but also utilize numerous digital channels and delivery services. The quality, consistency, and availability of products vary considerably. New Frontier Data estimates that the Mexican illicit market is currently worth about $3 billion USD (2020).
Illicit distributors obtain products from various sources. While local organizations produce and sell products to small niche markets, large international organizations source significant quantities of cannabis from rural areas to sell to sophisticated distribution networks. Interestingly, large organizations now also ship cannabis products from the U.S. into Mexico.
Some licensed American producers have found ways to sell excess inventory or noncompliant crops to illegal organizations. Thus, legally grown cannabis and some finished products find their way into Mexican cities. The inverted trade pattern has become sufficiently pervasive to catch media attention, yet Mexican sources claim that North American cannabis has been sold in Mexico ever since the adult market took off in California, creating regulatory challenges for both the Mexican and the U.S. governments.
Lessons and surprises
The evolution of illicit markets in Mexico, the U.S., Canada, and elsewhere offers instructive lessons for cannabis entrepreneurs and regulators. The first is that since illegal organizations have decades of experience refining their business models, illicit markets are mature. Over decades, they developed a good and affordable product, built world-class distribution networks, and got to know consumer demand very well. Few legal companies have achieved similar efficiencies.
The second is that illicit organizations are remarkably adaptable and resilient. Per the inverted trade pattern, illegal organizations effectively source, test, and distribute cannabis products across multiple jurisdictions and through numerous channels. Thanks to this, Mexican consumers can access to products ranging from dry flower, to branded edibles, and premium Delta-8 disposable vapes.
The third, perhaps most problematic lesson for legal businesses, is that illicit markets evolve much more rapidly than regulated markets. As cannabis firms learned the hard way, legislative advances, regulations, and guidelines each require some extensive collaboration between government agencies. Similarly, communicating the therapeutic benefits of cannabis to health-care professionals and the medical community is also a long process. Ironically, while the increasingly global illicit market advances like a tsunami, regulatory agencies across the world misplace their efforts and attention.
Rather than developing strategies to educate the public and outcompete illicit operators with lower prices, higher-quality offerings, and safety standards, regulators focus more often on time-consuming licensing procedures, THC limits, and security protocols. Moreover, in regarding CBD as a medicinal product and restricting consumer access, regulators effectively push consumers toward illicit markets, weakening compliant firms.
Nevertheless, figures indicate that legal markets continue to grow consistently (most notably in the U.S.), while Latin American legal markets remain immature. As detailed in the Global Cannabis report, total cannabis spending in the illicit market comprised $12.8 billion USD in Latin America. In comparison, the regulated (legal) market comprised just $7.3 million USD in 2020. These figures are particularly interesting considering that the largest countries in the region have yet to develop their domestic markets.
Despite the complex regulatory delays, the legal market keeps on growing. Sales and dividends are increasing, particularly in mature markets. Similarly, consumer interest and public perception remain overwhelmingly positive across jurisdictions including Mexico, the U.S., and most of Latin America. Most importantly, in locations where consumers can purchase cannabis flower at dispensaries, whether for medicinal or adult use, legal markets are poised to evolve much faster.
