Six Takeaways from the Colorado Cannabis Programs’ Past Three Years

By John Kagia, Chief Knowledge Officer, New Frontier Data

Colorado’s Marijuana Enforcement Division has released its long-awaited 2019 midyear update — the biannual report on the state’s regulated cannabis industry. Having compiled all the state reports since 2014, notable trends have begun to emerge as the state’s industry enters its next phase of growth. The state’s medical cannabis market continues its gradual contraction as demand and resources are focused on the adult-use market. However, due to the benefits afforded to registered patients (including tax exemptions and higher purchase allowances under permit), program participation remains strong, and the medical market remains more viable than in states where similar benefits are not afforded to patients.

Notable takeaways from this report include:

• As the market’s expansion slows, resources are shifting from the medical to the adult-use market. In a three-year period starting June 2016, the number of licensed cannabis businesses grow incrementally (5%). However, the market saw a major swing as the number of licensed medical businesses declined 14% while the number of adult- use businesses increased by 30%. The reallocation of resources from those markets indicate that operators are becoming more efficient, with growth driven by companies expanding their capacity rather than by new companies entering the space.
• Even as the medical market contracts, evolving patient preferences have buoyed retail demand. In that three-year period ending June 2019, the number of registered patients fell by 21%, from 105,841 to 83,984. The remaining patients, even as adult-use options abound, are generally those who benefit most from the patient tax concessions due to their high-volume purchases. Consequently, the decline in medical product demand has been slower than decline among registered patients, as the highest-consuming patients persist.
• Of the three largest product categories, flower has seen the largest contraction in the medical market, and greatest expansion in the adult-use market. The swing in flower demand underscores that — even as medical patients increasingly turn to noncombustible products — Colorado remains a flower-driven market. While non-flower products have commanded a rising share of total sales, it is due not to contraction of flower sales, but rather strong growth in the new product categories. Still, as consumers embrace the new products, flower remains the single-highest volume category.
• Product manufacturing has seen the greatest expansion over the past three years, driven by strong demand for concentrates and other noncombustibles in both the medical and adult-use markets. Concentrates represented the only category to see significant growth in both medical and adult-use demand (61% and 251%, respectively) over the three-year period. The strong growth in medical demand for concentrates (even as flower demand contracted) underscores patients’ twin objectives of moving away from combustion as a primary form of ingestion while still getting the fast-acting effects of inhaled products. As medical markets mature globally, New Frontier Data expects the transition from flower to non-flower products to happen on more compressed time frames as the foundational technologies to develop high-quality, fast-acting, noncombustible products have become more widely available.
• The popularity of concentrates in the medical market explains the disruption to vape sales in medical markets during the EVALI crisis. As the electronic vaping and lung injury crisis exploded in the fall of 2019, New Frontier Data found the decline in vape sales to be most pronounced in newer medical markets. With Colorado patients showing a strong preference for noncombustibles (vapes in particular), the long-term impact from EVALI on patient demand for vapes remains to be seen. However, as the CDC has definitively identified illegal vitamin E acetate as the culprit (banned among legally regulated products), vape demand is projected to rebound as health investigators affirm that the risk of EVALI is tied to unregulated and untested products in the illicit market.
• The number of expiring occupational licenses each month is rising as the industry builds efficiency and scale. The total number of active occupational licenses has more than doubled since 2015, but as the market nears saturation, the number of licenses expiring each month is rising, with the number of expiring support licenses growing at twice the rate of key licenses each month. In an increasingly efficient and maturing market, competition for top talent will increase even as less experienced personnel (especially those in support staff roles) face more difficulty to find new opportunities in the space.

Looking ahead to the 2019 Year End Update, New Frontier Data anticipates some destabilization on retail product sales from the EVALI crisis, with demand shifting from vapes to flower and edibles. Likewise, the liquidity crunch grown more acute in the latter half of the year can be expected to result in further industry consolidation, staffing cutbacks, and slower growth in capacity-building. Nevertheless, strong consumer demand in both the medical and adult-use markets will continue to drive growth opportunities for the most effective and efficient operators.