While Canada is only the second country in the world to legalize cannabis, it has not done so in a cultural vacuum. Nine US states have legalized recreational use since 2012, and their experiences, perks and pitfalls in doing so offer valuable insight into what can be expected for BC’s own legal industry.
The USA’s three oldest recreational markets - Colorado, Washington, and Oregon - provide a useful point of comparison for BC. As the most mature adult-use markets in the world, the three states yield a rich source of data and offer the strongest indicators of economic and commercial trends. Combined, the states accounted for over 40% of legal US sales last year, and with the population size of each state comparable to BC, they provide a helpful benchmark against which the province’s industry can be compared.
While each state has a unique regulatory, retail, and tax regime, broad themes - across job creation, product choice, price, and black market erosion - are evident. These similarities between the states also highlight distinctions between the Canadian and American models of legalization, and what these differences might mean for the success of the legal industry in BC.
Sales and tax revenue
Since legalization, Colorado, Washington, and Oregon have all enjoyed increasing sales of legal cannabis - and with this, rising tax revenue.
The first state to start recreational sales in January 2014, Colorado (population 5.6m) has spent more than $5.5 billion on legal weed to date with $1.5 billion of sales (c. $1.95bn CAD) in 2017 alone. With a 15% excise tax and a 15% marijuana sales tax, Colorado has raised nearly $816 million ($1.05bn CAD) in taxes, licenses, and fees since legalization. Tax take continues on an upward trend, with the state collecting nearly $250 million in 2017, and $23 million in September 2018 alone.
Washington (population 7.4m) was the second state to begin recreational cannabis sales in July 2014. At the onset of legalization, the state imposed a 25% excise tax on each stage of cannabis cultivation, processing, and retail, before transitioning in July 2015 to a flat 37% excise tax at the point of sale, plus state and local sales tax. In the 2017 fiscal year Washington enjoyed legal cannabis sales of $1.37 billion and collected over $342 million (c.$445m CAD) in tax, with current monthly tax revenues of around $30 million.
Oregon (population 4.1m) began sales of recreational cannabis in October 2015. Since then, the state has spent more than $1.21billion on legal product, with total monthly sales of between $45 and $55 million throughout 2018. Oregon taxes recreational cannabis sales at 17%, with an optional 3% levied by cities and counties, collecting $20.7million in the fiscal year to June 2016, $70.3 million in 2017 and $82.2 million (CAD$107m) in 2018.
US states have chosen to establish a direct link between cannabis tax revenue and public service provision. In Oregon, the state school fund receives 40% of cannabis tax take, with mental health, alcoholism, and drug services allotted a further 20%, state policing 15% and the health authority 5%. In Colorado, recipients include the state’s school building fund, the education department and local law enforcement, with revenue supporting projects such as cannabis education campaigns and substance abuse protection programs. While cannabis tax revenues may be small relative to state’s overall budgets, coupling them to specific agencies and programs helps to underscore legalizations positive contribution to wider society.
The legal cannabis industry has also generated thousands of jobs in each of the three states.
A study of Colorado’s cannabis industry found it created the equivalent of 18,000 new full-time positions in 2015. Of these, over 12,500 were in the plant-touching sectors of cultivation, processing, and retail, with an additional 2,900 jobs in ancillary industries such as security, real estate, construction and legal services. A further 2,500 jobs represented ‘induced employment’, generated by cannabis business owners and employees spending income on local housing, food and entertainment. The success of Colorado’s legal weed industry is even thought to be a key reason for the state enjoying one of the lowest unemployment rates in the USA.
As a first mover in the industry, Colorado’s Front Range has experienced a burst of cannabis business formation in technology, manufacturing, and testing - earning the area the nickname ‘the Silicon Valley of Cannabis . More so than other US states, Colorado has also harnessed the power of cannabis tourism. Canna-curious visitors can book a range of tours, experiences and 420-friendly accomodation, with some 6.5 million cannabis tourists clocking nearly 18 million use-days in 2016.
In Oregon, legislation has also created an estimated 12,500 plant- touching jobs, generating over $315 million in wages and $1.2 billion in broader economic activity. In Washington, active cannabis businesses employ the average equivalent of 9 full-time workers, and have generated more than 6,000 full-time equivalent jobs with total wages of $280 million. Neither figures given for these states include job creation in ancillary and secondary sectors, with the full employment effect of each industry therefore even higher.
In Colorado, Washington, and Oregon, recreational legalization has been characterised by an explosion in product innovation, variety, branding and consumer choice.
Cannabis consumers in each state are served by roughly 500 private retail stores. In Washington, the number is capped and distributed across counties, while Colorado and Oregon impose no state limit.
Given similar population sizes and use rates, this offers a ballpark figure for the total number of stores that BC - which has similarly uncapped retail numbers - might enjoy. This number is likely higher than the previous level of black-market dispensaries across BC, but will depend significantly on the restrictions and attitudes of local and municipal government. A month on from legalization and nearly 300 private retail applications have been submitted in BC, although only four private retail licenses have so far been granted.
Across the US states, thousands of products jostle in dispensaries for the attention of every kind of cannabis connoisseur - free from Canada’s federal packaging requirements, products range in presentation from the sleek and stylish to the brash and the bold. As product choice and consumer preferences develop, users increasingly look for more than a simple smoke - flower’s proportion of total sales continues to decline and hovers around 50% in all three states, while concentrates claim roughly 25% of the markets, and edibles another 10-15%. From Gorilla Glue vape pens, THC-infused coffee to CBD gummies, chances are that these markets can satisfy even the most specific of urges.
Colorado’s legal cannabis industry is home to 275 brands and 11,000 unique products, according to retail tracking data from 2016 and 2017. In Oregon, total product offerings grew by over 1,000% in the first six months of legalization, with over 400 brands and 10,000 products on sale within the state. Not one to be outdone, Washington State offers more brands and products than these two states combined: in this heavily-contested cannabis market, over 1,000 cannabis brands and 45,000 unique products were tracked over the same period.
Despite the sheer level of diversity, retail competition has also resulted in clear commercial winners. While no single product holds more than a few percent market share, a handful of firms have grown to dominate the easily-branded markets for edibles and concentrates - in each of the three states, the top ten edible brands hold a 70% market share, while In Colorado and vape-heavy Oregon the top five concentrates brands alone account for 70% of the market. This shows that brand identity is indeed valuable in the commercial cannabis space, and that those with a good product and a strong image can succeed against even thousands of competitors.
The competitive retail environments in Colorado, Washington, and Oregon are underpinned by their broader free-market structure, with significant competition at the cultivation level and, in contrast to BC’s own legal industry, a commercial marketplace void of government intervention.
Each of the three states exhibit a crowded and competitive cultivation sector, largely by intentional design. In Oregon, relatively low barriers to entry were seen as a way to establish legitimacy and bring black market growers into the new legal framework, while Washington regulators chose to regulate licenses at a retail rather than a producer or processor level. None of the three states have capped the total number of production licenses, with licenses instead limited by either plant size or canopy count. Colorado now has more than 700 sites licensed for recreational cultivation alone, while Oregon and Washington State both have more than 1,000 cultivators each.
When it comes to the sale and distribution cannabis in the US states, it is treated like any other consumer good. In contrast to BC’s interventionist model - where the Liquor Distribution Branch determines the exact brand assortment, volume, and wholesale price of the province’s cannabis - in Colorado, Washington and Oregon, individual producers and retailers negotiate supply agreements and wholesale prices amongst themselves.
Aided by online brokerage platforms such as Cannabase and Green Marimba or, in Oregon, one of 130 private cannabis wholesalers, cultivators, and retailers are free to contract for the product volume and price they wish on a fluid and responsive basis. With cultivators and processors free to sell direct to retailers without government approval, pricing or intervention, competition is fierce, quality is high and the price responds to market conditions.
Precise market structures vary between the three US states: In Colorado, the vertical integration of cultivation and retail was mandated for the first few months of legalization and is now optional. The same applies in Oregon, whereas vertical integration is strictly prohibited in Washington State. Yet despite these differences in retail structure, a functioning commercial market unites the three states and distinguishes them from Canadian models defined by provincial economic control.
In Canada’s cannabis industry, high barriers to entry and economies of scale mean that the number of LPs competing for national market share and multi-provincial supply deals will remain far lower than the level of cultivators in US states. However, Canada’s new micro-cultivation and processing licenses open the door for a groundswell of craft and boutique production focused predominantly at a local and provincial level, similar to growers in Colorado, Washington, and Oregon.
While micro-businesses can inject more diversity into Canada’s legal cannabis industry, without the open marketplace enjoyed by US states, craft producers in BC face far less opportunity to even access the consumer market, let alone succeed in it.
The competitiveness and ease of entry for US states’ cannabis markets have also had a defining impact on the price of legal weed.
Across each state, the onset of legalization was characterised by high retail and wholesale prices as new licensed production struggled to keep up with legal demand. As growing practices have improved, the number of has cultivators risen and supply has continued to increase, cannabis prices have fallen across the board.
Wholesale prices peaked in Colorado in early 2015, with a pound of bud reaching an average of $2,000. Since then, prices have continued to fall to an average of $760 per pound of bud, $325 for trim, and $225 for flower used in extractions. Retail prices in Washington State have gone from more than $30 a gram for flower to less than a third of this initial price, while wholesale prices have fallen to under $600 a pound.
Oregon’s cannabis market has been particularly volatile: initial scarcity and a poor harvest were followed by a flood of new capacity, triggering a steep drop in wholesale prices within 18 months of recreational sales. Retail prices in Oregon peaked in late 2015, with the average, pre-tax retail price for a gram of flower down 36% over the past two and a half years to $6.50.
Alongside plummeting prices, Oregon’s market is marked by significant oversupply: according to the state tracking system, there is over 1 million pounds of unsold legal cannabis and edibles in state inventories - nearly three times the total amount of cannabis sold in Oregon over the whole of 2017.
Low prices are a boon for consumers, but a growing threat to producers: smaller and less-economical operators from Washington and Oregon in particular have been scaling back and winding down as a result of market pressures. Market adjustments can be devastating for individual businesses and entrepreneurs, yet are neither new nor unexpected in such a nascent industry - especially one which generates as much interest and enthusiasm as cannabis.
Both Oregon and Washington regulators were prompted to freeze applications for new cannabis licenses this summer, thanks to a backlog of applications and rising concern over market oversaturation. But even without government intervention growers across the three states are finding ways to adjust - for example, by growing for the flower-intensive extraction market, switching to CBD-rich hemp production, or segmenting to high-grade flower and value-added products, which continue to attract a strong price premium. Growers are also responding by regulating their total output: in Colorado, recreational cultivators currently utilize only a third of their total allowable plant count.
Overproduction and plummeting prices have led some to deride ‘too much of a good thing’ in Oregon and Washington, often while criticising regulators’ ‘hands off’ approaches to cultivation management in the states. While it may be tempting to blame market saturation on the failing of an under-regulated, free-market approach to cannabis production, it’s worth considering whether the inverse - underproduction, overregulation, and legal prices far beyond that of the street dealer - are preferable instead.
It’s also worth noting that warnings of looming overproduction are given for the comparatively highly-regulated industry of Canada, too - although in this instance driven by the output of a handful of large cultivators rather than a plurality of smaller growers.
The Black Market
Colorado has enjoyed significant success tackling the cannabis black market, and four years on from legal sales has the lowest black market rates in the USA. Legal consumption now accounts for two-thirds of sales in the state, with the black market projected to be fully eliminated by 2020.
In Washington state, legal sales now account for between 50% to 65% of the market, while the black market remains more persistent in Oregon, representing an estimated 60% of sales.
Although there is still some way to go until the black market is fully eliminated, these figures reflect a significant transition of illicit cannabis production and use into the regulated system - and offer a benchmark against which Canada can measure its own progress eroding illegal sales.
Cannabis black markets continue to persist in the US states for several reasons. High tax rates which make legal sales uncompetitive are one, as in the early days of Washington’s legalization, and Colorado’s recent tax increase also blamed for a slowdown in black market erosion. Poor enforcement, including understaffed government agencies - and in the case of Washington, a meltdown of the state tracking software - is another.
Lack of access to legal cannabis remains a significant driver of the black market. In Washington, 30% of the state’s population live in an area banning cannabis retail, while in Colorado 65% of local jurisdictions have prohibited cannabis cultivators and stores. Similarly, 80 cities and 16 of Oregon’s 36 counties prohibit any kind of marijuana business.
With online delivery prohibited across each of the three states, the black market is often not just the best but the only source of cannabis in ‘dry’ locations. Even in jurisdictions with legal retail, the convenience of illegal delivery services remain a draw: of the three states, only Oregon allows deliveries by dispensaries, leaving consumers in cities like Seattle and Denver turning to neighbourhood dealers for ‘pizza-style’ home delivery.
However, the biggest reason for the persistence of the black market is an uniquely American one: the federal illegality of cannabis. Demand for weed in other states has not disappeared, and the market - legal or otherwise - is happy to oblige.
Falling prices in legalized jurisdictions with a continued price premium for cannabis in other states creates a lucrative opportunity for interstate trafficking. Faced with low prices and excess production, licensed growers have fuelled diversion by offloading product on the black market, as have retail consumers seeking arbitrage opportunities across state lines. Law enforcement have also reported an increase in organised illegal grows in legal states, with criminal enterprises using legalization as cover to operate in plain sight.
Like BC, Oregon has long enjoyed a reputation for high-quality cannabis production and notoriety for distribution beyond its borders. This in part accounts for the Beaver State’s comparatively robust black market: while the opportunities and reasons for supplying Oregon’s domestic market have been reduced, there has been relatively little incentive to pack up existing trafficking arrangements.
Over time, increasing access to legal cannabis across the USA will damped demand for diverted product, though the problem will likely persist until policy change at the federal level. However, continued trafficking is a trend that Canadian (and particularly BC) policymakers should be aware of, although the focus here is likely international rather than internal.
A high bar to beat
Although not without hiccups, the successful cannabis economies of Colorado, Washington, and Oregon show that legalization can be a catalyst for growth, jobs, public revenue and opportunity.
Under these states’ largely free-market models, consumer choice and product innovation have flourished and cannabis prices have plunged so low as to force former dealers into the painful world of actual jobs .
This has all been achieved despite the fact that cannabis’ federal illegality strips American cannabis businesses of banking facilities, imposes prohibitively high tax rates, and severely restricts opportunities for out-of-state expansion. In this respect, Canadian canna-preneurs are blessed with a far more accomodating business environment and enjoy greater financial opportunities than their American counterparts.
US states have also made great strides in eroding the black market, with the clear majority of producers and consumers enthusiastically embracing the legal, regulated industry. However, their experience demonstrates that aspects of the illicit market will continue to persist if there is incentive enough for their existence.
Just as trafficking opportunities and questions of consumer access keep a black market rumbling in legal US states, so too do issues of access, choice, and diversion pose a threat to the new industry in BC.
Yet the experience in US states can only reveal so much. Colorado, Washington, and Oregon have embraced an open market of cannabis production and sale, whereas British Columbia (like many other Canadian provinces) has opted for a model of provincial government control.
In diverging from the American experience, BC regulators may gain more influence over elements of the industry, but at a potential cost. While US states enjoy competition, innovation, and a thriving legal industry, some of the biggest risks to BC are that overbearing provincial control will stunt craft production and consumer choice, new economic opportunities fall by the wayside, and the black market endures.
Charlotte Bowyer of Hanway Associates