Rising High: Exclusive talk with cannabis market research firm BDSA

In this edition of “Rising High,” The Fly conducted an exclusive interview with Michael Arrington and Brendan Mitchel-Chesebro, industry analysts at BDSA, a Colorado-based cannabis market research and data analytics firm. Here are some highlights:

$55B MARKET SIZE: In September, BDSA released an update of its five-year global legal cannabis market forecast, predicting the industry will experience substantial global growth driven by adult-use sales, resulting in a market size of $55B by 2027. “The forecast is a combination of three primary major markets,” Arrington said. “We have the U.S., Canada and then we have the rest of the world, which we call international. Through the end of our forecast period, the primary growth driver in these markets is going to be the United States.”

He added Canada will continue to grow as well and BDSA is expecting to see some global growth, but the U.S. will be the main driver. “That growth has shifted from the Western states to states in the middle of country and now to the Northeast, where we are expecting to see the bulk of the growth over the next few years,” the analyst said. “And we’re looking at a CAGR from 2022-2027 of 10.5%. That is the entire U.S., but if we look at what are the sources of that growth it is primarily new and recently launched adult-use markets.”

Looking at markets that launched prior to 2020, he said BDSA has seen some slowing or even decline in growth in the recent period. “Michigan is the exception to that; they were launched just prior to 2020 and it has continued to grow strongly,” Arrington said. “Looking at markets that were launched after 2020 like Arizona, Connecticut, Delaware, Maine, Maryland, Missouri, New York, New Jersey and New Mexico, there’s a very long list. The original pre-2020 launch group we were looking at a 2.7% CAGR, whereas with these new and recently launched adult-use markets, we’re looking at about a 17% growth. We aggregate together those Northeastern markets, and we are looking at 19% growth.”

$43B U.S. MARKET: BDSA forecasted a $43B legal U.S. cannabis market in 2027, with the adult-use channel making up $35B of those sales. “A few of these adult-use market launches that we have had in the past couple of years, New York, New Jersey, Maryland and Missouri for instance, they’re all very large markets and all expected to climb very quickly over the next few years,” Arrington said. “But in the interim, we are still expecting to see Florida, Pennsylvania and Ohio, which are large medical only markets make the shift to adult-use in the 2025 timeframe.”

As those markets come online, the industry will begin to cross the threshold of over 50% of adults that have legal access to cannabis, he said. “As that happens and consumer penetration grows, we just continue to see overall growth for the market,” the analyst said. “Obviously individual market details vary.”

MARKET GROWTH: The firm also projected New York and New Jersey to become $2.5B markets by 2027. “New Jersey, which launched adult use in April 2022, has grown fairly slowly as dispensaries are rolled out and production has gotten up steam,” Arrington said. “We have begun to see that happening and believe that adult-use eventually grows very large in that market.”

He noted New York, which launched in December 2022, has also seen a slow rollout of dispensaries. “That has begun to pick up and I think we’re going to see some of these big MSOs get into the business towards the end of the year,” the analyst said. “The limited dispensary rollout in New York initially ended up with a rather large gray market that the state is trying to deal with and disassemble. As we go into the fourth quarter, they are making some progress and there has been a lot of movement to shut down gray market operators. We’re starting to see some get shut down, we’re starting to see legitimate dispensaries roll out and I think that is their path to continued growth.”

BDSA also found while mature markets continue to face stagnating or declining sales, Michigan has emerged as an outlier and is expected to become a $3.8B market by 2027. “Michigan has been around for quite a while and has grown quite large,” Arrington said. “Its growth continues to be pretty outstanding on the adult-use side and we continue to see more dispensaries rolling out.”

According to BDSA’s Consumer Insights data, Michigan already has a fairly high consumption rate and the firm sees that continuing to grow over time, he said. “All-in-all, Michigan does pretty well,” the analyst said. “It probably does have some cross-border traffic from other non-legal markets, so it probably benefits from that. It could be impacted by some of those markets going legal, but in general, we continue to see very strong growth.”

RETURN TO GROWTH: BDSA also forecasted a return to modest sales growth in California in 2025, with the market expected to rebound to $5.24B in 2027. “In California, we’re expecting to see some continued declines followed by stabilization,” Arrington said. “That is predicated on both the state and local governments continuing to do what they can to hopefully alleviate some of the issues in California, which include high prices, high labor costs, high rent, a very high tax burden, a relatively high regulatory burden and some oversupply issues.”

The state has started to attempt to address some of the challenges and BDSA has seen increased enforcement against illicit operations, he said. “We’ve seen some local municipalities and counties attempt to alleviate at least some of the tax burden and we have also seen a spreading of the business footprint to areas where it wasn’t previously allowed,” the analyst said. “So even though we see continued decline this year and the next, we are assuming that some of these turns continue and things get a little better in California. We start to see a little bit of growth toward the out years.”

The firm also said despite a sales decrease in 2022, Colorado’s cannabis market is stabilizing with expected sales of $1.6B in 2023, followed by eventual single-digit sales growth to reach $1.7B by 2027. “In Colorado, we deal with a lot of issues,” Arrington said. “There is still a little bit of oversupply and there is a lot of licenses on the market.”

He noted Colorado saw a spending increase and reversal of the medical market to growth following the coronavirus pandemic, but that has started to crater. “You had fewer people at home and you saw some category changes with flower becoming less important than vape,” he said. “We also saw rapid price declines in 2022. We began to see some stabilization in those prices and I think there will be consolidation in the industry. That is why we are predicting a little bit of a turnaround.”

INTERNATIONAL MARKETS: BDSA predicted international cannabis markets will maintain a 29% CAGR between 2022 and 2027, reaching $6.3B in sales by 2027. “Globally beyond the U.S. and Canada, the cannabis space is a lot different than what we see in Northern America,” Arrington said. “In general, they’re typically medical only markets. A large portion of this is driven by pharmaceutical cannabinoids and distribution methods are typically via pharmacy.”

He added international adult-use markets have not really come to fruition as of yet. “There are some exceptions, some small tests of commercial viability, but global large-scale adult-use hasn’t materialized yet,” the analyst said. “It may. Mexico for instance, has been approved for adult-use but they have been delayed in getting that rolled out. It is potentially a very large market.”

Germany has also expressed interest in launching a fully regulated adult-use program, he said. “Turns out the European Commission isn’t real keen on that and Germany isn’t real keen to bypass as U.S. states have our federal government,” Arrington said. “They have revised those plans and they have said they are going to make it legal, but they’re going to scale back their idea for commercialization to small-scale commercial tests. Even so, a lot of that growth is the rationalization of a lot of macro markets out there, where we’re going to see them become more like the macro markets that we see in North America.”

SAFER BANKING: A U.S. Senate committee recently voted to advance The Secure and Fair Enforcement Regulation Banking Act bill, which seeks to ensure that all businesses, including cannabis businesses, have access to deposit accounts, insurance and other financial services. The bill, which was introduced by a bipartisan group of senators, will now proceed to the Senate floor. “It does seem to have favorable bipartisan support in the Senate and continues to gain sponsors,” Arrington said. “It probably will eventually pass, but it’s been somewhat hindered by the desire to add additional things to it. If it does pass, it would be generally very good for the cannabis industry.”

He said BDSA has seen a mini industry of financial institutions serving the cannabis space in the absence of SAFER. “Of course, it is still more expensive and still more rigmarole-ish than just being a regular old company and having a bank account,” he said. “Obviously SAFER would lead to greater efficiencies and access to money. Access to additional debt sources and other money sources that are available to traditional businesses around the U.S. would be opened by that. It is good for the industry in general and probably will help out a lot of struggling companies with access to funds.”

SCHEDULING: In August, the U.S. Department of Health and Human Services made a recommendation to the Drug Enforcement Agency that cannabis be moved from Schedule I to Schedule III under the Controlled Substances Act. “We believe full descheduling would be the absolute best for the industry,” Arrington said. “States have the regulatory intricacies to treat cannabis like alcohol and this rescheduling comes up short of that. It treats it like a controlled pharmaceutical.”

He added there are both pros and cons to the acceptance of the recommendation. “Being Schedule III would mean freedom from IRS 280E, which has huge impact on profitability for state legal cannabis companies,” the analyst said. “They cannot write off expenses like a non-cannabis touching company would normally be able to do. It would also probably ease banking access for state legal businesses and would theoretically allow for interstate commerce, although the edges of that are very undefined.”

He stated he is not entirely sure how interstate commerce would play out if it becomes a possibility as there are a lot of factors to consider. “It would have an unknown impact on existing state-regulated legal markets,” Arrington said. “Currently everything is working just fine, the federal government isn’t interested in interfering and we see things going well. If it gets to a reschedule, how will it change the situation?”

Mitchel-Chesebro added that not all operators may be very eager about interstate commerce. “There are a lot of people in state legal markets that would benefit from having more supply of cannabis from states that have a surplus, who are probably going to lean more to the side of protectionism,” he said. “They invested a lot in getting their license and getting their business off the ground. I don’t think a lot of cultivators in states that have high retail prices be super enthusiastic about bulk California or Oregon cannabis being shipped in there.”

CHALLENGES: When asked about the largest hurdles facing the cannabis space, Arrington pointed to the high taxes and regulatory burden. “You just have to deal with those things when dealing with cannabis,” he said. “I also think that we’re starting to face, in a world of costs, a maturation of markets and what do the markets do in the future?”

BDSA is keeping an eye on markets like Colorado, California, Oregon, Washington and Alaska to see what they look like down the road, the analyst said. “Do we continue to see what we call rejectors and acceptors moving to become active consumers on a regular basis?,” he said. “Pricing stability, finding the right products for the markets you are in, educating new users into the space and reinvigorating the buying habits of existing users are ways towards growth. We have an industry now and it’s about cultivating that industry to increase its overall size and profitability.”

OPPORTUNITIES: As the cannabis sector develops, Arrington said he sees the biggest opportunities in the development of new adult-use markets. “Adult-use markets are the markets where we are seeing the potential for considerable growth because they open cannabis up to an awful lot of people within a given space to become active users,” he said.

Mitchel-Chesebro noted the industry is still very young and while sales have started to plateau in the most mature markets, there is still untapped opportunity for growth in the U.S. “We are really excited to see what happens with some of the strong performing medical markets that are about to move to adult-use,” he said. “Pennsylvania, Florida and Ohio are markets to look out for and markets in the Southeast are largely untapped. The addition of a more robust medical program in those states, moving towards adult-use would be a huge thing.”

Texas is another market with a huge population and a relatively high consumer participation rate, Mitchel-Chesebro said. “It is a completely unrealized opportunity,” he said. “There’s a few cities and counties that have decriminalization laws in place and thankfully those are spreading. But from an industry standpoint, that is a huge untapped opportunity and moving forward, even though we have some of the biggest markets historically starting to plateau, once those markets move towards legalization, that is going to mean huge things for the industry.”

CANNABIS/PSYCHEDELIC STOCKS: Publicly-traded companies in the space include Aleafia Health (ALEAF), Acreage (ACRHF), Atai Life Sciences (ATAI), Audacious (AUSAF), Aurora Cannabis (ACB), Avant Brands (AVTBF), Ayr Wellness (AYRWF), Awakn Life Sciences (AWKNF), Body and Mind (BMMJ), BZAM (BZAMF), Cannara Biotech (LOVFF), Canopy Growth (CGC), Chicago Atlantic (REFI), Clearmind (CMND), Clever Leaves (CLVR), CordovaCann (LVRLF), Cresco Labs (CRLBF), Cronos Group (CRON), Columbia Care (CCHWF), Compass Pathways (CMPS), CURE Pharmaceutical (CURR), Curaleaf (CURLF), CV Sciences (CVSI), Cybin (CYBN), Delic Holdings (DELCF), Delta 9 (DLTNF), Entourage Health (ETRGF), Enveric Biosciences (ENVB), Fire & Flower (FFLWF), Flora Growth (FLGC), General Cannabis (CANN), Goodness Growth (GDNSF), Greenlane (GNLN), Green Thumb (GTBIF), GrowGeneration (GRWG), Hemp (HEMP), High Tide (HITI), India Globalization Capital (IGC), Indiva (NDVAF), Innovative Industrial Properties (IIPR), InterCure (INCR), IM Cannabis (IMCC), Wellbeing Digital (KONEF), Khiron Life Sciences (KHRNF), Lowell Farms (LOWLF), Lotus Ventures (LTTSF), Lucy Scientific Discovery (LSDI), MediPharm (MEDIF), MedMen (MMNFF), MindMed (MNMD), NewLake Capital (NLCP), Numinus (NUMIF), Organigram (OGI), Planet 13 (PLNHF), Reunion Neuroscience (REUN), Revitalist (RVLWF), RIV Capital (CNPOF), Relmada (RLMD), RYAH Group (RYAHF), Safe Harbor Financial (SHFS), Small Pharma (DMTTF), SNDL (SNDL), Sproutly (SRUTF), Skye Biosciences (SKYE), Stem Holdings (STMH), Sunniva (SNNVF), TerrAscend (TRSSF), Tetra Bio-Pharma (TBPMF), Tilray (TLRY), Trulieve (TCNNF), Tryp Therapeutics (TRYPF), Verano (VRNOF), Village Farms (VFF), Wesana Health (WSNAF), Zynerba (ZYNE) and 4Front Ventures (FFNTF).