Rising High: Exclusive talk with cannabis market research firm BDSA

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

VALENTINE’S DAY: According to BDSA data, Valentine’s Day presents an opportunity to boost sales across several product categories, particularly with edibles and topicals. In looking at Valentine’s Day trends, the firm found that 56% of cannabis consumers claim they have used cannabis as part of their “date nights,” and 44% of consumers report always using cannabis on date nights. “When we talk to inhalable consumers, a lot of the top use occasions are related to health and wellness,” Mitchel-Chesebro said. “The top related benefit of inhalable cannabis consumption is being able to relax and be mellow, after that to manage stress and after that to sleep better. When we go down a little bit, almost as frequently cited, we have some of the more recreational consumption drivers. 53% of consumers cite that they see a benefit from inhalable consumption and that it helps them be happy and an equal number say it helps them have fun. Those are the use benefits and drivers that speak to those ‘date night’ use occasions.”

BDSA also said that identifying key categories is important to maximizing the sales potential of Valentine’s Day. “A lot of that just comes back to a databased-approach,” the analyst said. “Not just at the countrywide or statewide level, but a really localized databased-approach that requires knowing your consumers, who purchases what when they come in and what kind of volume each different consumer segment can drive. Also, having access to the type of data products that BDSA offers never hurts.”

He noted chocolates, massage oils and infused lubricants are categories that see the biggest boost around the holiday. According to BDSA Retail Sales Tracking, chocolates saw the highest sales increase of any edible subcategory during the week of Valentine’s Day, with chocolate sales up by 13% that week compared to any other week in February 2023. “Those products are ideally positioned to meet the need states that people want or are experiencing around Valentine’s Day, like having a romantic evening and spending time with their significant other,” Mitchel-Chesebro said. “These are just categories that are generally associated with the holiday.”

The firm also saw a few other categories rise, outside of chocolates and topicals, for the week of the holiday, he said. “Beverages saw an 8% lift, but the infused food category also saw a pretty big boost,” the analyst said. “It saw a roughly 8.7% sales boost in incremental daily sales for the week of Valentine’s Day versus non-holiday weeks. This is also with prices being roughly 5% lower. So even with a fairly steep discount compared to a lot of the other categories, infused foods performed pretty well.”

MAXIMIZING SALES: BDSA said while discounts and promotions can be a useful tool to drive sales on cannabis holidays, data suggests an untargeted approach to discounts can be a detriment when utilized on Valentine’s Day. “With all the price compression that we have seen in the industry, there is a point to which you get diminishing returns from the benefits of discounting and promotion and bringing more consumers in versus the drawbacks of seeing lower profit from the volume you’re driving from that increased traffic,” Mitchel-Chesebro said. “It requires a more targeted approach to discounts and promotions.”

For the week of Valentine’s Day in 2023, flower products were priced about 1% lower, but incremental daily dollar sales were negative 2% lower, he said. “You saw that the discounts and promotions might have been employed on a limited level in that category, but it actually ended up with them getting lower dollar sales and lower profit for that specific category,” the analyst said. “We can contrast that with what we saw in the chocolate category. Chocolate saw about a 13% sales boost for the week of Valentine’s Day with prices being 4% lower and somewhat similarly, beverages saw about an 8% boost with prices being about 1% lower. When we are looking at categories we know are going to be ideally geared toward the use occasions that holiday presents, it’s definitely worth looking into discounts and promotions in a very targeted manner.”

Outside of identifying key categories and having a pricing strategy for each one, there are a few other efforts businesses can make to maximize sales, he said. “One is to recognize that the sales boost for the whole week of Valentine’s Day wasn’t as sizeable compared to some other holidays,” Mitchel-Chesebro said. “Focusing promotions around the day itself, which is a Wednesday this year, is definitely a good strategy. Also, leveraging the holiday with a specific theme and creating an atmosphere that reflects the spirit of the holiday, a lot of retailers have seen success with a strategy like that.”

He added knowing the local and regional consumer base and tailoring strategies to them will bring more people into retail. “If you’re really catering to consumers effectively that has been shown to boost basket sizes,” the analyst said. “One last thing is being really careful when considering your assortment. Topical categories, massage oils and lubricants are pretty small categories in terms of their dollar sales and their share of total sales, and they also don’t have a super developed product landscape. Being careful not to stock two items that are too similar is one thing retailers should keep in mind. For example, if you have two massage oil products that have similar dosage and product characteristics, and product A is selling a lot more than product B, stocking product B is somewhat a detriment at retail because it is just going to cannibalize the sales of product A and vice versa.”

ST. PATRICK’S DAY: BDSA found that St. Patrick’s Day in 2023 was the fourth biggest cannabis holiday behind 4/20, Green Wednesday and Black Friday. “There is a really big opportunity to boost sales around St. Patrick’s Day,” Mitchel-Chesebro said. “St. Patrick’s Day is a big celebrations holiday. It is a party holiday, typically associated with alcohol consumption, and there has been a move away from that with some generations, specifically with younger folks. That might be part of the factor there.”

He noted St. Pat’s is one of the first bigger party holidays of spring, letting people enjoy themselves and be social, likely driving cannabis sales. “As far as strategies that companies can take to prepare for it, a lot it comes down to identifying the same stuff that I was speaking to with Valentine’s Day,” the analyst said. “Not leaning too much into discounts, not discounting across the board and focusing on products that see the biggest boost around St. Patrick’s Day. When it comes to those specific products that do see a boost, shake/trim/lite products saw roughly a 7.5% rise on the week of St. Patrick’s Day compared to the rest of the month. This is even with those products being priced up roughly 8%. Disposable vapes also saw a 3% boost in sales, so looking into those product categories and forming a careful strategy for pricing and also cross promotion is one way that retailers can maximize sales.”

CONSUMER PREFERENCE: In BDSA’s 2024 predictions, the firm said consumer preference for convenience will continue to drive shifts at the subcategory level. “When it comes to product categories here, we’ve seen it largely stabilize at the top level,” Mitchel-Chesebro said. “Flower takes up the biggest share of sales, after that it is usually vape, and then after that depending on the market, it is either pre-roll or edible products that takes up the third spot. When we get a bit more granular, we do see more shifts happening and one of those is the move towards disposable vape.”

The share of the total vape category made up by disposables grew about 82% between 4Q21 and 4Q23 and total dollar sales in the disposable vape category grew about 120% over that period, he said. “It’s mostly consumer preference for things like ease of use, portability, convenience and discretion that is driving that shift,” the analyst said. “There has also been a ton of innovation in the disposable vape space. Not only have these products gotten more available with more brands and products to choose from, but we’re seeing a lot more form factors that appeal to a broader range of consumers. We’ve seen big growth among rosin and live resin disposables, which are really primed to appeal to consumers who prioritize things like taste and flavor or having premium inputs in their products.”

CANNABIS REFORM: When asked about his views on future cannabis reform, Mitchel-Chesebro said he expects progress on the state level to continue to move forward. “For 2024 specifically, we do expect Florida and Pennsylvania to legalize this year and to start adult-use sales in 2025,” he said. “That’ll be significant. Florida is a huge market and Pennsylvania is also very sizeable, and part of the big four East Coast cannabis markets that we think are going to be a big driver of growth out to 2027. Both of those states with their healthy medical markets and high consumer participation are worth looking out for.”

On the federal level, the analyst said it is likely that if cannabis is rescheduled from a Schedule I drug to a Schedule III drug under the Controlled Substances Act in 2024, some regulatory reform will follow. “There is a lot of hope it will lead to reform on IRS Code 280E and cannabis banking laws to open up banking access and help with the ongoing capital crunch the industry has been dealing with,” he said. “Outside of that, I’m not super optimistic personally for much other cannabis reform to be passed through Congress. Rescheduling has the potential to have a lot of downstream effects that are positive for the industry, but the gridlock and the lack of progress on other issues in Congress points to the fact that we’re not likely to see much reform in 2024.”

CHALLENGES: When asked about the largest hurdles facing the cannabis industry, Mitchel-Chesebro cited profitability, illicit competition and lack of regulatory reform as a few of the challenges in the space. “A lot of companies are being really hit hard just by the tax and compliance burden that they have to deal with, especially when we are looking at markets that are more developed and have much lower prices at retail,” he said. “Those obstacles are creating a lot of issues for the industry at the moment.

OPPORTUNITIES: As the cannabis space develops, the analyst said BDSA sees the biggest opportunities in emerging cannabis markets. “We do expect between 2023 and 2027 that New York’s market will expand by roughly $2.3B,” he said. “That’s going to be the biggest growth opportunity as a single market.”

Mitchel-Chesebro said a lot of that growth is counting on New York working out challenges including retail availability, illicit competition and higher average retail prices. “But New York is still going to be a huge market in a few years,” he said. “We expect that in 2024, New York is going to be a roughly $1.3B market for legal sales. By 2027, we are forecasting New York to be the fourth biggest market in the U.S., just behind California, Florida and Michigan and with its big population, we think it is going to be pushing past Michigan in the years soon after.”

Florida also presents another significant growth opportunity as the state has built a strong medical market, the analyst said. “We expect them to see over $2B in growth between 2023 and 2027 and by 2027, we do expect Florida to be the second biggest cannabis market,” he said. “Other markets to watch out for include New Jersey, they’re expected to see almost as much growth as Florida, and Michigan is still rapidly expanding and outpacing price compression.”

Mitchel-Chesebro added he is particularly optimistic about the Ohio market. “Ohio has a really high consumer participation rate, a relatively strong medical industry and it is really poised to expand,” he said. “Especially when you look at all the states with limited access that are really close to Ohio. They’re right next to Pennsylvania, which might take a little bit longer to get its adult use program running, and Indiana, which is not expected to go legal for a long time. The fact that Ohio is right next door points to a fair amount of Indiana consumers coming to shop for cannabis in Ohio.”

CANNABIS/PSYCHEDELIC STOCKS: Publicly-traded companies in the space include Acreage (ACRHF), Audacious (AUSAF), Atai Life Sciences (ATAI), Aurora (ACB), Avant Brands (AVTBF), Ayr Wellness (AYRWF), BZAM (BZAMF), Cannara Biotech (LOVFF), Canopy Growth (CGC), Chicago Atlantic (REFI), Clearmind (CMND), Clever Leaves (CLVR), Cresco Labs (CRLBF), CordovaCann (LVRLF), Cronos (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), Trees Corporation (CANN), Goodness Growth (GDNSF), Greenlane (GNLN), Green Thumb (GTBIF), GrowGeneration (GRWG), Hemp (HEMP), High Tide (HITI), India Globalization Capital (IGC), Indiva (NDVAF), IM Cannabis (IMCC), Innovative Industrial Properties (IIPR), InterCure (INCR), Wellbeing Digital (KONEF), Khiron Life Sciences (KHRNF), Lotus Ventures (LTTSF), Lowell Farms (LOWLF), Lucy Scientific Discovery (LSDI), MediPharm (MEDIF), MedMen (MMNFF), MindMed (MNMD), NewLake Capital (NLCP), Numinus (NUMIF), Optimi Health (OPTHF), Organigram (OGI), Planet 13 (PLNHF), Red White & Bloom (RWBYF), Reunion Neuroscience (REUN), Revitalist (RVLWF), RIV Capital (CNPOF), Relmada (RLMD), RYAH Group (RYAHF), Safe Harbor Financial (SHFS), 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).