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:

INDUSTRY GROWTH: In March, BDSA released its updated five-year global legal cannabis market forecast, which anticipates that industry growth will be primarily driven by U.S. markets and the adult use sector, resulting in a $58B market by 2028. “Historically we have seen the global cannabis industry being driven by the U.S. and U.S. sales growth increasingly being driven by adult use,” Mitchel-Chesebro said. “Looking out to 2028, we have markets that haven’t launched adult-use, but we are expecting them to in the next year or two. Those are going to be rapid growers. Mature adult use markets, that have seen a little bit of a slip, are expected to return to growth. Then the emerging markets that recently launched sales, we are expecting those to really accelerate sales growth and be big contributors out to 2028.”

The firm is forecasting some of the biggest remaining medical markets to launch adult use sales in the next one or two years, like Florida, Pennsylvania and Ohio, he said. “Those are going to lead to a really rapid increase in adult use sales,” the analyst said. “They’re going to intensify this trend of adult use sales driving U.S. sales and U.S. sales driving global. U.S. adult use sales make up about 56% of global cannabis sales and we expect that to grow to over 65% by 2028. Florida and Ohio are expected to be the third and fourth biggest contributors to U.S. total sales growth out to 2028. Florida is expected to add about $1.9B and Ohio is expected to add about $1.6B.”

He noted mature markets like California and Colorado have seen stagnation or even small declines but are expected to return to growth. “For example, California is expected to add $1B in total sales out to 2028,” Mitchel-Chesebro said.

BDSA also expects markets that have recently launched sales, but have seen a slow start, to pick up starting in 2024 and really accelerate out to 2028, he said. “Those markets like New York are going to be the biggest contributors,” the analyst said. “New York is expected to grow its total cannabis sales by $2.1B out to 2028 and New Jersey is expected to grow its market by a similar figure.”

U.S. SALES: The firm also found that sales in the U.S. reached $29.5B in 2023 and predicted sales will increase to $32.4B this year and $46B by 2028. “Two of the biggest drivers of sales growth in 2024 are forecast at being New Jersey and New York,” Mitchel-Chesebro said. “New Jersey had a pretty strong start to their adult use sales. In 2023, the market saw roughly $800M in total sales and we are expecting that to grow to $1.3B in total sales in 2024.”

New York was a bit of a different story, he said, as the market faced some regulatory issues and has been slow to get retail online. “The first full year of adult use sales in New York brought in about $147M, pushing total sales to about $295M,” the analyst said. “We are expecting that market to pick up significantly in 2024 and cross the $1B mark to $1.04B. That’s going to be a big driver.”

The company is also forecasting Ohio to start adult use sales in 2024, he said. “We expect adult-use sales to total about $247M, pushing total sales in Ohio to about $692M,” Mitchel-Chesebro said. “This is a really big increase from last year when the state only saw about $485M. Those are three big drivers of sales growth.”

ADULT USE GROWTH: BDSA also expects U.S. adult use markets, which currently represent approximately 56% of total global cannabis sales, to further expand their share of global sales in the coming years as U.S. medical markets contract. “The biggest factor playing into that is just the spread of legalization,” the analyst said. “More markets are launching adult use sales and more markets are getting past regulatory and legislative hurdles that have prevented sales from launching. There are a few states that are like that, notably Viriginia. Virginia legalized cannabis quite a while ago, but they’re not expected to launch adult use sales until 2026.”

EMERGING ADULT USE MARKETS: BDSA said up-and-coming adult use states, particularly those on the East Coast and in the Midwest, are forecasted to drive the most significant growth in both the U.S. and globally. “Many of the big population states in the West are saturated and a lot of them have been experiencing some market wide issues due to price compression and illicit competition,” Mitchel-Chesebro said. “That’s led to stagnation in these mature markets and when we look at the top ten drivers of sales growth between 2023 and 2028, nine out of those ten markets are expected to be on the East Coast or the Midwest.”

The top five contributors are expected to be New York, New Jersey, Florida, Ohio and then California, he said. “California is the one Western market that is standing out in this group,” the analyst said. “After California, Michigan is expected to see strong sales growth. They have had a strong adult-use market for a few years now, but there are a few factors that have really given the state the resiliency to stand up to the pressures that have caused problems in other mature markets. They have a strong homegrown brand retailer landscape, a high consumer penetration and they are neighboring several other states that have much more restricted access. After Michigan, Pennsylvania, Minnesota, Connecticut and Maryland. That rounds out the top 10 U.S. contributors to sales growth up to 2028.”

MARKET LAUNCHES: The firm also forecast Florida and Pennsylvania, both home to strong medical markets, to launch adult use sales in 2025 and see strong growth out to 2028. “Both markets have pretty strong retail availability,” Mitchel-Chesebro said. “They’re not going to be fighting an uphill battle like some other markets did when they launched adult-use sales, with not having enough retailers or having too few retailers to really work out the problem of illicit competition.”

He noted there is a lot of support for legalization in state governments in these markets as well as institutional support from the industry. “Another thing we do believe that is going to be driving these markets to a strong place is strong consumer participation,” the analyst said. “Both Florida and Pennsylvania have seen strong patient growth and they both have high demand for cannabis. Once adult use switches on, it is more than likely that these markets are going to be leaning more business friendly and really working to get as many retailers online to supplant the illicit market with legal adult use retail.”

CANADIAN ADULT USE: BDSA added Canada’s cannabis market remains largely driven by adult use sales, with $4.2B of the $4.5B in sales for 2023 attributed to the adult use channel. “We saw an interesting dynamic at the start of adult use in Canada,” Mitchel-Chesebro said. “There were a few provinces that got up and running quickly and saw pretty sharp adult use sales growth in the early years. Other ones, particularly markets like British Columbia, which had a strong illicit gray market out of their medical industry, saw slower growth in regulated adult use sales towards the start.”

Out to 2028, BDSA believes the biggest drivers of growth in Canada are going to be markets that were more limited towards the launch of adult use, he said. “The biggest contributor to sales growth is expected to be Ontario, adding $260M in sales out to 2028, after that British Columbia with $200M and then Alberta with $140M,” the analyst said. “It’s really the markets that saw a little bit of a slower adoption of adult use toward the start.”

INTERNATIONAL GROWTH: According to BDSA, total international cannabis sales are forecast to grow at a CAGR of 24% through 2028, reaching $7B. “There continues to be strong growth of medical programs abroad, but we are expecting adult use to be increasingly driving international spending as well,” Mitchel-Chesebro said. “The first two markets that we expect to be contributors to that are Mexico and Germany. We are forecasting Mexico and Germany to start sales on a limited basis in 2024. Mexico is forecast to bring in $151M in adult use in 2024, while Germany is expected to launch a limited adult use pilot program towards the end of year and bring in roughly $65M in adult use sales.”

Looking out to 2028, Mexico is expected to contribute $1.9B in total sales growth, while Germany is expected to contribute $390M in sales growth, he said. “Aside from that we are mostly looking at countries that are in the Eurozone and a couple in Latin America, that are expected to be big drivers of growth,” the analyst said. “France is expected to take the number three spot of biggest contributors to international sales growth, then Denmark, Switzerland, Italy, Brazil, the UK and Peru.”

CONSUMER PREFERENCE: In BDSA’s recent Consumer Insights survey, the firm found that low price has taken over as the top driver of consumers’ retailer choice across all U.S. consumers, Mitchel-Chesebro said. “Location and convenience is no longer the top driver of retailer choice,” he said. “36% of consumers cite low price as a main driver of where they buy their cannabis. When we break that down and filter by consumer preference, it does change around a little bit.”

Inhalable consumers are more likely to prioritize price when they are choosing where to buy cannabis, the analyst said, whereas people who prefer edibles and ingestibles are more likely to prioritize location and convenience. “Consumers who prefer topicals are more likely to cite trustworthiness as a top driver of their retailer choice,” he said. “There’s a lot smaller share of consumers who cite preferring topicals as their route to consumption and topical consumers are more likely to consume for truly medical reasons. Those might be factors driving the importance of trustworthiness.”

CANNABIS REFORM: When asked about his views on future cannabis reform, Mitchel-Chesebro said he believes chances are still good that cannabis is rescheduled from a Schedule I drug to a Schedule III drug under the Controlled Substances Act in 2024. “If that happens, we do expect some really positive downstream effects,” he said. “Reform to IRS Code 280E is going to be a big one. Banking access is going to be another big one that, aside from just solving a lot of logistical problems for the industry, reduces costs and allows businesses to eliminate a lot of security concerns.”

CHALLENGES: When asked about the largest hurdles facing the cannabis industry, the analyst cited profitability, illicit competition and lack of regulatory reform as a few of the challenges in the space. “With the price compression we have seen over the past two years, the strain of 280E and general regulatory compliance costs are really impacting a lot of brands and retailers,” he said. “That and the ongoing capital crunch are big factors that are straining the cannabis industry. Illicit competition, especially in markets that we have recently seen start up in the Northeast, is also a concern. In markets like New York, illicit competition is so widespread and I don’t think the state government has really articulated a plan to deal with it effectively. What they are really going to have to do to get that under control is to get retail availability up and bring prices down to the point where they are competitive with illicit retailers.”

OPPORTUNITIES: As the cannabis space develops, Mitchel-Chesebro said BDSA is excited about a few markets that are going to be really dynamic and expand the industry once they get online. “Florida especially and Ohio has a whole lot of potential as well, so that’s something we are looking forward to a lot in the industry,” he said. “Another thing that we have been watching pretty closely is the development of the hemp-derived cannabinoid space. We think there is a lot of opportunity in intoxicating hemp products.”

The segment of the market is especially interesting as players await reform on issues like 280E and banking, because the intoxicating hemp industry exists outside of regulated cannabis channels, the analyst said. “A lot of these costs and struggles due to the federally illegal status of cannabis aren’t as much of a concern,” he said. “We are going to see a lot more brands in the regulated cannabis industry starting to explore the intoxicating hemp space and we are going to see a lot more partnerships with CPG, beverage/alcohol distributors and other industries as this space grows.”

BDSA will discuss the market forecast report in a webinar on March 20 at noon MT. The free webinar will unveil the cannabis industry growth opportunities in 2024, analyze industry forecasts through 2028 and delve into the factors driving growth in the U.S. and beyond.

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).