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:

STRATEGIC DISCOUNTING: According to BDSA research, the optimal approach for boosting sales on 4/20 will be offering strategic discounting coupled with exclusive, branded 4/20 merchandise. “We do expect a sales increase whether or not retailers really employ heavy discounts,” Mitchel-Chesebro said. “4/20 almost always brings an increase in foot traffic, an increase in sales and a lot of consumers do expect some degree of discounting. That being said, over the past two years, we’ve seen a really high increase in sales around holidays, particularly 4/20, even with relatively lower discounts.”

In 2023, sales for the week of 4/20 were roughly 29% higher than non-holiday weeks in April with discounts that were 5.5% lower than non-holiday weeks, he said. “We can contrast this with 2022, incremental daily sales for the week of 4/20 were 23% higher than non-holiday weeks and equivalent average retail prices were 7.5% lower,” the analyst said. “In 2023, we saw less discounting at retail but that translated to higher sales on the week of 4/20. There is a point of diminishing returns that you can get to with discounting and as price compression puts more pressure on the industry, retailers do have to be a lot more strategic about discounting.”

He added 4/20 is going to be on a Saturday in 2024 and Saturdays traditionally see the highest sales of any day of the week. “We can expect 4/20 to bring a really big increase in sales,” Mitchel-Chesebro said. “With that falling on one of the best days for cannabis sales, we don’t think that retailers have to reach more of the discounts across the board.”

However, there are some categories that BDSA expects to see a major increase in sales on 4/20, he said. “One of them is infused pre-rolls, which have seen a lot of growth across all cannabis markets that we track,” the analyst said. “In 2023, it saw some of the strongest increases in dollar sales. Also, solventless extract products saw a similar increase. These are products that experienced consumers, consumers who want really high-quality premium products, gravitate towards. We think that centering discounts on these categories can be an especially strong tactic to drive sales on 4/20.”

Retailers should also consider cross-promotion when it comes to the cannabis holiday, he said. “For example, topicals are only about 0.5% of total dollar sales across the markets we track, but these products see a really big boost around 4/20,” Mitchel-Chesebro said. “One way retailers can make the most of this boost is by offering cross-promotions with other products that are essentially add-ons into baskets rather than bought on their own. That can be a really valuable tool to not just bring more consumers into the door on 4/20, but to increase basket sizes with that foot traffic you are already seeing.”

TARGETED APPROACH: BDSA said retailers can align promotions and stock with anticipated consumer demand to capture increased foot traffic and sales on the 4/20 holiday. “Taking a really targeted look at assortment is one way that retailers can do that,” the analyst said. “Retailers should take a really close look at inventory for products that meet a similar consumer need state, so that you don’t have a lot of overlap in products that might be cannibalizing each other’s sales.”

Having more than just one or two of those type of products, like edibles that are targeted towards the sleep need state for example, can really lead to diminishing returns, he said. “Shelf space being really valuable around 4/20 is one thing that people need to think about,” Mitchel-Chesebro said. “Another important thing to remember this year is that 4/20 coming on Saturday means that that big boost in sales is going to be on Saturday itself. Making sure that you have the resources and the staff available to deal with that boost in foot traffic is going to be really important as well.”

BDSA also said retailers can adopt a targeted approach to inventory and promotions, emphasizing products like solventless extracts and culinary edibles. “Solventless extracts did see one of the biggest lifts on 4/20 last year and particularly the culinary edible segment also saw a really big lift,” the analyst said. “We have seen a big increase in the popularity of solventless products, and infused pre-roll products is another category where we have seen a lot of growth over the past year. One interesting thing about solventless and infused pre-roll products is they traditionally have been higher ticket items for the premium priced segment.”

He noted with the price compression seen over the past couple of years, these products have gotten a lot less price prohibitive. “Consumers who are a lot more price conscious are going to be lucky because a lot of these products are going to be more in their price range this year,” Mitchel-Chesebro said. “Some promotions around these categories that we’re expecting to see a big boost around 4/20 could really increase revenue by driving more consumers towards them.”

LOCAL TRENDS: BDSA also said businesses can opt for strategic discounting based on consumer preferences and past sales performance as well as tailor strategies and offerings to local market trends. “There are a few ways that retailers can do this,” the analyst said. “In some markets we do see a much larger share of total sales coming from certain categories than others.”

He cited the New Jersey market as an example. “When we look at New Jersey’s product mix, we see that it’s underindexed for categories like extracts compared to other markets,” Mitchel-Chesebro said. “This might point to the fact that there is not a whole lot of extract products and product variety in the market, but it also might point to a consumer base that is less driven towards these items. Because of that you might want to put more emphasis on discounting and promotions on other inhalable products versus extracts.”

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, the analyst said. “We have seen shifts as far as what drives consumer location choice, but I also think it’s pretty helpful to break it down by what consumer segment you are looking at,” he said. “Looking across all adult-use consumers, lowest price is the biggest factor driving retailer choice, with 36% of consumers in adult-use states citing lowest price. Location convenience is right behind that with 35%.”

When the data is segmented out by which form factors consumers prefer, BDSA sees some changes, Mitchel-Chesebro said. “Consumers who prefer inhalables prioritize lowest price even more at 38%, so it becomes an even big driver of location choice,” he said. “That changes when we look at edibles consumers. Consumers who prefer ingestibles are more likely to prioritize location convenience, with 37% of those consumers citing location convenience. And consumers who prefer topical products, which is a pretty small segment of the consumer base, are most likely to prioritize trustworthiness of a retailer, with 43% of them citing trustworthiness as their biggest driver of where they shop for cannabis.”

Retailers should be aware of what consumer segment in their area is driving the most business, the analyst said. “This is why having tools that can recognize what your consumer landscape looks like and having retail employees who are able to recognize that in their shoppers is also really important when you are building your strategy for the 4/20 holiday,” he said.

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. “We are not expecting a lot of positive news from Congress when it comes to congressional cannabis reform, but we are still expecting rescheduling to go through this year,” he said. “We do expect that to have some positive downstream effects on the industry. IRS Code 280E reform is one likely effect of rescheduling that we might see. Also, we may see some more banking reform as a result of rescheduling, but it’s pretty unclear what the timelines of those changes will be and exactly how they’ll shape up.”

The analyst added BDSA does expect some other moves as far as legalization on the state level. “We are expecting Florida’s adult-use referendum to pass this year and Florida has seen a lot of really strong growth in their market,” he said. “They have seen a ton of retailer growth and they have great retailer availability in the medical program. Once Florida actually goes adult-use, we do think that is going to be a massive boost to the industry and it’s likely we’ll see more reform in the Southeast region. We are pretty bullish on the Florida market and we do expect it to be the second biggest market in the U.S. by 2028.”

CHALLENGES: When asked about the largest hurdles facing the cannabis industry, Mitchel-Chesebro said regulatory uncertainty is still a problem for the space. “There’s been a lot of enthusiasm about rescheduling and the posture of the White House and the administration shifting on this a bit,” he said. “But I think it is still really slow to come and it’s still pretty uncertain exactly what effect rescheduling will have and when it will happen.”

The analyst noted price compression has also been a problem in the industry for a long time. “It seems like that has actually started to turn around in some markets,” he said. “Not fully, but we are seeing some mature markets like California, Colorado and Nevada, where we’re starting to see prices start to lash out and maybe there might be a rebound in the next year. That is a source of some enthusiasm for the industry.”

OPPORTUNITIES: As the cannabis space develops, Mitchel-Chesebro said there is still a ton of recent opportunity for optimism. “The launch of adult-use sales in Ohio, which we are expecting this year, is going to be a huge opportunity,” he said. “Expansion of adult-use in Florida, while we are not entirely sure what the regulatory landscape is going to look like once they get up and running, is going to be a huge opportunity because Florida has a really strong consumer participation rate and a big population with a lot of people who are already enthusiastic about cannabis.”

BDSA has also seen a lot of progress in the New York market, which had a lot of issues from the start, the analyst said. “They have licensed a whole lot more cannabis businesses of all types, their cultivation infrastructure has ramped up significantly, they have a lot more retailers coming online and there is more coming online each week,” he said. “New York is also one to be optimistic about going forward.”

Mitchel-Chesebro said he is particularly excited about some of the Midwest markets and seeing the development of the Ohio market. “They have a pretty strong medical program, a really vibrant brand landscape and a lot of homegrown brands, so I am excited to see how that plays out,” he said. “I’m excited to see whether they benefit from a lot of cross-border buyers, with Ohio being next to Indiana and Pennsylvania, which has been slow to move towards adult-use. I think we are going to see a lot of boost in Ohio from those markets.”

The analyst added he is also excited to keep an eye on the shifting trends around which products are selling well. “It’s largely stabilized at the top level,” he said. “Flower makes up the largest share of dollar sales, usually followed by vape, then pre-roll or extract. But when we get down to subcategories, we’re still seeing some really interesting shifts. We’re seeing the infused pre-roll category really becoming a mainstay of the industry. We’re seeing solventless concentrates still performing well and I think that we’re going to see a lot of interesting stuff in the flower category.”

Price compression did cause a lot of shifts in the flower category, Mitchel-Chesebro said, with it becoming a lot more common for consumers to buy bigger quantities of flower. “I think we are going to see a lot of innovation in the flower space,” he said. “A lot of brands are starting to realize the strength of having a unique strain and having a unique line of flower offerings. We are going to see a lot more brands innovating in that space and that spells good things for the whole industry.”

CANNABIS/PSYCHEDELIC STOCKS: Publicly-traded companies in the space include Acreage (ACRHF), Atai Life Sciences (ATAI), Aurora Cannabis (ACB), Ayr Wellness (AYRWF), Avant Brands (AVTBF), BZAM (BZAMF), Cannabist Company (CBSTF), Cannara Biotech (LOVFF), Canopy Growth (CGC), Chicago Atlantic (REFI), Clearmind (CMND), Clever Leaves (CLVR), Compass Pathways (CMPS), CordovaCann (LVRLF), Cresco Labs (CRLBF), Cronos Group (CRON), Curaleaf (CURLF), CURE Pharmaceutical (CURR), CV Sciences (CVSI), Cybin (CYBN), Delta 9 (DLTNF), Entourage Health (ETRGF), Enveric (ENVB), Fire & Flower (FFLWF), Flora Growth (FLGC), Trees Corporation (CANN), Goodness Growth (GDNSF), Greenlane (GNLN), Green Thumb (GTBIF), GrowGeneration (GRWG), Hemp (HEMP), Heritage Cannabis (HERTF), High Tide (HITI), IM Cannabis (IMCC), India Globalization Capital (IGC), Indiva (NDVAF), Innovative Industrial Properties (IIPR), InterCure (INCR), Lotus Ventures (LTTSF), Lowell Farms (LOWLF), Lucy Scientific Discovery (LSDI), MediPharm (MEDIF), MedMen (MMNFF), MindMed (MNMD), NewLake Capital (NLCP), Numinus (NUMIF), Organigram (OGI), Optimi Health (OPTHF), Planet 13 (PLNHF), Red White & Bloom (RWBYF), Relmada Therapeutics (RLMD), Reunion Neuroscience (REUN), Revitalist (RVLWF), RIV Capital (CNPOF), 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), Zynerba (ZYNE) and 4Front Ventures (FFNTF).