Access to legal cannabis retail outlets – or the lack thereof – can be a big determining factor in how well the licensed industry can compete with the illicit market. But determining the correct number of stores for each market can be challenging.
A recent report from cannabis research firm Pink Horse Capital suggests that looking at alcohol’s retail footprint size can help.
If an area doesn’t have enough legal dispensaries, or the existing ones are overcrowded, “consumers may not make the switch even at the same price,” the report noted.
“Comparing only the retail sales of alcohol to cannabis, we aim to look for the optimal retail footprint by state for the appropriate number of cannabis dispensaries to satisfy the entire demand and have a well-penetrated marketplace,” the firm wrote in its report “Recommended Cannabis Dispensary Count By State.”
What’s the Right Number?
Cannabis consumption is notoriously underreported. And figuring out how many stores a state can truly accommodate can be tricky.
For example, more Oklahomans signed up for their state’s laissez-fair medical cannabis program than admitted to using the product in surveys conducted before legalization, according to Tom Adams, principal analyst and CEO of Global Go.
But an open-range market such as Oklahoma has its limits, too. The Sooner State has notoriously been a hotbed for growth – so much so that fears of thinning profits threaten the prospects of operators still playing in an industry absent of any meaningful federal tax breaks or banking services.
Pink Market Capital’s estimates show that Oregon has likely reached a point of retail saturation, while California’s market is notoriously underserved. The latter is seeing a state-wide weed out of operators as onerous tax regulations have paved the way for a highly competitive gray market.
The two states represent two different issues with the same results: Small operators unable to compete on multiple fronts are shuttering stores, and companies looking to scale are using their capital toward new and emerging markets.
“The data shows that the industry still has a long way to go before the legal market can fully take shape, even in existing mature markets,” the firm wrote. “Limited licenses, local ordinances, and other regulations have limited progress to the appropriate number of dispensaries to create a fully functional legal market.”
“The U.S. alcohol retail market saw over $72 billion in sales between the beginning of December 2021 to the end of November 2022 from over 40,000 locations across the country. Though these numbers look high, it might surprise you that the combined market of U.S. legal and illicit sales of Cannabis is estimated to be $97 billion, $25 billion over the retail alcohol market.”
Still, the report acknowledges the overall alcohol market’s towering size compared to cannabis – especially when including service-based sales channels such as restaurants, bars, and event-hosting venues. Consumption lounges still haven’t been widely developed for cannabis.
Retail footprint and local opt-out rules are one of the largest determinants of spending. And how liberally a state program – medical or adult-use – is carved can indicate the degree of growth in a given market.
Factors for that include:
- Monthly percentage of adults consuming.
- Store count limits and local opt-out rules.
- Supply chain regulation (such as whether vertical integration is required, allowed, or banned).
- Limits on types of products allowed.
- Limitations on ownership of state licenses.
- Rules for prescribing doctors and qualified conditions approved.
“It is also important to note that the number of dispensaries alone is not enough to support a fully legal market. The main factor is cost, but quality, selection, and safety also rank highly,” the report said.
The numbers can also give investors some room to remain optimistic about the industry’s upside, the firm said. For instance, Canada’s population is still a tenth of the size of the United States.
“In contrast to Canada, the current U.S. market has an underutilized retail footprint, giving the industry room for a sustainable future.”