- A correct understanding of the medicinal and recreational cannabis markets is essential for investors
The state of Colorado is the Poster Child for the legal cannabis industry. Through sensible regulations, Colorado has a thriving legal cannabis industry that is now a $1 billion per business and has yielded (in total) more than $1 billion in state taxes and fees.
This also means that consumer trends in Colorado’s legal cannabis industry can provide broader insights into the cannabis industry as a whole. For this reason, a recent headline from Marijuana Moment will turn a lot of heads in the cannabis industry.
That’s a pretty stunning differential. This is also something of great interest to cannabis companies.
Only 11 U.S. states currently authorize adult use marijuana while 33 allow medicinal cannabis usage – three times as many. If the dollars available in the recreational market are that much greater, then it puts even more pressure on cannabis companies to focus operations on dual-use states.
Further details seem to be even more dramatic.
Colorado’s Marijuana Enforcement Division (MED) said that 288,292 pounds of bud were sold last year for recreational purposes, while 147,863 pounds were sold to medical marijuana patients. For comparison, in 2017, recreational consumers purchased 238,149 pounds and 172,994 pounds were sold to patients.
That means the recreational-medical gap increased 73 percent in one year. [emphasis mine]
That means the recreational-medical gap increased 73 percent in one year. [emphasis mine]
That’s an enormous market shift for just one year. But is this what is really happening in Colorado?
Unlikely.
Note the significant year-over-year decrease in “medicinal” sales in Colorado: from 172,994 lbs (2017) down to 147,863 lbs (2018). That’s roughly an 18% change in one year.
Did Colorado residents get that much healthier in 2018 (and not need as much medicinal weed)? Did they lose interest in cannabis as a medicinal remedy (i.e. falling demand)? Both those explanations are dubious.
More applications continue to be discovered for medicinal cannabis and more consumers are becoming receptive to cannabis as a medicinal therapy. True demand for cannabis as medicine can only go higher.
Instead, there seems to be a very different consumer dynamic on display. Colorado cannabis consumers who previously purchased their cannabis from medicinal cannabis sources are now purchasing from recreational cannabis stores.
Why?
First, it’s because the cannabis products sold by adult use cannabis stores contain the same cannabinoids as the cannabis sold in medicinal dispensaries. The concentrations and ratios vary between different strains, but it’s the same general substance.
Medicinal cannabis dispensaries can provide their clientele with more precise guidance on which strains of cannabis are more effective for their particular medical ailment. But recreational stores can offer consumers much more product variety. Not just dried flower and concentrates but also greater varieties of cannabis edibles as well as cannabis-infused beverages.
Consumers can get roughly equivalent medicinal benefit (for some medical conditions) from adult-use products while having much more product selection. The Marijuana Moment article provides support for this.
That may be partially explained by individuals who sought out medical cannabis recommendations choosing not to renew their registration after recreational marijuana shops became available. To that point, a recent study found that many customers at recreational dispensaries are consuming cannabis for the same reasons that registered patients do, such as to alleviate pain and sleep issues.
For sleep and pain issues in particular, adult-use cannabis can also provide medicinal benefit. But it’s deeper than that.
Consuming alcohol impairs one’s ability to sleep. Sleep disorders are a rising epidemic. For those sufferers, consuming recreational cannabis instead of alcohol in social settings will help them sleep better rather than make their problem worse.
As more consumers discover the medicinal benefits of cannabis (in general), they will naturally gravitate to more cannabis consumption recreationally.
In Colorado, there has also been a small shift in cannabis businesses: slightly more recreational facility business licenses and fewer medicinal facility licenses.
There could be one more (hidden) dynamic at work here. In the early days of legalized cannabis, recreational cannabis was either not yet legal, or (in previous years) a greater social stigma was attached to such usage. People in Colorado would claim that their cannabis consumption was “medicinal”, while their use was actually more for personal enjoyment, or equally so.
Flash forward to 2019. Adult use cannabis is becoming the drug-of-choice for educated professionals because it provides relaxing and health-promoting properties. While pockets of anti-cannabis ignorance remain, the social stigma attached to cannabis is rapidly fading.
This is on display in the U.S. at the political level as well. State governments are legalizing cannabis on their own, no longer being forced to do so by voter ballot. Congress is holding hearings not on if to end federal cannabis Prohibition but how (and when).
In this environment, Colorado residents who previously only felt comfortable purchasing “medicinal” cannabis are now moving more openly to adult use.
Recreational cannabis is a dynamic consumer trend. That much is clear from the Colorado data. But “medicinal” cannabis usage remains at least as strong as ever.
Cannabis investors need to be careful not to be swayed by consumption figures that are more a product of semantics rather than any fundamental shift in consumer behavior.
Medicinal cannabis is big. And because of this, recreational cannabis will be even bigger.