THE STATE OF COLORADO: CANNABIS PURCHASING TRENDS SUGGEST A SWITCH FROM “CONSUMER” TO “PATIENT” AS DISPOSABLE INCOME LEVELS LESSEN DURING COVID-19 PANDEMIC
The state of Colorado released its marijuana tax revenues for July which implies total monthly sales of $206.7M (+ 7% MoM; 20% YoY) with medical marijuana revenues at $42.4M (+4% MoM; 42% YoY) and recreational use ~$164.2M (+8% MoM; 16%YoY). We estimate that the average cardholder spend in the month ticked up to ~$510 from ~$490 in June ($338 July ’19). The number of cardholders at month end remained flat from June at ~83K but up from ~80K since the pandemic hit. (NOTE: Not every registered cardholder will make purchases in any given month, in fact some states have revealed active patients at ~70-75% thus the estimated average cardholder spend per month could be understated given that the denominator in our calculation is likely lower.)
Since the COVID-19 pandemic took its hit on the economy, The US Cannabis industry has proven remarkably resilient with a surprising resurgence in Colorado, from what had been considered a mature market (6+ years since recreational use was introduced).
Earlier this year, we suggested that as the economy worsens and disposable income levels fall, some cannabis consumers would switch to the illicit market because it provides a cheaper alternative (no sales tax and other costs associated with regulation). Additionally, we asserted that, a recreational use consumer could reduce monthly spending by obtaining a medical card that enables the purchase of similar cannabis products at a significantly lower sales tax rate (~20-25%+). In most states, a medical marijuana card can generally be obtained without much difficulty depending on the qualifying condition (i.e. chronic pain which is loosely defined).
Our analysis of Colorado’s recent sales trends could suggest that our prediction for these possible shifts in consumer behavior may have come to fruition based on the following:
- The medical market rate of growth has expanded 2500 bps which is notably more than recreational use +500 bps (July YTD). This is a clear reversal of the trends that we have observed pre-covid where medical market growth was decelerating.
- Since the pandemic, we note an uptick in cardholder counts (+3K) coupled with a sharp increase in monthly spending. This trend could also suggest that existing cardholders are spending more for resale into the “gray market” (purchased in the legal market, sold in the illicit market). Because cannabis is deemed an “essential business”, we don’t think that the increased level in spending is attributed to “hoarding” (though entirely possible in some markets for both recreational and medical use).
- As the bellwether for the U.S. Cannabis industry, Colorado could be an indicator of similar trends experienced in other recreational use markets. Our analysis is based upon information provided by the state of Colorado and is not derived from point of sale data. Cannabis regulations and disclosures vary by state and with a 6+ year track of regulating a dual market, we think Colorado could serve as an indicator of similar trends experienced in other U.S. bifurcated markets.
Eventually we think these trends will return to the norm with more growth to come from the recreational market. With the imminent end of federal prohibition, we recognize that this shift could prove inconsequential as the medicinal (as defined today) and recreational use markets combine into one substantially larger market (medical use will be redefined and recalibrated with precise dosage, efficacy etc. similar to other health/wellness products).
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