The 2018 NACS Show in Las Vegas marked the first-ever NACS session on the marijuana industry. While cannabis is still illegal federally, the massive crowds at the “Marijuana: Capitalizing on a Budding Opportunity” session and the strong presences in the overflow room suggest the convenience industry definitely is intrigued.
The interest is understandable. According to cannabis analytics company New Frontier Data, the marijuana industry could cumulatively generate $105.6 billion in federal tax revenue and 1 million new jobs by 2025, if legalized at the federal level.
“This is a movement,” said Scott Sinder, NACS general counsel and a partner at Steptoe & Johnson LLP. It’s a movement still very much in its infancy: Colorado and Washington were the first states to legalize recreational marijuana in 2012, with the states’ first recreational sales occurring in 2014. Since then, eight other states and the District of Columbia have created a patchwork of state laws governing their intrastate recreational cannabis markets.
Don Rhoads, president and CEO of The Convenience Group LLC, has firsthand experience with the market as the owner and operator of a cannabis production and processing facility in Oroville, Washington. “I really do believe it’s a game-changer,” Rhoads said of Washington’s “experiment” with recreational marijuana. “But it’s going to take some time.”
Sinder and Rhoads joined Ryan Sevigny, founder of High Tide Ranch, and Keelan Gallagher, director of trade marketing and brands for Smoker Friendly International, at the NACS Show session to review the opportunities and challenges surrounding the cannabis market as it currently exists in the United States.
It’s a game-changer. But it’s going to take some time.
Or, as Sinder put it: “It’s the ultimate tease. We’re going to tell you about how great an opportunity this is … and how, at least through your current businesses, you cannot directly take advantage of it today.”
The Latest Buzz
2018 was a great year for the legalization movement, with Sinder noting “marijuana legalization advocates may have emerged most victorious” of all the political parties last year. Victories included the November midterms, when Michigan legalized recreational usage and Missouri and Utah legalized medical usage, as well as Oklahoma’s passing of medical usage in June and the Vermont legislature’s passing of recreational usage in January (though Vermont does not allow retail sales). This means that as of 2019, only four states—Idaho, Kansas, Nebraska and South Dakota—have not legalized some form of marijuana usage, and there are 10 states (plus the District of Columbia) where the substance is fully legal.
This year could see even bigger changes, with several states—including New York, New Jersey, Illinois and Connecticut—actively evaluating legalization through legislation alternatives.
Millennials are the market. ... But there’s a lot of other people that are broadening the pie.
The revenues the marijuana market already is generating explain the increased interest from state lawmakers. According to “The State of Legal Marijuana Markets, 6th Edition” report by Arcview Market Research and BDS Analytics, combined recreational and medical marijuana sales reached $8.5 billion in 2017. Bloomberg predicts this number could grow to $50 billion by 2026.
A large percentage of these profits are going straight into states’ pockets. In Washington state, there’s a 37% marijuana excise tax collected at the retailer, in addition to the 10% sales tax. (Although most states hover around a 10-15% tax rate.) Ryan Sevigny of High Tide Ranch said the state already has collected $742 million in marijuana taxes. “In 2018–2019, it will be $450 million,” he added. “That’s more than double the alcohol tax being collected in the state.”
The impressive sales—and therefore, impressive tax dollars—are being driven by marijuana’s large customer base. Despite the fact that marijuana is an illegal substance under federal law, a 2017 Marist College study showed that more than half of U.S. adults have tried it, and 55 million describe themselves as regular users. “That’s only 5% less than cigarette smokers,” said Rhoads. “This is not going away.”
What About CBD?
Cannabidiol (CBD) has been getting a lot of attention since the December passage of the Farm Bill, which included a provision removing restrictions to produce and distribute hemp and CBD under the Controlled Substances Act (although there’s still uncertainty around how the U.S. Federal Drug Administration will regulate these products). But what exactly is CBD … and how is it different from marijuana? Here’s a glossary of relevant terms:
Cannabis: The parent plant and genotype for both hemp and marijuana, which fall at opposite ends of the spectrum in terms of effects. Cannabis contains a variety of different compounds called cannabinoids, most notably cannabidiol (CBD) and tetrahydrocannabinol (THC).
CBD: The compound found primarily in extractions from the hemp plant. CBD does not contain any psychoactive properties (i.e., it does not get the user high).
Hemp: The fiber of the cannabis plant. Hemp products are now legal in the United States, so long as they contain less than 0.3% THC. While hemp-based products historically have been used for industrial purposes (such as clothing and building materials), there’s been an increased demand for hemp-derived CBD consumer products used for things like anxiety, joint pain and even epilepsy. These CBD/hemp products come in gels, gummies, oils, supplements, extracts, tinctures and more, and are not legal under the FDA’s recent interpretation.
Marijuana: The psychoactive buds and leaves of the cannabis plant. Despite numerous states’ legalizing recreational and medical use of marijuana, it is illegal federally. Unlike hemp, marijuana contains high rates of THC—15% to 40%. It is used for both recreational and medical purposes and comes in multiple varieties including flowers (to be smoked), oils and liquids (to be vaped), edibles, tinctures and topical creams.
THC: The main psychoactive compound in the marijuana plant, responsible for the high consumers get from marijuana use.
Marijuana doesn’t enjoy just a large customer base, but a surprisingly diverse one as well. “Millennials are the market,” Savigny said. “They use it more frequently, they use it heavier, there’s a better turn rate. But there’s a lot of other people that are broadening the pie.”
Sevigny reported that while millennials skew toward combustible options, it’s actually baby boomers and the silent generation who are driving vape, edible, topical and tincture sales. The older generations also are buying more: Sevigny said millennials spend approximately $23 per transaction; Generation X, $28; baby boomers, $32; and the silent generation, $38.
Even with the high tax rates, that’s a lot of money for marijuana retailers. Rhoads said his hometown of Vancouver, Washington, has the state’s highest-grossing retail location. In 2017, this one retail location netted $18 million in gross sales. “That gives you the scale of where this is going,” Rhoads said. “The numbers are incredible.”
The Bummers for Convenience
With all these profits, it’s easy to understand why retailers would want to get in the marijuana business. The problem is there’s a plethora of reasons why they can’t. First and foremost, marijuana is a drug that remains very much illegal from a federal perspective.
“The sale or distribution of marijuana is a felony,” Sinder said. “[Marijuana is] classified as a Schedule 1 drug, meaning it’s got the same treatment as heroin and LSD. The ramifications are that you can be prosecuted under federal law if you sell, distribute or aid and assist in the sale or distribution [of marijuana] in any way.” This classification was reaffirmed as recently as 2016.
And if the risk of prosecution isn’t enough, there are many other problems retailers face because of its Schedule 1 classification. Marijuana businesses have difficulty accessing proper banking or insurance, and they take a major hit on the tax side. “Any expenses that you incur in the illegal business are not deductible—but the revenues are fully reportable,” Sinder explained. “The tax burdens for marijuana businesses are much higher.”
The departure of U.S. Attorney General Jeff Sessions—a noted opponent of marijuana legalization of any kind—certainly didn’t hurt legalization efforts. But so long as marijuana remains illegal under federal law, Sinder said, it might not matter who the attorney general is. “There’s going to be more pressure in Congress to fix this problem,” he said.
Marijuana is fully legal in 10 states plus the District of Columbia, and several states are considering legalization in 2019.
Even if marijuana were decriminalized tomorrow, the convenience channel still faces a significant regulatory roadblock: Recreational state markets currently prohibit traditional retail channels from participating. While every state regulates recreational marijuana a little differently, Sinder outlined some common components, including that such laws:
- Legalize marijuana for use by adults over 21;
- Create new a regulatory entity (or rely on an existing state regulator); and
- Establish a taxation regime and an associated state fund to collect the revenue.
Those regulatory entities must then establish how marijuana will be sold: likely through state-granted retail licenses. In most states, retail licenses come with strict requirements that make it difficult, if not impossible, for convenience retailers to qualify. Everything from restricted hours of operation, geographic limitations, onerous insurance and security requirements and most importantly, prohibitions against retailers selling non-cannabis products (often specifically including alcohol and tobacco) can completely prevent an existing retailer from engaging in this space.
“That’s the biggest problem for us,” Sinder said. “It’s an exclusive channel.”
When the Smoke Clears
Retailers in states where recreational marijuana already has been legalized encourage those in other states to get involved in the legislative process early. This way, they can help ensure that the convenience channel can participate if and when it is legal to do so.
“We have all these different states with different laws,” said Keelan Gallagher of Colorado-based Smoker Friendly. “Regulators are looking for feedback as to how the system should work. If you’re proactive, chances are you’re going to be more suited to benefitting from the industry.”
If you’re proactive, chances are you’re going to be more suited to benefitting from the industry.
To assist retailers in this engagement, NACS and Sinder have put together a toolkit with resources to help the convenience industry advocate for its participation in the recreational marijuana market.
“If a state like Texas moves forward with legalization, we want to make sure that convenience retailers are able to sell a legal product in a legal manner, just like anybody else,” Sinder said. “Rumors are rampant in D.C. that Congress will formally vote shortly after the new year to remove any federal prohibitions on marijuana-related activities. That would open the door to the provision of full banking and insurance services to the fledgling industry.”
Whether this happens in 2019, next year or further out, legalization is coming one way or another. It’s up to retailers to be prepared for when that day comes.
“The train has left the station,” said Sevigny. “We’re not going backwards.”