The cannabis edibles market has been growing rapidly for years. Many consumers are uncomfortable with the idea of smoking, so edibles provide the perfect entry point into the marijuana market.
To get an idea of the rapid growth rate in the edibles market, consider Colorado where edibles sales increased by 67% between February 2016 and February 2017. Another example is California where, according to Arcview Market Research, the percentage of cannabis-infused foods and drinks purchased in 2017 accounted for 10% of the state’s total cannabis sales. Just two months later, in February 2018 (one month after adult-use marijuana was legalized in the state), the percentage skyrocketed to 18%.
The good news for the cannabis edibles market is that there is widespread and growing consumer demand for cannabis-infused products. April 2018 research by GreensData found that edibles were the most purchased type of cannabis products among consumers during the 12 months prior to the survey being conducted. Edibles were also the second most preferred consumption method (behind flower) in all age groups.
Based on all of this data from sales and consumer research, you’d think the cannabis edibles market would be poised for explosive growth with all edibles businesses benefitting. Unfortunately, that’s not entirely true as there are three big problems looming for the cannabis edibles market that could hinder growth and competition while benefiting the black market at the same time.
Problem 1: Legalization and Regulations
For many edibles businesses, the idea of cannabis legalization is looked upon with excitement. The many small business owners crafting innovative edibles products often think legalization will give them opportunities to get their products to more people, and as a result, their profits will increase and their businesses will be able to grow. Unfortunately, that’s not the reality of legalization in states where adult-use is allowed.
For example, recreational marijuana became legal in California in January 2018. Fast forward six months and many small edibles businesses have closed or will close soon. The problem with legalization for small business owners is the onerous requirements that come with corresponding regulations.
In California, new regulations affect where edibles manufacturers can operate from. Many towns and counties don’t allow edibles production at all, or they zone a very small area for these businesses. With decreased rental space supply, prices are artificially inflated. For edibles processors who already operated on slim margins, exorbitant rent can make it impossible to do business.
Add on the high costs to obtain the right licenses and the inability to get bank or government loans to start a marijuana-related business, and it’s not hard to understand why small businesses can’t compete in the edibles market after legalization based on the current regulatory environment.
Problem 2: Taxes
High taxes aren’t a new thing in the cannabis industry, but in many states, the taxes edibles producers have to pay drive not only small businesses but also larger, established businesses out of the market. Since high taxes on businesses always trickle down to consumers in the form of higher prices, current tax structures not only restrict industry growth but also push consumers to the black market where prices are significantly lower.
This is what’s happening in California where legalization brought even more taxes to cannabis edibles businesses. Legal cannabis taxes can total between 22.25 and 46.25% when you add state sales tax, state excise tax, local sales tax (which varies by municipality), and local excise tax (which also varies by municipality).
How many businesses do you know that can survive when nearly half of every dollar generated in revenue has to be used to pay taxes? Again, it’s not surprising that small cannabis edibles businesses are shutting down.
Problem 3: Big Corporations
Given the regulations and tax structure cannabis edibles businesses face in many states, which make it extremely difficult for small businesses (and even mid-size businesses) to compete, the writing is on the wall for big corporations with deep pockets to take over. When that happens, the market will surely change. A small number of “craft” edibles processors will hang in there, but the rest of the cannabis edibles available to consumers could become completely commoditized.
Already we’ve seen big companies expressing interest in the cannabis-infused drinks and edibles market. As I shared on Cannabis Business Executive earlier this year, in October 2017, Constellation Brands (which owns Corona, Pacifico, and Modela) acquired a 9.9% stake in Canada’s Canopy Growth Corp., a leading cannabis producer. The company plans to launch cannabis-based beverages in the near future. Heineken already owns California’s Lagunitas Brewing and its line of cannabis-infused beers, and beverage analysts list Molson Coors Brewing Co., Anheuser-Bush InBev NV among the global corporations considering entering the cannabis-infused beverage market.
It’s not just alcohol companies that are eyeing the cannabis edibles market. While some big corporations continue to avoid the cannabis market entirely since marijuana is still illegal at the federal level, the earnings potential is hard to resist. We can expect to see more large companies finding ways to enter this market sooner rather than later.
The Rising Cost of Doing Business in the Cannabis Edibles Market
As we’ve seen happen in Colorado and California, taxes, legalization, regulations, and the entry of big companies into the industry can have a negative effect on competition, innovation, and pricing in the cannabis edibles market. A report by Arcview Market Research and BDS Analytics, California: The Golden Opportunity, revealed that taxes and regulations in California create a 77% handicap for cannabis businesses compared to prices in the black market. How can a small business owner compete?
While regulations are critical to ensure precise dosing and consistent manufacturing processes, the ripple effect of all of these regulations and taxes will reduce competition over time, and that is never a good thing for any market.