Now in July 2020, two months into the reopening of the Massachusetts adult use marijuana industry, it is time to take a step back and look at the numbers. The second adult use retail store in Boston opened this past Monday, adding to the 16 others that have opened throughout the Commonwealth since the state’s reopening on May 25.

This jump in retailers comes after a two-month shutdown that, in their latest update, Nucleus One estimated had a total direct impact of $116 million in lost sales for operators, $2 million per day. Despite the reopening and immediate growth seen in the market, the lingering and indirect effects of these store closures and the subsequent preventive and social distancing measures remain. Compounded by targeted attacks on dispensaries during the protests, this major disruption has had and will continue to have serious implications for operators and authorities alike.

Retail Sales

Prior to the pandemic, the Massachusetts adult use marijuana market had seen impressive growth: retail sales in the first 12 weeks of 2020 were up 200% over the same period in 2019, fueled by steady store openings throughout the year.

This growth came to a grinding halt on March 24^th 2020 when Massachusetts’ adult use stores were deemed non-essential and mandated to shut down due to COVID-19. The two-month closure caused a $116 million sales deficit and resulted in an estimated direct tax revenue shortfall of $19.3 million.

After being allowed to reopen on May 25, adult use stores adapted to new COVID-19 regulations and served customers through curbside pickup only. Since Phase II of Governor Baker’s reopening plan started, dispensaries have been able to welcome customers back in-store, albeit with significant occupancy limits (40% of capacity). In spite of these huge constraints to their business and operating models, retail stores have achieved an impressive feat by selling $54.8 million of products in June, the second-best month ever for the market.

However, as we dig deeper, we quickly realize that this market growth has been diluted across a larger number of stores, leaving the average daily sales per store 25% below their pre-COVID levels, from $52k to $39k.

Interestingly, this decrease in daily store sales is even more pronounced on Fridays (-29%) and Saturdays (-36%), highlighting that customers have changed their behavior. In terms of product mix, there has been no radical shift but some product-specific trends stand out: the share of edibles has declined from 18% of total sales in May to 14.8% in July, while sales of pre-rolls boomed from 6.5% to 10.4%. The long-lasting impact of COVID-19 remains to be seen, but the product mix is reverting to pre-COVID patterns in the short term.

Production

When looking at the supply side of the market, the news is encouraging as well. The total number of employees has recovered and reached a new record high of around 4,617 as of July 14, up 7% since the reopening. Harvesting has also rebounded, reaching new highs in late June (more than 1,400 plants per day) before a decline in early July due to the holidays.

During the shutdown, cultivators with adult use licenses could not start new crop cycles or produce products “unless operations were necessary to support the medical marijuana supply chain,” according to the Cannabis Control Commission (CCC). Despite this regulation, cultivators were able to retain a reduced staff and maintain operations during the shutdown.

There are currently 32 active adult use cultivators within the Commonwealth of Massachusetts with an average establishment size of 52,000 sq. ft. With the 15 final licenses soon to start operations and 99 provisional licenses, the pipeline of additional cultivation capacity is significant: another 6 million sq. ft. will come on top of the 1.7 million sq. ft. already active. This should help rebalance supply and demand and prevent any product shortage in the foreseeable future. Indoor cultivation is certainly the go-to method of cultivation in Massachusetts, but 18 applicants plan to grow outdoors.

Applications and Licenses

As the first state to legalize adult use marijuana on the East Coast, Massachusetts faced numerous challenges and garnered criticism due to the slow licensing process. However, those days appear to be over.

The shutdown did not slow application approvals, instead, the Massachusetts Cannabis Control Commission (CCC) continued and seemingly sped up its processing and licensing process, reducing its backlog of pending applications and granting 32 new final licenses since the end of March.

As a result, the number of stores in operation has increased significantly since the reopening: 17 additional stores have opened throughout the state, bringing the total number to 57 as of July 22. This growth is a positive sign that despite the pandemic, the industry is both in high demand and ready to meet the demand.

Delivery

While the pandemic slowed business in some areas, it also encouraged growth in others such as curbside pickup and delivery. For both health reasons and convenience, delivery has become more attractive to stores and customers as regulations and fear continue to plague business.

In Massachusetts, the CCC approved rules to allow delivery of recreational marijuana in September 2019. It was not until the end of May 2020 that licensing applications to prospective delivery-only marijuana establishments and certain microbusinesses seeking delivery endorsements began moving forward.

Despite the slow start, interest and potential remain high with 190 communities allowing adult use deliveries in the state and more than 400 applicants eligible for delivery-only and micro-business delivery endorsement exclusivity, including 122 certified economic empowerment applicants and nearly 300 social equity program participants.

Out of the gate, licenses were requested and provisionally approved, with the CCC reporting 26 delivery applicants as of July 9^th 2020. This number can be expected to increase as awareness grows and COVID-19 continues, strengthening the allure of such an option.

There is clearly opportunity in the delivery space, but the exact potential remains to be confirmed. Technology platforms such as Drizzly and Dutchie have already stepped in to meet the new needs of retailers and consumers, capitalizing on and enabling this shift towards omni-channel retail in the Massachusetts marijuana retail market. This bodes well for the market as a whole, but the economics remain uncertain at the store level. Deliveries entail significant costs and breaking even on delivery operations has been challenging for retailers in other markets such as California.

It will be interesting to see how retailers manage to gain the scale and efficiencies needed to make the unit economics work for them. Whether they seek to reach new customers or better serve their existing ones, they will need to carefully design delivery operating models that can prove financially viable.

Looking Forward

The Massachusetts adult use marijuana industry has shown immense resiliency in its prompt recovery in sales, the number of employees, and harvested plants.

The reopening has brought some relief to Commonwealth operators, but daily sales per store have not fully recovered, highlighting the challenges ahead for retail stores. It is too early to predict the full impact of the pandemic on the Massachusetts market, however increasing competition will likely raise the bar for operators and lead them to rethink their business and operating models. Cashless, contactless dispensing processes are being implemented throughout the retail industry and omni-channel has become more than a buzzword for marijuana companies. The implications for operators are manifold and will require swift adaptation to this new normal, from store design to technology solutions.

Our team is expecting an ongoing impact on the market with subdued growth and more challenging store economics in this new normal as more stores come online.