July 16, 2019
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How the first year of Maine’s recreational marijuana market will likely roll out

Robert F. Bukaty | AP
Robert F. Bukaty | AP
In this Dec. 13, 2018, photo a marijuana plant grows under artificial light at an indoor facility in Portland, Maine.

With the Legislature ready to vote this week on rules for recreational marijuana sales and regulation in Maine, businesses that have been waiting to enter that market can draw from the experiences with marijuana use for nonmedical purposes in the 11 states, plus the District of Columbia, where it is approved.

The Veterans and Legal Affairs committee voted on Thursday to approve amended rules so the full Legislature could review them. The next step, if they are approved by the Legislature, is the governor’s desk. With all approvals, the rules would go into effect 90 days after the Legislature adjourns this week.

Industry experts expect adult-use marijuana businesses to take off quickly, in many cases displacing the already lackluster market for medical marijuana. However, by the end of the first year, they expect the recreational marijuana business to start tapering off as well.

“This is the natural growth in a new market. Prices tend to fall over time,”said Eli McVey, research editor for the Marijuana Business Factbook published last week by Marijuana Business Daily.

“There will be a glut of companies and a rush of consumers to a handful of retail stores when the market starts, and then business will fall off,” he said.

Sales will slow as more businesses open, eventually flooding the market with products. That leads to decreasing prices. Any new sales growth would come from current non-users of marijuana, and those sales are hard to attract, McVey said.

Under the draft rules, businesses selling marijuana must provide an operations plan that the state regulatory office could approve conditionally. Sellers, which typically would operate out of a storefront, must form a relationship with one or more municipalities that opt in to allow recreational businesses before the Office of Marijuana Policy can change the conditional to an active license.

The rules do not allow current medical marijuana dispensaries to co-locate a recreational marijuana business in the same storefront.

Nick Westervelt, a medical marijuana caregiver who opened a storefront in Rockland three weeks ago, wishes that were not the case. Good statistics on marijuana sales by caregivers are difficult to come by, as the state does not track them.

Westervelt would like to be in both markets, but if he cannot he likely will switch from a medical to a recreational business.

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“Our job, first and foremost, is to make these transactions easier, smoother and simpler in every way for our customers,” he said. “Ideally we’d like to sell to both medical and recreational customers like they do in some other states, because many folks have a medical need that doesn’t deserve to be taxed highly. Unfortunately, it doesn’t look like Maine is going that way.”

Westervelt said some towns are hesitating to opt in because “no town wants to have twice the number of storefronts, one for recreational and one for medical.”

So far there are at least 15 municipalities, including Portland and South Portland, that have opted in, according to Office of Marijuana Policy spokesman David Heidrich.

Wellness Connection of Maine, the largest medical marijuana dispensary network in the state with four of the eight licensed storefronts, intends to be a big player in the adult-use market while keeping its medical marijuana base. The four other dispensaries did not return calls from the Bangor Daily News to discuss their plans for the recreational market.

However, there initially was a hitch for it to get going. Wellness Connection and one of its investors told the Veterans and Legal Affairs Committee during a public hearing last Monday that they are prepared to sue the state over residency requirements that favor in-state investors to the exclusion of out-of-state ones.

CEO Patricia Rosi told the committee that the residency requirement for investors could “threaten our very existence.”

The committee agreed on rule revisions on Thursday.

“We can work with the changes that were made,” said Dan Walker, an attorney with Preti Flaherty who represents Wellness Connection. “We do not feel we need to bring a lawsuit.”

Troy R. Bennett | BDN
Troy R. Bennett | BDN
Patricia Rosi, CEO of the Wellness Connection (right) stands with some of the cannabis buds for sale while Paul Robbins (left) works behind the counter in Portland last month. Rosi's company runs four of the eight medical marijuana stores in the state.

Shifting ‘cannabiz’

Rosi expects big business when the rules get the governor’s stamp of approval.

“Medical marijuana sales continue to trend down. Eight years after we started, sales now are down 50 percent,” she said. She would not comment on revenue, but said the company is profitable.

She said the price for cannabis was about $400 per ounce when Wellness Connection started, and now is less than $200 an ounce and trending toward $115, if not $100.

“We’ll stay in medical, but it will become 15 percent to 20 percent of our business, with 80 percent recreational,” she said.

McVey said there are a number of reasons medical marijuana is on the decline, including a black market for lower priced marijuana and buyers opting for convenience purchases instead of from a medical retailer.

“There is no reason for people to pay higher prices and drive to a store,” he said. “There’s no significant incentive for people to buy medical marijuana.”

Rosi said current medical marijuana users have become sophisticated about doses and products. Even though they do not pay sales tax to buy medical marijuana, the $100 to $200 they must pay for a card that lets them buy it legally is about the same as the up to 20 percent tax, including the excise tax, for recreational marijuana.

Nationally, combined retail sales of medical and recreational marijuana will be on the increase from 2018 to 2023, with adult-use cannabis sales on a sharp rise, according to Marijuana Business Daily.

Total sales this year are expected to rise 35 percent to $13.7 billion. More than half of that is recreational marijuna, at $8.5 billion.

In 2023 total sales are projected to rise to $34 billion, with up to $22 billion of that being recreational marijuana.

Medical marijuana sales will continue to level out through the five-year period.

“Medical sales are tapering off as recreational markets begun to emerge nationally. Maine will be part of that,” McVey said. “But existing medical businesses have a major leg up on people trying to get into the recreational market.”

He said 36 states plus the District of Columbia have approved medical marijuana, and 11 states plus the District of Columbia have approved recreational marijuana, with Illinois being the latest.

The economic impact of both types of marijuana, which includes related businesses and sales, is projected to more than double from as much as $48 billion in 2019 to $106 billion in 2023.

New markets, high prices

Wholesale cannabis prices already are dropping in existing recreational marijuana markets, according to Marijuana Business Daily.

The average per-pound wholesale price for recreational cannabis declined by 63 percent to $626 in Oregon, the state that saw the largest price drop from October 2017 to October 2018. Washington was down 53 percent to $595 per pound, and was the lowest priced state for legal recreational marijuana sales.

The state with the smallest price decline was Arizona, down 2 percent to $2,069 per pound. The figures were extrapolated from Cannabis Benchmarks, a cannabis price-tracking company, by Marijuana Business Daily.

Older markets such as Washington and Oregon will continue to have lower prices, while new markets will have high prices, a March 2019 report by cannabis data analysis company Headset found.

Headset and Budzu are among the websites tracking medical and recreational marijuana prices.

Colorado launched the first recreational marijuana market in January 2014. On June 12 the state’s department of revenue said tax, license and fee revenue from marijuana topped $1.02 billion since sales started in 2014.

Sales from 2014 until May 2019 exceeded $6.56 billion. Colorado has 2,917 licensed marijuana businesses and 41,076 individuals who are licensed to work in the industry.

“This industry is helping grow our economy by creating jobs and generating valuable revenue that is going towards preventing youth consumption, protecting public health and safety and investing in public school construction,” Colorado Gov. Jared Polis said in a statement.

Neighboring Massachusetts, which launched commercial sales at two recreational dispensaries in November 2018, has seen a sharp rise in sales in the first six full months of operations, according to the Marijuana Business Factbook.

Sales as of June 2019 approached $139 million, and are expected to hit $500 million by the end of the year.

As of late May, the Massachusetts Cannabis Control Commission had issued final licenses to 58 retailers, 48 cultivators, 42 manufacturers and three testing labs.

Maine is expected to see sales of $250 million to $300 million, Rosi said, far larger than the market for medical marijuana.

The plan is to tax adult-use marijuana sales at 10 percent, plus have another excise fee on sales by a cultivation facility to a retail store or production manufacturing facility. That fee could be up to 10 percent of sales, Rosi said, higher than the 8 percent tax on sales of processed medical marijuana.

At 20 percent, Maine’s maximum rate still would be less than the 37 percent tax in Washington state, according to the Tax Foundation. Colorado has a 15 percent sales tax and 15 percent excise tax on sales from a cultivator to a retailer. In Massachusetts, the tax is 10.75 percent.

Rosi noted that neighboring states like Massachusetts pose competition to Maine for both medical and recreational marijuana, especially in the high sales months during the summer vacation season.

With combined marijuana sales rising, cannabis is taking its place among popular consumer items. Wine sales were $72.2 billion in 2018, while legal and medical cannabis sales were about $10 billion. Pizza came in at $60 billion, e-cigarettes at $3.6 billion and Goldfish crackers at $980 million, according to the Marijuana Business Factbook.

Robert F. Bukaty | AP
Robert F. Bukaty | AP
David Boyer, Maine political director of Marijuana Policy Project, discusses policy at a hearing held by Maine Office of Marijuana Policy, Thursday, May 23, 2109, in Portland, Maine.

Taking care of business

McVey said companies in their first year of business will need to have a lot of operating capital to get off the ground.

At first that money typically comes from bootstrapping, such a refinancing a home to take out money. But companies will need to tap investments from high net worth individuals or partners with a significant amount to invest.

“It can cost $250,000 to several million dollars to get a cultivation facility off the ground and about $300,000 for a retail store,” he said.

Westervelt said he expects costs for recreational marijuana sales would increase his overhead.

His point-of-sale system, which tracks patients and patient cards, would double in cost from the current $7,000 because recreational sales are more risky to the companies that lease those systems. He also expects to have to pay for a camera system and a recordkeeping system to track seed-to-sale transactions.

McVey said that recreational businesses also will need to know the business environment in their state.

“Managing the cost of goods and margins, as well as trying to be as efficient as possible in operations is important,” said Rosi. “This business is very capital intensive and you need a lot of money for a grow or extraction if you do it right.”

She said it takes longer than expected for new companies to get licenses and gain market traction, so they need to stay on top of their business plan.

And, marijuana businesses do not qualify for energy efficiency programs such as Efficiency Maine. Electricity, along with labor, are the highest costs for marijuana growers, Rosi said.

She expects more municipalities will opt in to host recreational marijuana businesses once the state votes on the rules.

“There’s excitement at the beginning, and then the market will start to level off after the first six months when it starts to settle in,” Rosi said.

Watch these 2 guys get high and describe their new magazine all about Maine weed

 



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