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Keeping the Pace
Author: Charlie Alovisetti 05/10/2017 - 12:00:00

One of the most exciting aspects of the cannabis industry is the extraordinarily high growth rate seen as the industry transitions from the underground economy to the legal, regulated market. While there has been, and continues to be, a great deal of speculation about the future growth rate of cannabis businesses, there are only a limited number of examples of actual legal, regulated markets. Colorado, which first saw retail sales of cannabis on January 1, 2014, is currently the oldest and most mature legal cannabis market in the world and a good place to look for historical data when trying to estimate future rates of growth. 

“CAGR is a useful measure of growth over time—the easiest way to think of it is as an average that represents the consistent rate at which an investment would have grown if the investment had compounded at the same rate each year.” 

Colorado had annual total sales (both medical and retail) in 2014 of $702,816,603 and in 2016 of $1,313,156,546, equating to a compound annual growth rate (CAGR) of 36.69 percent. The first year of growth was the fastest, with annual growth of 41.47 percent. Growth from 2015 to 2016 was slower, but still substantial, at 31.82 percent. On the medical side, growth was substantially slower, with a CAGR of 6.20 percent. While on the retail (i.e., recreational) side, growth was significantly greater, with a CAGR of 66.80 percent. This is not a fair comparison since the advent of retail sales has reduced the incentive to get medical cannabis cards—on January 31, 2014, there were 111,030 patients with registered medical cannabis cards compared to only 94,577 on December 31, 2016—and some of the retail growth likely has been cannibalization of what would have been medical sales growth.

Why is this significant? CAGR is a useful measure of growth over time—the easiest way to think of it is as an average that represents the consistent rate at which an investment would have grown if the investment had compounded at the same rate each year. In finance, CAGR is considered one of the more accurate ways to gauge returns for any asset or portfolio or other metric (e.g., annual sales) that can increase or decrease over time.

Cannabis sales in Colorado demonstrate very impressive CAGRs when compared to those of other industries. As an example, average growth in the global energy drink industry, often considered a fast-growing segment, has only been ten percent over the past five years. The beverage industry in general experienced a CAGR of 2.3 percent for the period spanning 2007-2016. And, though it is an inexact comparison since these numbers reflect projected CAGRs, analysts projected that between 2013 and 2018 online grocery sales will grow at a CAGR of 21.1 percent, with traditional offline grocery sales rising by only 3.1 percent during the same period.

While Colorado does present us with the best example of potential growth rate of sales in the cannabis industry, this data requires legal and regulatory context. Every marketplace is different and regulatory structures can have dramatic impacts on growth—you cannot expect other marketplaces to replicate the growth experienced in Colorado, unless the regulatory structures are comparable.

The following are a number of reasons why Colorado might have seen a higher growth rate than we will see in the newly legal states: Thriving tourism industry bringing in customers, an existing highly competitive medical cannabis industry that was able to transition to adult use, and successful capture of underground market consumers. Each of the new adult use markets have the potential to hit these same criteria—Massachusetts, Maine, California and Nevada (although both Massachusetts and Maine have far smaller and less developed medical cannabis markets)—if they are also able to successfully transition existing market consumers, particularly the most frequent consumers that are likely to be more price conscious and have stronger ties to the existing illicit market.

The ability to cannibalize the underground market is largely a question of appropriate pricing and access points—consumers will typically not switch to regulated businesses if they must pay markedly higher prices or travel to inconveniently located dispensaries (California, it should be noted, will allow delivery, which remains illegal in Colorado). But if the newly legal states can get this right, we may be in for several more years of rapid growth across the country.

The post Keeping the Pace appeared first on Culture Magazine.

Original article from ireadculture:Keeping the Pace



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