With nationwide legalization of marijuana use around the corner, the economic benefits of the cannabis industry are only now beginning to be realized. Legalizing marijuana consumption, or at least its medicinal use, has been a nationwide debate for years. For many states, the decision is less ideological than pragmatic: where the cannabis industry is permitted, “state coffers are definitely bulging,” according to John Kagia, Director of Industry Analytics at New Frontier, the cannabis industry’s leading data and analytics firm. Eye-popping numbers have emerged in the mainstream media, such as $5.4 billion in revenue in 2015, though further study is certainly needed.
An enormous market with an enormous economic impact
The US contains so many pot smokers that its market size is unrivaled around the globe. In 2015, US medicinal patients contributed to “$4.4B in medical marijuana sales.” By comparison, “the adult use market, which was just over a billion dollars, remains relatively small.” Still, recreational users in the US certainly outspent smaller liberal countries like Israel and Holland. Several South American countries are poised to sanction adult recreational use, but their relatively weak economies mean the American market will retain a significantly larger global share.
With that huge market comes great potential for positive change. States are reaping huge revenues from taxes. In Colorado, the state collects a combined 28% of the product’s final price from producers, retailers, and consumers, while in Washington consumers pay 37% outright. That means state governments brought in over a billion dollars in 2015, just for allowing their citizens the right to smoke marijuana.
Room for growth
Kagia explained that it was medicinal and adult use consumer markets alone that generated the $5.4B figure presented in an Arcview Market Research projection powered by New Frontier. While this sector “generates the greatest interest, because all other verticals in this industry are reliant on how much product customers are buying,” New Frontier plans to begin studying growth in other sectors in 2016.
The two primary sectors Kagia expects heavy growth in are “investments made into the marijuana businesses themselves- so, if you wanted to open a grow facility or a dispensary…” and “ancillary products and services that serve the industry or that are used as part of the kind of marijuana ecosystem.” While investment in the cannabis industry is still relatively small, there are some big names joining the playing field.
Private investment surging
Cannabis is like many industries in that, “investment is such an important engine in this industry.” That importance is ratcheted up a notch in the cannabis industry however, as “businesses have a lot of problems getting bank loans.” Banks are concerned “about doing business with companies that are engaged in a federally illicit substance.” Though “both the Department of Justice and Department of Treasury have assured banks they will not be prosecuted for working with these marijuana businesses,” to date, they continue to shy away from lending to cannabis-related ventures.
In the meantime, that hesitance is only hurting the banks. In their absence, the marijuana industry has found investors from The ArcView Group and in firms such as Privateer Holdings. PayPal co-founder Peter Thiel, whose venture capital firm, Founders Fund, is watched by investors worldwide, recently backed Privateer. According to Kagia, “for people sitting on the sidelines trying to figure out what was going to happen next with the industry, the visible entry of such a well-known technology icon and successful investor in emerging industry innovation was a very strong signal that there is substantial opportunity in this industry.” With growing interest among investors, the reticence of banks will not slow the cannabis industry.
The future looks green
Over the next five years, New Frontier expects to see two geographical regions experience the most growth. The “Corridor” from the Pacific northwest through the southwest, which includes Washington, Oregon, California, Nevada, and Arizona, is a collection of states in which the marijuana industry is either already operational, or it is likely they will vote for legalization in November 2016. Kagia explains that, “those markets would come online in either late 2017 or early 2018,” creating a “long corridor where cannabis is legal that stretches from the Canadian to the Mexican border, and halfway across the Mexican border.”
A second region is the upper northeast of the US: Vermont, New Hampshire, Massachusetts, and Maine. These four states are poised to legalize marijuana consumption in 2016, “establishing a beachhead for legalization in northeastern United States.” That “first adult use market on the East Coast” would significantly impact regional tourism. The shift from medicinal to recreational use is huge, drastically increasing the size of the potential customer population.
A growing customer base means expanding revenues. In 2015, that revenue was excellent: $5.4B is nothing to scoff at. But 2016 promises to be even better, with an expected $6.7B in sales. New Frontier predicts marijuana sales will top $21B by 2020, and deems it likely that projection will increase, if recent developments in Colorado and Maine are any indication of what’s in store for the future of the cannabis industry. As we move forward, investors and entrepreneurs will grow increasingly grateful to cannabis for sparking whole new sectors for growth.
