Despite a global pandemic that uprooted businesses around the world, the U.S. cannabis market showed no signs of slowing down in 2020, as we had predicted a year ago. Through lockdowns and mask mandates, the industry innovated how consumers purchase cannabis. Brands grew nationwide thanks to increased SPAC involvement and the growth and ambition of MSOs to become nationally recognized brands. Plus, adult-use cannabis was legalized in four states, while medical marijuana was approved in one. With 2020 now finally behind us, my team and I are optimistic about the continued development of the industry. We anticipate not only further regulatory progress in new states, but also the refinement of retail, cultivation, and extraction operations in existing markets and overall increased investor interest in emerging cannabis brands.
Strong Demand for Cannabis Continues
We can’t look back on the year without acknowledging the resiliency of the market and the mounting cultural acceptance of cannabis use nationwide. In a survey conducted by The Harris Poll and Curaleaf, 42% of respondents reported that their cannabis consumption increased this past year. As Covid-19 gripped the nation, consumers turned to methods of stress relief and cannabis was no exception. During Thanksgiving weekend alone, the industry saw $238 million in sales. In total, cannabis purchases in the United States in 2020 reached almost $18 billion.
These impressive sales figures would not have been possible without the innovative and forward-thinking sales measures the industry adopted. While at first, the closure of operations was deeply worrisome, cannabis retailers pivoted their operations with a focus on online ordering, curbside pickup, and delivery. Another significant contributing factor to these impressive numbers was the determination by several states that cannabis businesses be deemed essential. Not only did this classification allow cannabis operations to continue and provide needed revenue for financially strapped state governments, but it also had an added benefit of helping sway public opinion about the uses and benefits of cannabis.
It was this shift in public opinion that led to sweeping wins for cannabis on Election Day 2020 with five states legalizing either adult-use or medical marijuana. We anticipate that 2021 will be no different. In the upcoming year, we predict that much of the Northeast (Connecticut, New York, Pennsylvania, and Rhode Island) will soon legalize adult-use cannabis and we expect a fast-tracked regulatory process due to the urgency to capture the tax opportunity. In the next few years, we are watching as Vermont makes significant legislative progress in enacting its adult-use market. Sandwiched between Maine and Massachusetts, we also plan to watch New Hampshire for legalization efforts post 2022. Outside the Northeast, we expect New Mexico and Virginia to legalize recreational cannabis, while initiatives in Texas are pushing to expand the currently very restrictive medical market in 2021. Especially when it comes to Texas, we see the domino effect playing out in the Southwest just as it has in the Northeast.
At the federal level, the Biden administration is understood to be friendlier toward proposed cannabis policies. While there has been momentum in the last year with the introduction and passage of the MORE Act in the House of Representatives, it is unlikely that we will see major legalization or decriminalization legislation in 2021, even with a Democratic-leaning Congress. We anticipate that progress at the federal level will continue with the debate and passage of smaller pieces of legislation aimed at banking reform, and hopefully, taxes and 280E.
While there is still much uncertainty about the upcoming year, we anticipate that more states will legalize adult-use and medical marijuana, opening new opportunities for operators across the country, and we expect more first-time consumers to contribute to the strong sales performance of the past year.
Supply-Side Challenges
As demand increases, cannabis businesses are facing challenges in operations and compliance, which will likely continue in the new year. Cannabis operators are continuing to invest in extraction research and new product development designed to increase yields. Personally, I am working with NCIA, as a member of their Facility Design committee, to create those standards and GMPs, and improve education to all industry stakeholders. While we will continue to see innovation in this space, risk management systems are needed now more than ever as cannabis operators continue to search for this competitive edge. These steps in innovation reflect the shifts in the market towards more, higher quality products offered to consumers at a lower cost.
In cultivation, the challenge of how to increase yields and throughput remains, especially as the industry sees more energy regulations and unionization. Many cultivators are questioning how they can stay competitive as new facilities install state-of-the-art equipment while decreasing their cost per gram. We see a trend towards automation in the cultivation and trimming space to decrease costs.
Between expanding retail markets, increasing demand, and the need for more extraction and cultivation facilities nationwide, we will see significant investments in real estate and related infrastructure in the cannabis space. This comes at a time when commercial real estate vacancies are climbing and investment in real estate from industry players will be welcome by state and local authorities. We expect these investments to accelerate development processes with this increased support. In particular, we see the positioning for a land grab happening quickly in New Jersey and the tri-state area as more states in this highly populated region legalize adult-use. In the new year, we also expect to see the expansion of cannabis banking services at local financial institutions as larger banks will continue to shy away from cannabis businesses unless there are changes at the federal level. Additionally, proper liability insurance coverage will be needed by many new businesses.
With these newcomers and companies interested in joining the cannabis industry (at some level), we anticipate that the hiring boom we witnessed in late 2020 will continue. There are many roles to fill in the industry at large for applicants of all backgrounds, especially in states that recently voted for legalization. However, as talent needs increase, the search for appropriate talent may be a challenge for some businesses. Of equal importance to firms will be the need for a proactive human resource strategy that formalizes processes and centralizes institutional knowledge to avoid jeopardizing the business as employee’s turnover. The industry must work on providing comprehensive benefits to employees to achieve better retention.
Despite these challenges, we view these pain points as opportunities for the industry to move toward a higher quality product at a lower price. Cannabis businesses will innovate as they did in the last year and seize these opportunities to improve not only their own operations, but also the overall industry.
Increased Access to Financing
While funding stalled at the beginning of the pandemic as business operations closed in many parts of the country, mergers and acquisitions began to increase at the end of 2020 and will be a defining part of 2021 and most likely for a few more years. Excited by the strong organic growth of cannabis, SPACs began to see M&A as a way to build on this success. It is anticipated that larger operators and MSOs will expand by either entering new state markets, by purchasing private operators, or by purchasing bigger assets within their existing states of operation.
With well-funded MSOs and SPACs ready to splurge on new acquisitions to build or consolidate their position, all industry actors need to move quickly to stay relevant for fear of losing ground. Operators need to ensure they have all the skills required to succeed and stand out. The market will reward businesses committed to meet the changing expectations of their various stakeholders: customers, state and local governments, staff and investors.
Social Equity
Throughout the last year, you likely heard a lot about social equity and its impact on the industry. Not only is social equity important to the diversity of cannabis, but it is also valuable for the future of smaller operators, many of whom are vital to the local economies they serve. Yet, whether a business is a social equity applicant or not, it is clear that state licensing caps have exacerbated some social equity discussions and have the potential to hinder growth in some states. This can be especially consequential for independently owned, smaller businesses and the growth of the industry at large.
Finally, our team is starting to advise more non-cannabis companies that are moving into the market for the first time. The impressive growth of the market has caused other companies to consider participating in the space and, as more operators move into the industry, brand differentiation is going to be key. Cannabis has the potential to fulfill many market needs from serving as medicine, a substitute for alcohol, or as a tool for relaxation and wellness. No matter what corner of the market a brand is trying to operate in, they need to have a strategic plan to establish a brand position quickly and own that space in the market. Specifically, the challenge for many operators will be to have consumers request their specific brands by name, rather than seeking out any brand available.
For all of the upheaval and strife that 2020 brought, the cannabis industry continued to expand and change rapidly. However, beyond speed, 2021 will require agility and creativity. In the upcoming year, we believe the market will continue to become more regulated and more mature nationwide. With a brighter future on the horizon, we look forward to another innovative and prosperous year for cannabis. And who knows what 2021 will bring….
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