How medical canna-businesses transition to recreational markets

Emily Gray Brosious

June 9, 2017

(Photo credit: Uriel Sinai/Getty Images)

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Four states with established medical cannabis programs legalized pot for adult recreational use in November 2016, bringing the nation’s total to eight states with legal recreational cannabis. And more than a dozen states with existing medical cannabis programs are currently pushing to legalize the drug for adult recreational use as well.

But what happens to existing medical cannabis businesses when states expand their marijuana marketplaces to recreational consumers?

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Regulatory structure is key

The fate of medical cannabis businesses depends heavily on the regulatory structure and licensing system of the new recreational marketplace, and on the structure and political influence of the existing medical cannabis industry.

Legalization bills in states with tightly regulated medical cannabis industries tend to “give deference to the dispensaries,” to avoid opposition from the medical cannabis community, explains Jill Lamoureux, co-founder and former chair of the National Cannabis Industry Association.

That’s what happened in Colorado after it became the first state in the nation to legalize cannabis for recreational use in 2013.

“The medical system was working in Colorado, so I think they wanted to roll out recreational [legalization] smoothly to keep patients happy, and to continue being a national model,” Lamoureux told Extract in an interview. “If it’s streamlined, then it’s easier for everyone.”

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Deference to medical cannabis

Colorado’s recreational legalization bill gave retail licensing priority to medical cannabis dispensaries in the state, allowing existing dispensary operators to get a foothold in the new industry before anyone else.

“In Colorado, the system was set up to benefit the medical marijuana licensees,” Justin Jones, co-owner of DANK Colorado dispensaries, told Extract in an interview. “It gave medical marijuana companies a head start, and most of them opened for recreational customers too.”

Jones’ own dispensary, DANK Colorado, was among the first handful of stores in Denver to begin selling cannabis to recreational consumers on Jan. 1, 2014.

“We put our application in on day one to guarantee that we’d be open on the very first day for the end of prohibition,” Jones said. “We had something like 3,000 people in that day.”

Denver city officials said 42 retail marijuana businesses had completed all city requirements for selling recreational cannabis on Jan. 1, 2014, The Gazette reported. But Tim Cullen, CEO and co-owner of three Colorado Harvest Company retail marijuana shops, says just 12 or so dispensaries were fully licensed to begin legal recreational sales on day one.

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Sean Azzariti, a veteran of the Iraq war, prepares to make the first legal recreational marijuana purchase in Colorado at the 3-D Denver Discrete Dispensary on Jan. 1, 2014 in Denver, Colorado. (Photo credit: Theo Stroomer/Getty Images)

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Green rush

The handful of retailers operating in the early days of Colorado’s legal pot market made hay.

DANK Colorado rapidly expanded to catch up with soaring demand, Jones said. In short order, the shop went from five employees serving between 20 and 50 customers each day to 35 employees serving between 400 and 500 customers daily.

“It was a like a 10-times multiplier for everything in the company,” he said.

Cullen opened Colorado Harvest Company in 2009, so by the time recreational cannabis sales became legal in 2014, the shop already had all the systems in place for selling cannabis. The only thing the company wasn’t fully prepared for was the sheer “volume of people who came” in seeking recreational cannabis, Cullen told Extract.

“We were used to having two to three people trickle in all day, and then suddenly we had something like 1,500 people lined up at our stores on January 1, 2014,” he said. “It was wild. There were lines out the door.”

Cullen’s retail cannabis sales increased by more than 400 percent in 2014, he said. It took his company about a year to build out its retail spaces and hire additional employees to handle the new traffic. During that time, Cullen focused on providing fast service and efficient sales to move customers in and out of the shop as quickly as possible.

Between January and December of 2014, recreational cannabis cultivation in Colorado expanded from 25,000 registered plants to over 200,000. During the same time, the number of recreational marijuana storefronts grew to 306, Wired reported.

The influx of newer recreational cannabis storefronts has leveled out customer traffic for Colorado pot retailers. It also has created more competition and driven down cannabis prices.

But even with the added competition and slimmer margins, recreational cannabis continues to be profitable, according to Cullen. Recreational pot sales make up about 80 percent of Colorado Harvest Company’s business at this point, he said.

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Separate state cannabis markets

Although recreational cannabis legalization has been largely positive for Colorado’s medical cannabis industry, it’s a somewhat different story in states like Oregon, where medical cannabis operators are prohibited from selling cannabis to recreational consumers.

When Oregon voters legalized marijuana for adult use in 2014, medical dispensaries were permitted to sell cannabis to recreational consumers between Oct. 1, 2015 and Jan. 1, 2017 as a stopgap measure while regulators drafted rules for recreational marijuana sales.

Effective Jan. 1, 2017, medical dispensaries were no longer allowed to sell cannabis to recreational consumers. That meant medical dispensaries who wanted a piece of the lucrative recreational market had to become recreational-only pot shops.

“Though the state is still home to 300 dispensaries, that number is expected to continue to drop as medical-only shops migrate to the larger recreational industry,” Noelle Crombie reported in The Oregonian shortly after the new law took effect in January 2017.

By June 2017, more than 80 percent of those 300-plus medical dispensaries had applied to become recreational pot shops, Oregon Public Broadcasting reports.

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Patients get their prescriptions filled at Sunset Junction medical marijuana dispensary on May 11, 2010 in Los Angeles, California.(Photo credit: Kevork Djansezian/Getty Images)

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Ramping up for recreational customers

California, which was the very first state to legalize medical cannabis in 1995, was among four states that legalized the drug for adult recreational use in the November 2016 elections. More than 1,000 publicly disclosed medical cannabis sellers must navigate the market transition, according to figures from the California Board of Equalization.

California’s law gives priority licensing to medical cannabis businesses operating prior to Jan. 1, 2016, and who are in good standing with their local governments. The state isn’t slated to start licensing recreational cannabis businesses until Jan. 1, 2018, at the earliest.  

Outliers Collective, a San Diego medical cannabis dispensary managed by a vertically integrated cannabis company named OutCo, is already preparing for the advent of California’s recreational pot market. When recreational sales roll out, OutCo CEO Lincoln Fish expects a supply shortage, but he’s working to avoid that.

“There’s a lot still up in the air about California’s recreational law, but there could be real issues with availability and volume in the beginning,” Fish told Extract. “I think we’ll see higher demand and shorter supply, which is why we’re really focusing on gearing up to cultivate at a larger scale.”

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Legalization on the horizon

A number of states are currently pushing to legalize cannabis for adult use in 2017 and 2018, including Illinois, where state lawmakers introduced legislation earlier this year to tax and regulate cannabis for adult use. The current version of the bill would give priority business licensing to medical cannabis operators in the state.

Illinois’ medical cannabis program began operating in 2015, though pushback from Republican Gov. Bruce Rauner’s office has stymied program growth. Industry analysts initially predicted much larger patient numbers than the 20,600 or so current medical cannabis cardholders in the state.

Given the slow medical cannabis program rollout, dispensary operators like Brad Zerman are somewhat taken aback by legislative efforts to legalize the drug for adult recreational use in the state.

“This was just a sudden kind of thing that we didn’t expect to happen,” Zerman, CEO of Seven Point dispensary in Oak Park, told Extract in an interview. “So it will be interesting to see how this works out. But you know, until a few weeks ago, I never would have said that Illinois would be one of the next recreational states.”

Cannabis legalization is still a ways off in Illinois, however, and Zerman says his primary focus is aimed at expanding the state’s medical cannabis qualifying conditions list for now.

Illinois lawmakers don’t plan to bring cannabis legalization up for a vote until 2018, and a lot depends on whether or not Rauner wins re-election next year. Most observers believe the current governor would veto any legalization bill that reaches his desk.

Either way, operators at Dispensary 33 in Chicago are fully on board with efforts to legalize cannabis for adult use.

“Every day at Dispensary 33, we get to witness how beneficial cannabis is for our patients,”  co-owner Zach Zises told Extract. “We are fully supportive of Representative Cassidy and Senator Steans’ efforts to expand its reach.”

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