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California marijuana industry is a ‘$25 billion opportunity’

California marijuana

california marijuana

LOS ANGELES — MedMen likens itself, as many cannabis companies do, to an early tech startup. Its West Hollywood dispensary looks a bit like an Apple store, with samples of product in polished glass cases and information about each on iPads. In a grow facility in Sun Valley, north of Los Angeles, marijuana plants grow in coconut fiber, sustained by drip irrigation and marked by thin plastic labels stuck in soil. Beyond the dispensary and cultivation center, the company offers “turnkey management services” to others in the cannabis space and boasts a $100 million venture capital fund.

This is the future of legal marijuana in California: Diversification, slick branding and professional investment.

Marijuana is already as big a business as coffee and Indian gaming, with analysts estimating $30 billion in annual consumer spending. The trouble is, only one in every five of those dollars are currently spent on legal products. The rest, some $24 billion annually, ends up in black-market pockets, according to a 2016 cannabis report from the Cowen Group, a New York-based market research firm.

But more and more of that money will come out of the shadows in the next two years. This month, voters legalized recreational marijuana use in four states and medical marijuana in four more. California, home to 12 percent of Americans, is expected to triple the size of the legal market when the state begins issuing licenses in 2018. Vivien Azer, a cannabis analyst with Cowen, believes the nation’s legal market will grow ninefold over the next decade, with consumer spending on recreational and medical marijuana hitting $50 billion by 2026.

“Formalizing the informal market alone is a $25 billion opportunity,” Azer wrote in a September report.

Part of that growth will come from black-market customers moving into the legal market. And some will come from new customers, who were uncomfortable seeking prescriptions for the drug or have never used it at all. There’s a similar industry evolution already underway. While some mom-and-pop growers, operating for years in a “gray zone” without regulation, struggle to come out of the shadows, companies are circling the enormous California marijuana recreational market — some with millions in the bank already.

Mainstreaming an industry

Even before California voters passed Proposition 64, the state’s medical marijuana market was two decades old and fairly sophisticated. California marijuana has apps, wealthy investors and companies that specialize in packaging and branding. But even now it lacks some key resources: For example, many banks won’t serve cannabis businesses while the drug remains illegal at the federal level.

“Something people forget is that medical marijuana has been around in Cailfornia for two decades now,” MedMen communications director Daniel Yi said. “I think we are at an inflection point in our industry now where it’s going from legacy growers — people who were in the trenches at the beginning of the medical marijuana fight — and it’s becoming more and more business-like. Some people see negative connotations in that, but this has become more of a mainstream industry.”

The current patchwork of laws have kept the largest investors — entrepreneurs mentioned Goldman Sachs and tobacco giant Phillip Morris — out of the market for now. Azer, the Cowen analyst, believes those companies will start acquiring or investing in California marijuana companies only after the drug is legalized at the federal level. But private investors are already eagerly seeking opportunities in cannabis, eyeing high returns.

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