Episode 6 — Marijuana Markets, Part 2: Existing Markets

Podcast – The 4Front Podcast

http://forefront.wpengine.com/podcast/4FrontPodcast-E06.mp3

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Today’s conversation focuses on Existing Marijuana Markets, including the opportunities, benefits, and challenges of operating in an established market. This episode is a followup to an earlier episode that focused on New Marijuana Markets. 4Front’s Co-Founder and Managing Partner Kris Krane will be leading the conversation, joined by Jaime Lewis, founder of Mountain Medicine, a medical marijuana-infused product manufacturer out of Colorado, and Ted Rebholz, the former CFO for Harborside Health Center and currently Founder and President of Temescal Wellness.

Host:

Kris Krane, President, 4Front Ventures

Guests:

Ted Rebholz, President, Temescal Wellness
Ted recently formed Temescal Wellness and is raising money to launch new companies in the cannabis industry. Most immediately, Ted is focusing Temescal on pursuing licenses in New Hampshire and Florida. Until just last month, Ted was CFO for Harborside Health Center, one of the premier cannabis companies. Previously, Ted was CFO for Beyond Meat, a vertically-integrated consumer health company backed by Bill Gates and Kleiner Perkins; and CFO for WhipTail Technologies, which was sold to Cisco in 2013.

Jaime Lewis, Billy Goat Owner, Mountain Medicine
Jaime has more than nine years of experience managing the production of medical marijuana-infused products (MIP), as well as all facets of managing and operating a medical and recreational marijuana dispensary. A California Culinary Academy graduate, she’s worked in many highly-acclaimed kitchens, including serving as the executive chef of a Michelin-rated three-star restaurant in San Francisco. In 2009, Jaime moved to Colorado and founded Mountain Medicine, a medical marijuana-infused product manufacturer that is now an operating company of Good Chemistry Colorado. She continues to serve as its executive chef, as well as the vice president of business development for Good Chemistry, where she is responsible for strategic planning and business development, policy development and governmental affairs, and marketing and serves as the community liaison to demonstrate good corporate citizenship.

Click here to see the transcript

MEL MCGRAW: Welcome to the 4Front Podcast, the industry standard for credible, relevant business intelligence within the legal marijuana industry.

KRIS KRANE, HOST: Hello everyone and welcome to the 4Front Podcast. Today is the second part of a two part series looking at the markets in the industry. In our last podcast we focused on new markets and today we’re going to focus on existing markets. These being places that have had medical marijuana or marijuana businesses established for quite some many years. And we’ve got a couple of terrific veterans of the industry joining us today for this conversation.

First with us we have Jaime Lewis, the CEO of Mountain Medicine who also helps to take good chemistry and build that into one of the largest brands in Colorado. Also joining us today is Ted Rebholz, the former CFO of Harborside Health Center in Oakland and recent founder of Temescal Wellness. Thank you both for being here today.

JAIME LEWIS: Thank you.

TED REBHOLZ: Thanks Kris.

KRANE: You know what let’s jump right into it I think because we’ve got both of you here from the two most established markets in the country. I think it’s a good springboard to have a little bit of a discussion about both Colorado and California. And then we can move into some of the specific conversations around existing markets.

So Jaime, let’s start with you. Colorado was really a unique market here in that it developed pretty organically as opposed to most of the new markets that come online today where there’s a designated number of permits and the ability for people to apply for them all at once. In Colorado this kind of developed organically and then the state had to sort of wrap it’s hand around it and get control of the market and allow everyone to come into a more regulated framework. And then of course there was the transition to adult use that happened years later.

But can you discuss a little bit what that was like transitioning through that first set of regulations and the kinds of hurdles and challenges that you had to overcome to comply with these new regs?
LEWIS: It was, for a good example, it was getting the cows back in the cage if you will. We were in a sort of unregulated market with basic retail sales licenses that allowed us to operate and then when house bill 1284 came into play. We then had to jump through various hurdles and hoops to get into a more regulated market.

From a business perspective, and as a business owner, it was a very difficult process to one: set up operations and then have to maneuver through these sort of very difficult and constantly changing regulations. I will say the transition that took place during recreational was a lot smoother but that’s because we had a pretty sound foundation in terms of what that regulated market was going to look like. And looking back hindsight being five years now working in the medical marijuana market, I can say that the regulations have only one: helped us; and two: protected us from federal interference since we are still dealing with an illegal substance on the federal level. Those regulations have protected us because we do have a sound and strong regulatory body that governs us which is the Department of Revenue in the state of Colorado.

KRANE: That’s a really terrific point and that will dovetail nicely as we move onto Ted in a moment here. I think this situation in California has been quite different in terms of the regulatory protections from federal interference. But let’s stick with Colorado for just a moment here Jaime. Talk about how difficult is it for somebody new to the market to break into the Colorado market now that it’s so well established.

LEWIS: That’s a really good question. I will say that you know the state of Colorado has some interesting rules in place: the two year residency requirement, not being able to allow out of state money – which certainly limits a lot of us in the state from capital investment. Outside of that, because Colorado has been so well established I would say that the market is pretty saturated in the sense that across the board this is probably one of the most competitive markets to operate in because there are just for an example, over 180 dispensaries that operate in the city of Denver alone. And the population of the entire state is just a little over 3 million. So when you think of that in terms of much larger states we are pretty saturated. There’s always room for more. I have seen a lot of start up companies coming into play now that have a strong background in other areas, whether it be finance or real estate sort of paying attention to the market here.

But as it stands with the tier residents who require the lack of capital investment, and just to be frank, in the city of Denver the lack of real estate available based off of various zoning rules it makes it rather difficult for new operators to come in just starting from scratch.

KRANE: That’s a really good point about the real estate. It’s something that as you look at some of these now more established markets I think it’s going to be an increasing problem not just in Colorado, but you look at a state like for example Arizona. They’re going to open up their next round of applications later on this year but you’re going to be limited to applying in areas where licenses were not granted the first time around. A similar situation in Nevada whenever they open up their next round. And in that case it’s not necessarily the zoning that’s going not be the restriction but really the limited areas where you can apply. They’re going to be more rural, less desirable, less populated, and generally with less friendly governments. But stick with Colorado for a minute.

We’ve seen some interesting issues arise with this transition to adult use where if I’m not mistaken here, local jurisdictions have the ability to opt out of adult use. What is that do for the sort of the competitive forces of the market in Colorado?

LEWIS: It certainly corners us into specific areas. I will say that most of those counties, cities, towns, that have decided to opt out are more of the rural areas in Colorado. A lot of the bigger cities, and not to be biased I am a California girl, but there are a lot of really open-minded people in Colorado. So for the bigger cities it does seem to be that most of them are opting in.

There’s additional tax benefits that they get from this recreational market coming into play and a lot of them are paying close attention to the jobs they create as well as the ancillary businesses that flourish but you are correct. It does sort of pin us in certain specific areas. And what I see that playing most in is not so much in the retail but when you start talking about cultivations and you start talking about how this market is merging out more towards now a greenhouse perspective where there’s large amounts of available land that we don’t have access to because there are bans or moratoriums in place.

KRANE: All terrific points. There’s a couple things you hit on there that I’d like to come back to as we move to broader conversation. But I think now is a good time to transition over to Ted and talk a little bit about California. We mentioned earlier in Colorado you really have had for many years now a terrific regulatory framework that’s provided a great deal of protection from the federal government. That has not been the case in California. California is the oldest and most established market in the country but in many ways it’s the most challenging. California, despite having medical cannabis on the books now for nineteen years has never adopted a state regulatory system that would permit and license cannabis business operators at the state level.

Ted, you worked with Harborside for many years before branching out here. Talk a little about some of the challenges that the lack of state regulations in such a well established market that you had to face operating in Oakland.

REBHOLZ: Great question. I mean I think a lot of people in California are very jealous of other states including Colorado because they do have that regulatory certainty. And even if some of those regulations are disliked or even hated by some of the operators, at least you know what the rules of the game are. And that is sorely lacking in California.

California is fascinating in this industry because like you said Kris it was the first mover in terms of repealing cannabis prohibition. But it is certainly not the first mover in terms of providing regulatory certainty. At a minimum, at the statewide level, what we’ve seen in that vacuum in the absence of statewide regulations we’re finally seeing more of the major cities step into that void and create their licensing all by themselves. Oakland of course was one of the first along with Berkeley and San Francisco. And that is probably the primary reason why today you see the limited licensing regime in those jurisdictions but you see in contrast, in southern California, a lot of those jurisdictions including the city of Los Angeles scrambling to catch up.

And it’s been a source of great frustration not just for the entrepreneurs but a source of great frustration for elected officials as well as agency staffers to try to deal with this; to try to create some order out of the chaos. Very frustrating both on the side of entrepreneurs as well as the regulators not to mention investors who want to get into the California market.

KRANE: That’s a great point. You think from an investors stand point that lack of state regulations and the potential for federal interference, that’s a major sticking point particularly as you have all of these new markets opening up around the country that don’t face that same kind of uncertainty. But you know you hit on something here that I’d like to go into a little bit more depth on in that I think it’s a very unique California specific issue and that is in California, in the absence of state regulations, the cities themselves really have sort of stepped up to fill that void. And so you have this contrast between cities like Oakland and San Francisco and Berkeley and Sebastopol and a handful of others that have adopted really good regulations versus cities like Los Angeles and San Jose and until recently San Diego that have not done so.

Can you talk a little bit about what impact that’s had on market forces in those cities? What is the market in Los Angeles look like and what are the business opportunities there versus a market like in Oakland or a Berkeley?

REBHOLZ: Well in one respect it makes those jurisdictions incredibly attractive because regardless of where you go around the world the unique thing about this product, about marijuana, about this medicine, is that there’s no uncertainty about patient demand. There’s no uncertainty about consumer demand. And that is a stark contrast with a lot of investment opportunities outside of cannabis. And that’s even more so the case in cities like Los Angeles, like San Jose, like San Diego where you have a relatively mature market demand from patients and from other consumers. So that makes it very very attractive.

However that also means that there are a lot of incumbents – incumbent entrepreneurs. Folks who have been operating in these grey zones throughout California. And sometimes those folks don’t want change. And I think we’re going to continue to see that not only in individual jurisdictions but statewide as California moves to 2016 with the possibility of full adult use you’re going to have some of those incumbents not too happy about those changes on a statewide level.

But getting back to the city specific question, it means that in the race to get one of those coveted licenses, you’re going to have that many more entrenched interests competing against you. So on the one hand, it’s great from the investor point of view because you have very well established demand from patients. On the other hand it’s going to be commensurately more challenging because of the established operators already in those jurisdictions.

KRANE: All great points. And I should mention too for those who have been able to get a real foothold and do it the right way in those permitted markets, certainly from the sales data that we see out of California, they tend to do quite a bit better. I don’t think there are any dispensaries in California or in Los Angeles I should say that put up the kind of sales volume that you see out of the dispensaries in Oakland, Berkeley, San Francisco- particularly the better players the Harborside and SPARC and Patients Group and so forth. The numbers are vastly different in those well-regulated markets. And some of that may have to do with the fact that these cities put market caps in place. Whereas in LA you can basically throw open and hope the city doesn’t come in and shut you down. It’s a much lower barrier to entry in terms of the upfront capital costs and the hurdles you have to jump through but you’re facing a much larger competitive landscape. You’re in a largely unregulated market. And it’s just overall seems a little bit shadier.

REBHOLZ: I would agree. I think we’re going to see very few jurisdictions whether at the state or the local level. As more and more states repeal cannabis prohibition we’re going to see fewer of them without a limited number of operating licenses. And I think that is going to of course favor folks who get those coveted licenses. And I think it’s going to be driven largely by the fact that we’re coming off of almost 80 years not just of illegality of marijuana but the government’s proactively stigmatizing this product.

And so you know no surprise that the folks in government who now need to regulate this industry are pretty concerned, some might say scared, of having to deal with an industry… and let’s keep in mind theirs is a thankless task. Nobody in government actually ever asked for this type of project. And so you’re going to see a lot of jurisdictions continue down this path of having a limited number of licenses. And I expect that to continue for the foreseeable future. And if you look at other industries, such as alcohol, these types of limited licensing regimes continued even several generations after the end of alcohol prohibition.

KRANE: That’s absolutely right. So that actually leads to a really interesting discussions that I want to bring both of you in on. Start with California and I think it leads really well into Colorado here which is that if California as you mention Ted is likely going to go adult use in 2016, it’s a near certainty it’s going to be on the ballet and I think the public support is likely there -now the model and this is where Jaime I’d love for you to jump in and comment on this- the model is has largely been the Colorado 2012 model where the existing state licensed medical dispensaries were given the first opportunity to transition over to adult use before anybody else was able to enter the market.

In California however you have this different dichotomy that didn’t exist in Colorado because of the lack of state regulations. Where you have a lot of dispensaries in places like Oakland and San Francisco and these well regulated cities that will be able to make a viable case that, “Hey we should have that first right to transition over. We’ve done everything right, we’re in compliance.” But then you’re going to have these dispensaries in places like Los Angeles and San Jose and elsewhere that are going to say, “Hey we’ve been operating for you know for years as well” but the regulators or maybe even the business interests in the regulated cities are going to say, “Hey wait a minute, they didn’t have to play by the same set of rules, they should have to get in line behind us just like any other new operator would.”

So I’d be curious to hear Ted from you, how do you see that playing out? I think this is going to be one of the most fascinating fights in the drafting process here. And Jaime if you could also bring in your experience of having gone through that process, that transition process in Colorado, and offer up any advice to the business owners or entrepreneurs in California and elsewhere that are likely going to face a similar transition.

REBHOLZ: Yes I would say that this is going to be… you know no legislative process is pretty and this is certainly not going to be any exception to that. If there’s going to be any difference between California and Colorado or any other state that has gone before California it’s going to be the fact that there are that many more people today that are interested in the marijuana industry.

And they’re going to see… you know, it’s no surprise Jaime mentioned how Colorado’s population is 3 million, California’s is more than ten times that. And so the prospect of the existing operators, the incumbents in California, being able to pull the ladder up behind them as folks did in Colorado- and trust me this is not being critical, this is just the reality of the situation – the folks are certainly going to try to do that in California. Their challenge is going to be that much greater because you have so many more people now outside of California who want to get in and trust me, they are already at the various bargaining tables. And it’s going to be pretty challenging.

That being said, from the point of view of the regulators and the elected officials in California, they have the same concerns that the folks did in Colorado and every other state which is, “Hey if we open this up too quickly and if we open it up too broadly to all investors and to all operators around the world, there’s going to be a higher risk of chaos. There’s going to be a higher risk of things going wrong.” I think you’re going to have a lot of the elected officials and a lot of the regulators realizing that in a state of almost 40 million people, in a state that represents the 8th largest economy in the world, and in a state where almost for 2 decades there’s been at least some level of allowance for these types of activities, you do have more than ample supply of talent and financing in the state already. And so I think there’s going to be a lot of good public policy arguments in favor of some of the same residency requirements that you see in Colorado and elsewhere.

KRANE: Interesting. Jaime, any thoughts on having been through that transition and advice that you could give to entrepreneurs and potentially even to the state of California, the regulators who are going to be looking at this?

LEWIS: I’ve been at the table; I’ve dealt a lot with policy. I have a trade association that I founded. I was at the table when house bill 1284 was going through. And the conversations around two year residency and out of state was a five year ago conversation because the policy makers were fearful of black market money coming into this, the drug lords, all of what that sort of marijuana propaganda has been built on. And true enough funding a lot of the black market marijuana that’s in this country now.

So that conversation we had to attach language that made it just for Colorado residents and no out of state money to protect that industry as it was getting off of its feet. I don’t know that the conversation needs to be carried over to California or to any other state for that matter when you talk about treating this like any other business. And I often have this conversation with colleagues in other states as well as my own, let’s not reinvent the wheel. Though marijuana is a very special and exciting industry, when you take the marijuana out of it and treat it like any other business there are no residency requirements, or out of state. Unless you’re talking about gaming and casinos and those are tracked in a way to keep out the black market money as well.

So I do feel strongly that there are systems in place and things that can happen that may alleviate the idea of this two-year residency and out of state money being such a fear base around what that actually looks like. It is important now that in the state of Colorado we’re limited to capital and we’re limited to investment and though California is a large market there are a lot of investment companies and money that comes from other states that can help the small ma and pa organizations or companies that have been alive as long as they’ve been alive in order for them to continue to move forward they need access to capital.

And so my advice would be just to – though marijuana is a very specific issue – treat it like any other market. And just be very sensitive to the idea that though there are established licenses there that there’s a way to protect those licenses and that would go and fall to a local zoning process. Meaning that if you’re in play in the local, the local jurisdictions very similar to the state of Colorado can offer moratoriums and bans to sort of tighten around what it is they have to actually see what the market could take.

So my suggestion would be to let the locals approve and to get sort of a rubber-stamp on the state level. Which is very similar to liquor licensing in a lot of states like Colorado for example or California where there are a limited amount of liquor licenses available, in San Francisco for example. And when one operator wants to move or transfer or whatnot those licenses are one of value which is important to an owner operator, as well as being able to transfer them over to someone who wants to step into that.

And the third piece and the one thing that I’m wanting to pay close attention to because you both are right in terms of the fact that in Colorado we had some sort of licensing process that allowed us to be grandfathered in for both retail, MIPs, and for cultivation. Our retail sales license, our commercial manufacturing license allowed us access into the medical marijuana market as it was being regulated. The interesting thing to watch on this one would be dispensaries in certain jurisdictions do have some sort of a licensing process but it’s even more limited when you start talking about the MIPs which is the marijuana infused products as well as the cultivations. I mean there are cultivators that have been doing this for years that don’t have any sort of licensing process. So how you go about grandfathering those existing cultivations or MIPs would be something that I’m very interested to see how they figure that one out.

RIBHOLTZ: Kris if I may, I think Jaime brought up a really good point: this distinction between zoning which is often controlled at the local level and then let’s call it professional background checks, something that’s done at the state level. By professional background checks I mean states making sure that the folks who get these licenses don’t have a criminal record.

I think there’s a third part though and we’re seeing this and that’s the vetting of the expertise of the license applicant. And I think Nevada unfortunately is going to be the learning case for a lot of other jurisdictions where the state took on the burden of vetting the backgrounds of the license applicants and also took on the burden of vetting each of the applicants in terms of their expertise. Are these folks who can grow this plant, create products that improve the health of our citizens? And they basically left the zoning down to the city and the county level.

However in that part, what I call the beauty contest, you know, are these folks good at growing? Are they good at dispensing? They were unclear about whether the state has that and whether the state preempts the localities. And that’s why unfortunately you have this uncertain situation continuing in Clark County by far the most populous in the state, where they both took a stab at it. And in some cases the cities like Las Vegas also took a stab at vetting the expertise, the operating expertise of the applicants.

So I think in other states, at the state level, some will want to just do that basic vetting. Are they a criminal or are they not? And most states will leave the zoning decisions up to the local jurisdictions including the decision to say there is no zone for these types of activities, and then it’s the beauty contest, the vetting of the operating expertise of the applicant. That’s going to be quite frankly, that’s really tough work and sometimes the folks at the state level want to take on that tough work. Sometimes they don’t. And in some cases a city or a county, the resources, the bandwidth, of one city that’s one thousand people is going to be radically different than the city with 5 million people. And I think that part of the licensing process is going to be different as you go from state to state.

KRANE: Terrific points by both of you. And I think this part of the discussion is incredibly important because as we look at the next really two years and we look at the states that are likely to be the next to adopt adult use, they are basically all states that have established markets. The next adult use states here in the next few years are likely going to be states like California but also Nevada, Arizona, Massachusetts, Maine, quite likely Rhode Island, maybe Vermont and New Hampshire. All of these states have established markets in place or are in the process of establishing a market that will be in place by the time these initiatives pass. So this is a topic we’ll probably revisit on this podcast series because it’s one that I think is going to be of critical importance if these states are going to make the transition from a medical market to an adult use market and do so effectively.

So let’s stay on this for just a minute. Jaime can you talk a little bit about the differences that you’ve seen in the patients that you’ve served as a medical dispensary versus the consumers that you’re now seeing in the adult use market? What kind of changes in consumer behavior are we seeing during this transition from medical to adult use in this very established market?

LEWIS: The two things that I’ve noticed the most, and again speaking to a state that’s about to go through the sort of growing pains that we are currently going through right now, medical marijuana has been established in California longer than any other state so what you have is an experienced patient who knows the medicine, knows the medication. You also have patients who need high amounts of this to manage pain whether it be chronic pain or HIV or cancer. And I do feel very strongly about the need for both markets. You’re dealing with a patient who requires a large amount of THC in concentrated forms to manage their day to day activities.

What we witnessed in 2014 with the legalization of marijuana recreationally was the novice consumer who for whatever reason, or for very good reason because it was illegal for them to use, is now starting to come into our dispensaries and wanting to use this product and they’ve never used it before. And the one thing that I have noticed and you know I have an edibles company Mountain Medicine, the one thing that I wish we would have done was paid close attention to what the consumer dosage should be for the novice consumer.

We’ve taken a little bit of backlash in the press as well as the capital in terms of there being too much THC in these products or not even properly educating the novice consumer around what it means to consume both from a smokeable form as well as from an edibles form. And just speaking specifically on the edibles, there’s a bit of a learning curve that you have with edibles. I mean they come on slowly and they can hit very hard if they’re in high concentrated forms. So the state of Colorado has limited us to 100 mg in edibles that are distributed to the 21 and up market. Though not a fan of that at first, I do think that that has actually protected us and it is a strong and viable regulation for us to maneuver through.

And we just recently went through a whole new packaging on the edibles where they are child resistant in F1 packaging which is the pharmaceutical grade packaging because unfortunately the edibles are something that are attractive to children when left out. So there’s sort of an interesting thing with the wellness side of what this product actually does and then the need to protect the consumer and the industry to make sure that it’s handled safely.

So I would pay close attention to the edibles side of thing and also a strong education campaign as soon as recreational hits. Whether that be funding from the industry that’s pulled in through the taxes that are created, where ours comes through the department of health where they’ve started this whole campaign on what it means to consume this product, and then the trade associations that these industries are a part of. We have one for Cannabis Business Alliance, that’s a start low, go-slow campaign to sort of educate the new consumers coming on board. That would be my advice.

KRANE: Terrific point. I think this is one of the most important debates that we’re having in the industry right now, is how to handle this edible issue. I’m actually personally a proponent of typically in the adult use markets, limiting or capping the milligram content per edible. Because if you’re dealing with an uneducated or novice consumer, you know somebody could take a 100 mg gummy bear and if they’re a novice consumer, they’re going to have a really bad time. And it’s going to be a really bad experience for them and turn them off to the product but also we might lose them as a supporter on the issue as a whole simply because they weren’t properly educated or the store sold them something too high of a dose. So really important issue for us moving forward and I’m glad you brought that one to light here.

LEWIS: It is the industry’s responsibility to make sure this gets out on the right foot. And hindsight being 20/20 Kris, I would’ve paid closer attention to it because it is very costly to business owners to maneuver through regulations and then to add additional regulations on us sort of mid swim is even more difficult. So it is at 10 mg are the suggested dose and those need to be easily identifiable to the consumer moving forward. I wasn’t a fan at first but I can tell you I’m a fan of it now.

KRANE: I’m glad to hear that. And it’s very smart. Establishing 10mg as a dose or some specific milligram number, and 10 is probably a good number as a dose, is going to be extremely helpful for consumers to gauge what it is they’re taking and I’m kind of of the mindset that nobody really needs a 100mg gummy bear. You can’t have a 10 dose gummy bear. I don’t know anybody that’s going to sit there and cut a gummy bear into 10 pieces. In the medical market it’s a different story. You’ve got patients who really need higher concentrations in order to treat their conditions. In the adult use market, if somebody needs to eat you know three gummy bears as opposed to one, it’s not going to kill them and it might result in us having a more favorably looked upon industry as a whole. So that’s probably a worthwhile sacrifice for us to make.

Let’s take this now to a related topic but slightly different. We’re going to talk about pricing. What we see in these new markets typically, and this is somewhere that 4Front’s been very reactive particularly in the new markets is prices tend to be relatively high and largely mimic black market prices. We’ve seen that in some of these new states like Arizona or when Maine came online. We’re likely going to see something similar in Illinois and Nevada and Massachusetts as these states come online. But it’s been a bit of a different story in the more established markets. I’d be interested to hear either of you comment on what trends have you seen in pricing over time as these markets, particularly Colorado and California, have become more and more established and in some ways more competitive.

LEWIS: Well in Colorado specifically because there has been sort of this capitalistic idea on not limiting licenses we’ve seen a substantial price drop. And you know speaking to some of my colleagues it’s definitely growing pains that were painful for them to accept. I am on the side of things that we are pulling this product out of the black market as a whole.

So to compete with the black market, your product has to be cheaper than the black market. And then with that also said with this being in the black market, was it over priced to begin with? And what we’re actually seeing are not price drops but more of a sustainability of what this product is actually worth? I mean that’s the question that I ask. In the state of Colorado we have seen substantial drops. I mean it was $60 eighths all the way down to now we’re at $25 eighths. There are rumors that this product will drop as low as $49 ounces during the month of April. There is a surplus that will come into this but again you know it’ll be interesting to see. I do think that those larger cultivators and those larger brand of dispensaries who have good quality product will stay very competitive in this market. Where those that won’t be able to keep up either by capital or by quality of product or brand may just cease to disappear. And instead of 200 dispensaries we could potentially just see 100 or maybe 50 dispensaries moving forward.

KRANE: It’s an interesting point Jaime. Because what that kind of says to me is that the future of the mom and pops at least on the production side, it doesn’t look very good. Unless somebody has the scale to grow in really large facilities and get their cost of production down, it’s going to be very hard for them to compete when you’re seeing $49 or $100 ounces.

LEWIS: I counter that with there are boutique breweries and there are boutique grocery stores. There are boutique design ma and pas that are very successful. And that comes from a well-established brand, a great customer experience, and quality product. So what is going to come out in surplus will be maybe not the best quality marijuana. It may be more of an outdoor versus an indoor or a mix of the two of a hybrid where it’s a greenhouse.

I think there’ll be different grades of what this looks like. There’ll be the Coors, no pun intended, I live in the great state I love Coors, but there’ll be the Coors brands which you know you can buy anywhere and they’re the masses and you’ll look more towards the Fat Tire brands where there’ll be some really good quality products where the consumers are willing to spend a little extra for a little better experience. And then the even high end stuff where you get into the finer wines and the finer champagnes. So I don’t know if they’ll cease to exist. I just think there will be a quality difference between those. And the pricing will substantially drop in any state that moves forward and pulls this out of the black market and pushes it towards a more regulated market. I embrace it. I mean I do think that that makes it even funner to be in this industry because now we get to talk about my Billy Goat being a part of Mountain Medicine and how I make that a distinct brand now. Rather than constantly fighting the regulation where we’re starting to see a little simmer of that now and getting into the more fun business operator stuff. Or the stuff I find fun anyways, making boxes look pretty. [laughs]

KRANE: Hey Ted, how about in California? What are we seeing, not just in terms of pricing although I think let’s hit on that as well, but also trends in terms of what the more educated consumer base – and I think in states like California, Colorado, you have a consumer base that’s much more educated on this issue and much more experienced than you’ll have as these new markets open up around the country- what kind of trends are you seeing in consumer behavior and patient purchasing behavior as the market has matured?

RIBHOLTZ: Well first of all I want to respond to the prior question about education because I think it’s really important so bear with me before I respond to your pricing question. Let’s use the analogy going back to beer. Jaime mentioned Fat Tire. And if you pick up a bottle of Fat Tire, say it’s their Ranger IPA you’re going to see the same 5.9% ABV and that 5.9% means something different to Jaime, it means something different to you Kris, it means something different to me, but at least all of us have some confidence in that. And that confidence comes through not just education but also the development of good industry standards. And that is a huge a huge sore spot in the industry right now. It’s one thing to require no more than 10 mg of active ingredient in an edible. It’s a whole ‘nother thing for your consumer base to have confidence in that measure.

Not to mention to learn and to benefit from the education, which I fully agree with Jaime, it’s not a nice to have it’s a must to have. And we can for better or worse learn from the trials of the tobacco industry, of the alcohol industry. We know we need to be proactive. We do not want to have to endure some of the public backlash because quite frankly we’ve had 80 years of public backlash and 80 years of cultural stigmatization against this. So education and getting the industry standards, especially around dosing, is going to be absolutely essential and it’s going to be something that we don’t do just for the first five years. We will be doing it in perpetuity. And if you are a business that does not take that to heart, you’re a business that’s going to have a short life span.

KRANE: Fantastic point.

RIBHOLTZ: Moving to your question around pricing. This is an absolutely fascinating topic. And I agree with Jaime that the prices that we have inherited from the black market are born of the scarcity that has been caused by prohibition. And I think Jaime hits the nail on the head. What is the appropriate price? The appropriate price is not the price born of a black market. The appropriate price is born of having good trustworthy credible operators, lower the cost of production, improve consistency, and increase the ability for each and every unique patient to find a medicine and each and every customer to find a product that best suits her needs.

I think the state of Washington is actually an even better case study for what we’re seeing with the changes in pricing. I do believe that a responsible operator must ensure that her prices are no lower than what’s in the black market. Now pegging something to the black market is of course challenging because of the opacity of the black market. But for lack of anything better we have to rely on anecdotes, “anecdata” to drive those pricing decisions.

And I think we’re also realizing that as states, you know everyone wants to walk before they run, when states first transitioned to a medical environment they know that they are heeding the calls of compassion to serve those patients. But they are also basically preserving the black market. And I think that needs to become a bigger part of our policy discussions. That failure to fully go full adult-use legal is preserving the black market. Now we’re all doing that for good reasons, states are doing that for good reasons, because they want to take these baby steps with the medical market before the full adult use legalization market but we have to appreciate that when we take that intermediary step of medical only, we’re going to have these challenges with pricing. And the good operators are going to peg their prices to the black market to minimize the risk of diversion to the black market.

In terms of trends, I think you know what we saw in Washington where you had a one or two month swing where prices were very very high and now what we’re seeing is the same thing we’ve seen in other industries. Think of semi-conductors. Think of large ocean going vessels. These are capital-intensive projects where it takes at least many months, in some cases years, for the investments to actually bear fruit with the additional supply. And then, once the additional supply comes online for the prices to adjust appropriately. So I think things that will be very helpful for the cannabis industry will be for the development of exchange markets similar to what we have. A lot of them are in Chicago for corn, oil, and other commodities. And along with that the development of a futures market, I think that will lead to greater pricing stability over the long term.

I also think we’re going to start to see the proverbial long tail. Where just like Jaime said, you’re going to have the Coors and the Bud Lites of the world that may account for the lion’s share of purchasing volume but as more sates follow Colorado’s lead and Washington’s lead and establish these better regulatory environments, what’s going to follow is more investment. And it’s going to be more scale. And while there’s some folks who prefer local and small, I think what we need to appreciate is that there’s now room for everyone because consumers and patients have better information. Because the wider array of products in cannabis and other markets are more widely available, there is going to be the room for both the Coors and the Fat Tires of the world and even for smaller producers.

KRANE: We’re getting a little short on time but I have a couple more topics I’d like to hit. We might just have time for one here. But sticking with that for a minute, I’d like to hear both of you talk about the product trends in terms of what you’re seeing becoming popular today. And to give you an example, when we look at some of these new markets when they come online, looking at Arizona for example which is relatively new only being in the market for a year and a half, for the first certainly year or so about 90% to probably 80-90% depending on the store of the products sold were cannabis flowers. Traditional marijuana. That’s not really the case any more in Colorado or California where you have a much more educated patient and consumer base.

Can you guys talk to the shift that we’ve seen over the last few years in consumer behavior in terms of the products that they’re looking to purchase. And this is I think instructive for those operators in some of these new markets that are getting up and running, for them to be able to anticipate what they’re likely to see as their markets become as educated as the consumers in Colorado and California.

LEWIS: I think what I’ve noticed mainly focusing on the edibles company Mountain Medicine, there’s been a transition on the recreational side for edibles. The Department of Revenue came out with a report that showed that edibles were almost 35 to 40% of the recreational market. I think that the idea of this being in smokeable flower form is still a very popular product but as the market moves forward I think we’re going to see more of a transition towards edibles and extractions. And I just link it to we’re a healthier society, though I don’t go to the gym regularly I’m sure others do. The idea that there will be smoking is something a lot of people will not want to do. So what I’ve noticed mainly is that there’s been a transition from the smokeable flower over to edibles or you know the very popular vape pens right now in terms of how that looks. And the vaporizers and the vape pens are a huge part of this market as well. Just because you can smoke those out and about and they look like e-cigarettes and it also is a healthier way to medicate or consume.

KRANE: That’s right. And are you seeing something similar in California Ted?

RIBHOLTZ: Absolutely. I think the same trends are here as what we’re seeing in other states where you have this movement away from dried flowers to which let’s keep in mind the only reason dry flowers have been popular is because that is the form factor that is the quickest to get it from the point of production to the point of consumption. And if what you’re holding is incredibly illegal, you’re going to want to maximize the speed from point of production to point of consumption as much as possible. Now people have options. Now because the producers, because the operators in the industry have greater regulatory and legal certainty, they are willing to create products that are more satisfying for customers.

And I think if I can simplify it into three things that customers in the long term are always going to prefer it’s: Is it discrete? Is it simple to use? And can I trust that when I buy it one day at one store and the next day at another store, it’s going to be consistent? So: discretion, simplicity, and consistency. Those are things that people are not used to when you talk about dried flowers in the black market. And thankfully people are going to get that more and more these days.

I think the opportunities to proliferate products are almost endless in this industry. I think the product development is one example of how innovation in the cannabis industry, for at least the next couple decades, innovation is really going to be imitating what other industries have done. Which is not to say that it’s not worthwhile to try to do brand new things for cannabis that haven’t been done for any other products. But it is to say that you can make great strides in the cannabis industry simply by looking at what other industries have done. Whether that’s in the healthcare field like pharmaceutical products or in other CPG consumer packaged goods industries.

KRANE: All excellent points and I think this is something to really watch as this industry continues to mature. I think Jaime you hit it on the head when you talked about the rise of vape pens in particular. That’s something we’ve just seen a massive increase in the demand for those products in particular. And I think that as this becomes more and more legal and as it becomes more and more legal for adult use in other states, that’s a product that really tracks an older consumer base. Not necessarily elderly consumer base but people with jobs and kids. It’s pretty hard for somebody to sneak away and smoke a joint and come back home and have their kids and their family not know what they were doing. But they can easily go outside with a vape pen or do that much more discreetly in public places and not be sort of stigmatized for smoking. Which there’s clearly a trend away from smoking in this country. This innovation in new types of delivery methods and new products really opens this industry up to new market segments that just haven’t really been there in the black market.

So I think we are just about out of time with that. Jaime, Ted, I want to thank both of you for being here. I consider both of you to be real heroes in this industry and this movement. And we’re very honored that you were able to join us here today. Thank you so much.

LEWIS: Thank you both gentleman.

RIBHOLTZ: Always a pleasure, thanks Kris.

KRANE: Excellent. Well that wraps up this second part of our market series. I hope you all have enjoyed it. And tune in for more.

MCGRAW: The 4Front podcast is a part of 4Front Publishing, your source for understanding what works in the legal marijuana industry. If you enjoyed this podcast feel free to share it with your colleagues and leave a review on iTunes. Visit us at 4FrontPublishing.Org/Podcast. Take care until next time on the 4Front Podcast.