The Tipping Point

November’s historic elections will create massive opportunities for entrepreneurs and propel the industry forward, but uncertainty looms

by Marijuana Business Magazine staff

Oh, what a night!

On the evening of Nov. 8, 2016, voters in eight states approved significant marijuana-related ballot measures, ushering in countless business opportunities and laying the groundwork for immense growth across the cannabis industry.

It was nearly a clean sweep for the marijuana movement, with just one measure – a proposal to legalize recreational marijuana in Arizona – falling short. The results surprised even the most optimistic industry leaders and advocates, as almost no one predicted last summer that eight measures would pass in the fall.

The final outcome: California, Maine, Massachusetts and Nevada voted to legalize recreational cannabis, while Arkansas, Florida and North Dakota approved medical marijuana measures. (Note: As of press time, Maine was undergoing a recount of votes on its marijuana initiatives, as it passed by a slim margin.) Montana, which legalized medical marijuana in 2004, also passed a measure to set up commercial cultivation operations and dispensaries.

All told, these markets could create an additional $7 billion to $8 billion in annual retail sales for the cannabis industry several years after the first dispensaries and rec shops open in each state, according to estimates by Marijuana Business Daily, which publishes this magazine. To put that in perspective, the entire industry is expected to post about $4.5 billion in sales this year. These new markets could therefore roughly triple the size of the industry and create thousands of new opportunities for plant-touching companies and ancillary businesses as well as for investors.

It wasn’t all roses for the marijuana industry on election night, though. Donald Trump’s victory in the presidential race immediately created some potential storm clouds on the horizon, as no one is quite sure how he’ll approach cannabis. He could play a pivotal role in determining where the industry goes from here and whether the eight new markets reach their full potential – or get off the ground at all..

Regardless, the election will have a major impact, one way or another, on the marijuana industry for years and even decades to come. Here’s a closer look at some of the biggest potential business and legalization implications of the election.

Federal Changes

Perhaps the biggest question mark facing the cannabis industry is how the Trump administration, along with a Republican-controlled Congress, will govern the marijuana trade.

As of press time for this magazine (early December), there were no real answers to be had – only speculation. Opinions were all over the board, with some industry, advocacy and lobbying leaders expressing optimism and others sounding alarm bells.

There’s a chance the Trump administration will continue President Barack Obama’s hands-off policy or even help foster growth, but there’s an equal or even better chance that he will look to crack down on cannabis businesses, particularly those involved in the recreational side of the industry. Trump’s choice of ultra-conservative, anti-marijuana Alabama Sen. Jeff Sessions as attorney general raised fresh concerns that the new administration could rip up the Obama-era memos that essentially allow state-legal cannabis businesses to operate without interference from the feds.

Trump himself has been somewhat vague on the issue, indicating at one point before the election that he is OK with medical marijuana and believes in general that the issue of cannabis should be left up to each state. On the other hand, he has also spoken critically of the recreational marijuana industry.

Despite all the unknowns, one thing is certain: If members of Congress vote to support their respective states’ marijuana laws, cannabis will have a major numbers advantage.

The incoming Congress will have 58 senators and 276 representatives from states that either already have operating cannabis industries or will soon. That’s 334 federal lawmakers out of 535 total, or 62% of Congress. And this doesn’t even include legislators from another dozen-plus states that have legalized only CBD, such as Texas, Georgia and Virginia.

“That’s huge, because now there’s a stronger voice that will hopefully get us banking reform, some type of taxation relief, and so on,” said Beau Whitney, an economist with Green Point Oregon.

Of course, that doesn’t mean major reforms are assured. Congress could avoid the topic almost entirely or bottle up pro-marijuana bills in committee, as has been its practice for years.

“I think what we’re going to see is the federal government has no interest in changing 280E,” said Mike Devlin, a co-founder of Washington state-based edibles maker Db3, referring to a key federal accounting rule governing tax deductions. “I expect things to stay much the same, in terms of it (being) federally illegal. And there are barriers all around that are going to affect the industry.”

But that doesn’t mean there won’t be a huge spurt in business opportunities thanks to the 2016 election, Devlin added.

State Legalization

The ink on the election results wasn’t even dry before cannabis activists and industry insiders began thinking about which states could next legalize medical or recreational marijuana.

The Marijuana Policy Project, for example, is already eyeballing 18 states that could further loosen cannabis-related laws in the next few years via voters or lawmakers.

During November’s Marijuana Business Conference & Expo in Las Vegas, MPP Executive Director Rob Kampia singled out Michigan as a top priority for an adult-use ballot initiative in 2018. He also said lawmakers in Rhode Island and Vermont could move ahead in 2017 with bills to legalize recreational marijuana.

But those are hardly the only targets for MPP and organizations like the Drug Policy Alliance, NORML and state-level activists.

“This is going to be the most ambitious year for MPP in almost 14 years,” said Karen O’Keefe, director of state policies for MPP. “It’s exciting, but it’s by no means a done deal. It’s going to take a lot of work.”

O’Keefe said some states that could take action in the near future to legalize either medical or recreational cannabis include Texas and even South Carolina, with Louisiana’s new MMJ law targeted for tweaking. The organization also will be working to get medical legalized in Missouri, Oklahoma, Nebraska and Utah, and recreational or decriminalization approved in Connecticut, Delaware, Illinois, Hawaii, New Jersey and Maryland.

Business Opportunities

Cannabis entrepreneurs will have eight new recreational and medical markets to explore – the biggest wave of new states coming online at one time.

That will likely equate to tens of thousands of new business opportunities for both well-established companies in the space as well as new entrants. These opportunities will range from new licenses to grow and sell medical or recreational marijuana to businesses that provide ancillary services and products such as security, legal expertise and cultivation equipment.

Nic Easley, CEO of Denver-based 3C Consulting, estimated there will be 2,000-3,000 opportunities for plant-touching companies in the new markets, along with 7,000-10,000 opportunities for ancillary businesses.

Lance Ott – CEO of Washington state-based Guardian Data Systems, which provides financial solutions to cannabis companies – said he thinks the numbers will be even bigger.

“I’d say well over 100,000” new marijuana-related businesses will sprout up, Ott said, adding that a government source in California told him the state is anticipating 75,000 new cannabis business licenses over the next few years.

Experts predict that the growing cannabis market pie will feed both new entrepreneurs entering the space and existing marijuana companies with an eye on expansion. A deep understanding of the marijuana sector and an executive team with experience in the field will be key for newer companies as well as legacy businesses. The most successful companies will be those that are set up to legally capitalize on tax advantages and other benefits, Easley said.

“Now that we know the capital required and we know what to do and what not to do … these new companies that come in structured correctly (are) going to make 25 cents on the dollar more (than poorly structured competitors),” he said.

Black Market

The marijuana black market may be the biggest loser in the election. Tested, economical, quality-controlled marijuana from dispensaries and rec stores will drive many consumers to seek out legal businesses in states where cannabis is newly legalized.

“It’s going to come down to what a consumer really wants,” said Thomas Murphy, a consultant with Green Rush Consulting in Oakland, California. “And I have a feeling most consumers in California are going to go with better quality than what you would find on the black market.”

In California and other states, cannabis will be tracked from seed to sale, with heavy regulations, controls and testing required.

“If you’re going to buy an eighth from somebody (on the black market), what do you really know about that product itself? Has it ever been tested? Is there any type of pesticide or chemical involved?” Murphy said.

That lack of clarity and safety will drive more users to the legal market.

Aside from California, Murphy believes, legalization will nip the black market in the bud in Massachusetts and Maine, in particular. He highlighted Maine’s market as very approachable as far as costs are concerned.

“There’s really no reason anybody would want to continue to grow at full scale in the black market,” Murphy said.

Marijuana Stigma

The election underscored the view that marijuana is shedding its long-held stigma.

The results mean that nearly 60% of the U.S. population now lives in states that have legalized some form of marijuana use and sales. And 21% of the U.S. population lives in states with adult-use laws. Moreover, polls show upward of 60% of Americans approve of marijuana legalization.

“The results on election day were pretty resounding in favor of marijuana law reform and reducing the stigma against marijuana users,” said Erik Altieri, executive director of NORML.

With marijuana initiatives approved from coast to coast, including the central and southern parts of the country, “we really showed that this was no longer simply confined to the West Coast,” Altieri said.

He added: “As this becomes more of an American issue and less of a regional issue, the stigma will slowly continue to wither away.”

Marijuana’s more favorable public image means cannabis entrepreneurs will have additional opportunities to expand their businesses. And the election results mean the industry may be able to further reform the law through political channels.

“The more states that legalize medicinal or recreational marijuana, the more pressure we can apply on the federal government to resolve issues such as banking and the taxation issue,” Altieri said. “The more reform wins, the easier it will be to operate in this country as a marijuana business.”

Innovation

New technology and talent entering the cannabis industry after the election plus growing competition and a need for cost control will spur technological innovation. At the same time, however, fragmentation and limits on investment and research will slow advances in innovation.

“There’s not a lot of innovation because we’re so fragmented. Everybody is working on so many different things, but mostly in isolation,” said Brett Roper, chief operating officer of the Denver-based marijuana consultancy Medicine Man Technologies.

“The only incentive businesses have to innovate is to be cost effective,” Roper added. “Once the market gets competitive, that’s when innovation happens.”

Innovation is expected to happen through greater automation and the use of technology in the cultivation and retail sectors – think automated environmental controls for the former and online purchasing and management platforms for the latter. The processing and manufacturing sector is expected to continue to focus on dosage consistency.

“You’ll see the continued development of manufactured products with repeatable consistency being the focus,” said Charles Bachtell, CEO of Cresco Labs, a medical marijuana cultivator and processor in Illinois.

Newly legalized states that come online and the rules they implement also will drive innovation, particularly in California, which is a hub of new ideas.

“The way the marijuana industry is structured, different states have different rules for companies to follow, and they’ll need companies to help them follow those rules,” said Keegan Peterson, CEO of Denver-based Würk, which has developed employee management software for the cannabis industry. “Necessity is the mother of invention.”

Impact on Existing Recreational Markets

The adult-use markets that already are up and running in Colorado, Washington state, Oregon and Alaska will face changes as new recreational markets come online. California and Nevada, both of which border Oregon, could have the biggest impact on existing rec states.

“There will be some changes, but I don’t expect any big exodus of investment or brain power,” said Donald Morse, director of the Oregon Cannabis Business Council, a trade group.

Still, just as Colorado entrepreneurs flocked to Oregon and Washington state after those markets opened, some industry professionals in existing rec states will head to California or Nevada to start businesses. Alternatively, they may set out for Massachusetts and Maine.

“I’m sure there are people who have found opportunities here, but now they want to leave Oregon and go to California to get in on the ground floor, which doesn’t exist here anymore,” Morse said. “The companies that are going to make it here are already established.”

Kayvan Khalatbari, founding partner with Denver Relief Consulting, expects investments to taper off in oversaturated rec states and to instead flow to new markets.

The new recreational states also are expected to take away some of the tourist dollars that Colorado, Oregon and Washington state have been seeing.

“We’ll see more people go to California and Nevada to get the experience they sought in Colorado,” Khalatbari said.

That could have an impact on sales in existing rec states, though some experts say that growth might simply slow down slightly, not stop all together.

In addition, states that suffer from oversaturation – most notably Colorado and Oregon – could see an outflow of businesses to new markets. That could spell less competition for those business owners who stay behind.

International Scene

From South America to Europe to Asia, global investors are eyeing the U.S. market after the election.

With marijuana still federally illegal, it will be some time before U.S. cannabis businesses can export their plant-touching products. However, their knowledge and equipment will be in demand. Also, U.S. cannabis business owners can probably expect to see greater investor interest from overseas.

Ken Sobel, vice president and senior attorney for San Diego consultancy Genesis International Cannabis Solutions, anticipates a significant increase in overseas investor interest in the United States, particularly in California. He said international players view the United States as the world’s dominant market for industry knowledge, whether that’s cultivation, manufacturing or retail. The new markets that legalized on Election Day will help bolster the nation’s marijuana expertise.

Overseas entrepreneurs want to model what firms are doing here, opening new avenues for U.S. businesses.

“There are many opportunities for the stateside experts to guide and funnel the investments in the appropriate ways,” Sobel added.

Looking ahead, the string of legalization victories in this country could pave the wave for legalization overseas. But don’t expect the floodgates to completely open at the international level, especially when it comes to recreational marijuana.

“There’s a movement going on in Europe,” said Edwin Schilperoord, sales manager at Knecht, a Germany-based greenhouse equipment company.

That movement is a medical one. And while recreational markets tend to follow medical marijuana, Schilperoord isn’t optimistic about Germany, or other western European countries such as France or England, moving toward rec sales.

He projected it will take at least 10 years before Germany would see recreational cannabis. However, in the southern nations of Portugal, Spain and Italy, there is more a sense of acceptance. The U.S. elections could convince these countries and others to further loosen marijuana laws.

Conclusion

Marijuana businesses and entrepreneurs can look forward to many new business opportunities after the November election. But at the same time, they will need to keep a wary eye on the federal government under President Trump.

John Schroyer, Omar Sacirbey and Bart Schaneman contributed to this report.