(This is the second in an occasional series about existing marijuana markets that have good business opportunities. The previous part is available here.)
After a slow start in late 2018, recreational marijuana sales in Massachusetts are skyrocketing – to top $ 1.2 billion this year and reach up to $ 2.6 billion by 2025.
Cannabis companies are drawn to a densely populated market and a licensing system that prevents an oligopoly by allowing companies to operate only three adult stores and 100,000 square feet of growing space.
Strong business opportunities remain in cultivation and select retail locations, including the underserved area of Boston. Social justice applicants also have opportunities in marijuana retail and delivery services.
“I think there is still a fair amount of runway in Massachusetts before the market is fully mature,” said Jesse Alderman, Boston-based co-chair of Foley Hoag’s statewide cannabis practice.
But most “flags were planted in the retail market,” Alderman said, noting a “COVID-era explosion” of retail stores with dozens of additional uses in the licensing pipeline.
Massachusetts regulators had issued 168 final adult store licenses by last week, according to the Massachusetts Cannabis Commission’s open data portal.
While some of these aren’t yet open for trading, the numbers compare 2021 to 39 stores that were operational in early 2020, according to the MJBizFactbook.
The recreational marijuana market got off to a slow start following its November 2018 launch, in large part because the state commissioned the highly controversial Host Community Agreements (HCAs) between communities and marijuana companies.
Marijuana companies had to negotiate such agreements before they could apply for their state licenses.
Today there are other hurdles.
According to Alderman, it could be difficult for potential newcomers to break into the state’s retail market unless they:
- Are applicants for social justice.
- There are already agreements with municipalities.
- Acquire existing retail locations.
Award-winning retail locations typically fetch prices from $ 5 million to $ 10 million.
The cultivation could also offer potential market opportunities in Massachusetts.
“What we haven’t seen is a similar explosion in growing capacity,” said Alderman. “With relatively robust sales growth, the wholesale market remains limited and is very cheap for producers.”
However, this could change if most of the applications in the approval pipeline are approved and the plant plans are implemented.
Why Massachusetts is attractive
Frank Colombo, director of data analytics at Viridian Capital Advisors, based in New York, noted that a state’s regulatory environment in general is a deciding factor in how attractive it is to new entrants.
In this sense, Massachusetts is a dichotomy.
“It has a huge population and a new recreational marijuana program. On the one hand, that makes it extremely attractive, ”said Colombo. “On the other hand, the regulatory system was relatively restrictive.
“It is one of the few states that did not classify recreational cannabis as an essential commodity during the (first weeks of) the pandemic and completely banned vaping products for a while (during the 2019 vaping crisis).
“It’s symptomatic of a regulatory system that wasn’t very industry-friendly.”
Still, in a relatively new recreational market, “we’re already seeing pretty much all of the multistate operators with one or two exceptions that have stakes in Massachusetts,” Colombo said.
In fact, MSOs are aggressively expanding the maximum allowed footprint to take advantage of a dense population and strong demand.
For example, Arizona-based 4Front Ventures announced this week that it has received final approval for its third store – in the Boston suburb of Brookline.
MSOs have been part of a spate of big deals such as:
- In parallel, then Atlanta-based Surterra Wellness bought Massachusetts-based New England Treatment Access (NETA) for an undisclosed price in 2019.
- Illinois-based Cresco Labs announced in March a deal to purchase Massachusetts vertically integrated operator Cultivate for $ 90 million and up to $ 68 million in earnouts based on specific financial goals.
- Florida-headquartered Jushi Holdings announced in April that it will purchase vertically integrated Nature’s Remedy for up to $ 110 million.
- Illinois-based Green Thumb Industries acquired Liberty Compassion in June for an undisclosed price. The transaction will add two stores and a cultivation and processing facility to GTI’s existing Massachusetts operations.
Smaller merger and acquisition deals seem to be the norm in Massachusetts by now.
For example, in June, Florida-based Trulieve completed the acquisition of a retail store in Worcester for $ 13.5 million, of which $ 7 million was in cash.
Even Canada-based and established US companies are keeping their eye on Massachusetts.
Last week, Ohio-based Scotts Miracle-Gro Co. announced a strategic investment in Toronto-based RIV Capital that will target emerging U.S. cannabis markets.
RIV CEO Narbé Alexandrian named Massachusetts as one of the markets the company is interested in in an interview with MJBizDaily.
Retail restricted in some areas
What makes it difficult to penetrate the Massachusetts marijuana market today, Alderman said, is that most of the communities through the HCAs have decided which companies to partner with.
“In many cases, municipalities already have that in their rear-view mirrors,” he said.
Some communities are still open for business, but this also includes areas where a new entrant could face strong competition.
“If you look at a map of the pharmacies, they are everywhere and extend to the Berkshires, the western border,” said Colombo. “What you don’t see is a lot in Boston. It is undersupplied. “
But getting to Boston and some of the suburbs is more complicated. For example:
- Boston wants to license one social justice applicant for every non-social justice applicant, Alderman said.
- Cambridge gives priority to applicants for social justice for two years.
- Somerville focuses on economic equity applicants, local businesses and existing medical cannabis operators.
“I would say they are not officially closed in these jurisdictions, but there are tremendous obstacles if you are not a social justice applicant,” Alderman said.
But there are operators who break into the underserved Boston market with great expectations.
Happy Valley, a vertically integrated operator based in Massachusetts, opened its flagship store in East Boston in June, just minutes from Logan International Airport. Happy Valley also has a coastal store in Gloucester.
“The potential of Boston’s cannabis market is huge for both tourism and business due to the demographics of the city’s residents combined with the number of annual visitors,” wrote Michael Reardon, the company’s CEO, in an email to MJBizDaily .
Despite efforts to provide opportunities for minorities and other underrepresented communities in the marijuana industry, Massachusetts has so far failed to meet its social justice goals.
And one big reason is that state lawmakers have given communities far too much power in terms of the agreements with the host communities, Alderman said.
Cannabis companies complained that most communities were charging a maximum of 3% of gross sales as community contribution, plus tens of thousands of dollars in “donations” and other payments, with no evidence of actual costs.
At one point, federal prosecutors reportedly investigated some of the deals, and a study funded by the Massachusetts Cannabis Business Association concluded that cannabis companies had paid at least $ 2.46 million in fees more than the HCAs allowed.
“I don’t know of any other industry besides gaming that has to pay a legalized extortion fee to open up to the community,” David O’Brien, president and CEO of the Massachusetts Cannabis Business Association, told MJBizDaily in 2019.
Legal corrections have been proposed, such as a clear upper limit for municipal fees and an opening up of the procedure.
“The sad truth is that the ship sailed,” said Alderman. “The damage is done.”
Jeff Smith can be reached at [email protected]