How Recreational Markets Tend To Perform Post Legalization in Illinois, Michigan, Massachusetts and Arizona

Amid the green wave expected in the northeast including New Jersey, Connecticut, New York and Virginia, Pablo Zuanic, analyst at Cantor Fitzgerald reviewed economic trends in four states that have legalized the recreational use of cannabis: Illinois, Michigan, Massachusetts and Arizona.

Except for Arizona, which had a well-developed medical market, Zuanic estimates sales of adult-use cannabis 2-3 years into the respective programs will be anywhere from ~5x to 7x the level of medical sales (before recreational legalization).

According to the analyst, that “could imply significant upside for operators in New Jersey and other soon-to-be rec states.” He warned that the proliferation of stores in some states over time may lead to weaker economics both in terms of gross margins and (especially) in terms of sales per store.

At the same time, Zuanic noted that limited cultivation licenses and caps will also impact prices and economics. while “limited cultivation licenses combined with store proliferation will benefit the more established operators.”

The analyst explained that sales are driven by "the three As, access (stores; retail density), assortment (formats, range, potency, quality), and affordability (prices)."

Among the Overweight-rated stocks followed by Cantor, Zuanic highlighted Curaleaf CURLF and Green Thumb Industries GTBIF which have operations in NJ/NY/CT; Columbia Care CCHWF with operations in NJ, and in NY, like Cresco CRLBF; TerrAscend TRSSF in NJ and Trulieve TCNNF in CT.

State Markets Breakdown

Illinois

Although local cannabis markets went through a minor deceleration after a strong second quarter, Zuanic says that it will continue to offer some of the most attractive economics, in terms of sales per store and wholesale prices.

• Recreational cannabis sales in September amounted to $122 million, reaching $371 million in the third quarter, 24% above the second quarter of 2021.
• IL is on a run rate of $1.49 billion in recreational sales. 
• Almost two years after recreational sales began (in Jan 2020), these are 5.4x what medical sales were in the third quarter of 2019 ( $69 million).

• Medical sales have continued to move up, amounting to $101 million in the second quarter of 2021.

• Without the competition of new stores, incumbents continue to benefit from ongoing market growth in the state.

• Wholesale prices of $4,129 per pound are up from $3,652/lb in April. Among the highest prices in the 20 states tracked by Cannabis Benchmarks.

Michigan

Zuanic said this market presented “robust growth trends,” but he said he was uncertain about the economics, “given the lower wholesale prices and the low average revenue per store”.

• Recreational sales in September amounted to $125 million with the third quarter reaching $379 million, up 19% from the previous quarter and 37% from the second quarter in 2021.
• MI is on a run rate of $1.52 billion in recreational sales per year.
• Almost two years after adult-use cannabis sales began in December 2019, recreational cannabis sales represent 4x what medical sales were in the third quarter of 2019 ($92Mn). Medical sales have continued to grow, amounting to $119 million in the third quarter of 2021.

• Adult-use cannabis sales per store, at $4.9 million, are well below other states and wholesale prices at $2,378 per pound are below those seen in Illinois and Massachusetts.

Massachusetts

Zuanic views the market to have robust growth trends and stable economics. At the same time, the analyst admitted that he wondered about the risk of store proliferation (this may be less of a concern for those more focused on wholesaling).

• Sales of recreational cannabis in September amounted to $111 million, reaching $368 million in the third quarter, an increment of 12% when compared to the previous quarter, and 21% when compared to the second quarter of 2021.
• MA is on a run rate of $1.47 billion rec sales per annum.
• Recreational cannabis per capita consumption at $214 a year, is well ahead of peers east of the Mississippi.  
• In early March 2021, there were 102 stores offering adult-use cannabis in MA with an average sales per store of $11 million.

• According to the official state data, there could be close to 370 stores by late 2022.

• Arizona

Finally, Zuanic referred to Arizona as a market “facing somewhat of a lull after a strong start.” And considered that “this is a state where state ownership may be more valuable than cultivation.”

Although there is no official sales data for AZ, BDS Analytics estimates sales of recreational cannabis at an averaged of $55 million per month in July/August. That would be equivalent to an average of $91 in cannabis sales, per capita (below IL’s $117).

The analyst argues that Arizona’s medical program was very developed when the recreational program came along. However, medical sales continue to trend down.