EXCLUSIVE: BDSA Forecasts Price Compression, Inflation Effects On Retail Cannabis In 2023

Liz Stahura, COO and co-founder of cannabinoid data provider BDSA, recently spoke with Benzinga about the effects of price compression on retail sales and other vital issues regarding the future of the cannabis industry.

Among the topics discussed:

• How does inflation impact consumer behavior?
• Which are the premiumization trends in cannabis retail?
• How will markets look in 2023?

The Future Is Solventless

Plummeting wholesale prices, tighter profit margins and oversaturated legal cannabis markets are affecting retail prices everywhere, driving down the average basket size. Across the board, cannabis customers are buying the same number of products at lower prices.

Faced with this challenge cannabis companies can either keep lowering their prices or upgrade their products by emphasizing their superior quality.

What then are the drivers of this premiumization? According to Stahura, the future of premiumization is tied to the evolution of solventless products.

“The attributes of solventless products make them very appealing to consumers given their unique flavor profile," Stahura says. "32% of adult-use consumers cite taste or flavor as the main driver of product choice. Natural ingredients are a top product choice driver for about 15% of adult-use consumers. In the edibles category in California, one of the leading solventless gummy brands is in the top ten best-selling gummy products in 2022, which is a pretty big statement because it's an incredibly competitive market.”

As the hype for live resin in terms of being a premium product winds down, the opportunity for premiumization as the opportunity for bottling price compression could well be solventless.

“We are seeing that solventless concentrates are holding their price,” Stahura tells Benzinga. “In California, in the second and third quarters of 2022, the average retail price of live resin dropped to about $20 a gram. Meanwhile, Rosin, which is primarily what you're going to see as solventless, was sitting at about $35 a gram. We're seeing that it is just an evolution towards the next hot product trend.”

Is Inflation Curving Consumption?

When we talk about inflation, we tend to hear the mantra: “the consumer wants the highest potency for the lowest price.” But what does consumer data say?

Is cannabis demand inelastic enough to support premiumization? Would retail sales increase if the quality of cannabis products is increased along with prices?

Stahura, who analyzes cannabis consumer trends within a traditional CPG framework, says cannabis consumers' preferences “are just like a traditional CPG consumer.” Taste and product quality are two top factors for making purchases.

“We see that what some folks call a race to the bottom in terms of pricing, becomes a floor where discounting is not necessarily going to build into an additional unit volume. The elasticity of those products starts to suffer and you start to not see a bump in units sold,” Stahura explained.

As flower prices decrease, elasticity follows making deals and promos less effective at increasing demand, BDSA discovered.

“In less concentrated markets, a lower number of daily baskets led to lower AU sales, despite consumers adding more products to their baskets. Markets with fewer players and more concentrated shares tend to see lower price declines than more open and fragmented markets,” per BDSA’s recent report on price compression.

Cannabis Retail: A CPG Shopping Experience

BDSA analyzes a vast wealth of very granular sales data to delineate consumer trends and understand what is happening in retail, including consumer attitudes, behaviors and perceptions. “Retail is moving towards a CPG shopping experience,” Stahura said.

So, are all future dispensaries going to look like an Apple store? Or, is there something else to learn regarding the shopping experience in cannabis? How can dispensaries leverage their resources to deliver an impactful experience?

“I think primarily it's two things, first, thinking about additional fulfillment options and opportunities. Leaning into things like curbside drive-thru and delivery and also direct-to-consumer sales. Those types of different and alternative fulfillment methods explode during the COVID-19 pandemic,” Stahura said. “Our consumer insights data show that the share of consumers in California who reported purchasing cannabis from a delivery service grew from about 20% in the pre-pandemic to over 30% in the fall of 2020, and we expect to see that trend continuing into 2023.

“It's not just about consumers looking for different fulfillment options,” Stahura noted that BDSA expects the in-store experience to continue to evolve.

“It's about continual learning into consumer education and consumer experience, and that's driven by not just the retailer but the brands as well. It is about delivering an immersive experience and getting away from the counter-driven kind of single interaction with the budtender experience.” 

Market Forecast

Each new year BDSA puts together a list of somewhere between five and seven predictions for the coming year. BDSA forecasts U.S. legal cannabis sales for 2023, including both adult use and medical sales, will exceed $30 billion in total sales.

“When we talk about our global forecast, that number will be about 38 billion in 2023. The US will continue to be the driving force behind both volume and sales growth, although there are some really intriguing international markets,” Stahura said.

“The mature markets, such as California, Oregon, and Colorado are seeing some challenges that will continue into 2023 (...) they're battling price compression, illicit markets, regulatory challenges. With 50 million adults across 11 states, we believe that the majority of the growth in the U.S. is going to be coming out of the Northeast.”

For mature markets such as California, Oregon, and Colorado, BDSA forecasts single-digit compound annual growth through 2026. Meanwhile, the Northeast region is expected to grow about 30% in 2023 and more than double sales across that region between 2022 and 2026.

“Those new markets that are going to fuel growth at least for the next couple of years. New Jersey at about 35% and Pennsylvania at 12%. The New York market remains the single biggest opportunity for growth in the US in 2023, despite challenges,” Stahura said.

“The size and volume of the New York market are going to fuel opportunity, and we are forecasting sales in New York to top 1 billion by the end of 2023. New York sales can account for about 3 billion in annual sales by 2026,” Stahura continued.

Regarding international markets, BDSA is paying very close attention to Mexico and Germany. The firm expects both countries to be among the top five contributors to global sales growth between 2022 and 2026.

Small Brands In Emerging Markets: Target For Acquisitions In 2023

BDSA focuses on all brands, including fast-growing brands. In the context of market creation, these brands can become valuable assets for strategic acquisitions by other entities.

Stahura explained that small brands can use tools like direct-to-consumer to boost their footprint and revenue. “We're seeing this play out in California with some of the companies that are really targeting those smaller brands and building out a sustainable economic model.” 

At the same time, BDSA forecasts continued consolidation, especially in mature markets.

“We're really going to be looking at the major MSOs that continue to acquire, whether it's smaller MSOs or even independent brands across both mature and emerging markets. Especially in some of the high-growth markets like Maryland, Michigan, and Missouri. We're seeing these independent homegrown brands really thriving in those markets. Those markets are not going unnoticed by the MSOs and some of the bigger brand houses,” Stahura concluded.

Image By Daniel Albany on Pixabay.