Colorado grows annual cannabis sales to $1 billion as other states struggle to gain a market foothold

Helen H. Richardson | Denver Post | Getty Images
The MMJ America cannabis growing facility at the old Dardano's Flowerland greenhouse in Denver. Its aim is to create some of the most potent marijuana strains in the world.

On Jan. 1, 2014, Colorado launched what many considered a controversial experiment: It became the first state in the country to legalize recreational cannabis. No one was sure how things would play out. Would new entrepreneurs enter the market? Would people stop buying from the black market? Would crime rates fall? Now, more than five years after the first pot shops opened their doors in Colorado, it's clear the experiment has been a success.

On June 12 the state announced that it surpassed $1 billion in total cannabis-related revenue, the first state in the country to hit that milestone. Companies also have made more than $6.5 billion in sales over the last five years, with April and May of this year the highest-grossing months since legalization.

Per-person sales are also highest in Colorado, with people buying, on average, $280 worth of cannabis per year compared to $220 and $130 for Washington and Oregon, respectively, the second and third states to legalize weed, according to Scott Willis, head of research at Grizzle, a New York-based investment research company.

Much of the legal marijuana market revenue, which accounts for about 3% of the state's $30 billion budget, goes toward education, health care, literacy services and drug prevention programs.

Colorado's first-mover advantage

Naturally, Jared Polis, Colorado's governor, is pleased by how well things have gone. "We were one of the first states to create a comprehensive approach to the cannabis market," he said. "We built a first-mover advantage into a strong leadership role in America and around the world."

With cannabis now legal in 11 states — Illinois being the most recent state where legal marijuana has become law — Polis thinks recreational cannabis eventually will become legal at a federal level and Colorado's cannabis sector will grow more from here. "A lot of the Colorado technology and know-how will help power the industry as more states come online," he says. "From our point-of-sale systems and chemistry and business systems, we're well positioned."

Colorado had 2,917 licensed marijuana businesses and 41,076 individuals licensed to work in the industry as of June.

Colorado has been successful compared to other states, some of which still struggle with sales, in part because it's had the most time to get it right, Willis said. When cannabis first went on sale, only 30 stores opened, which caused legal prices to rise and the black market to thrive. By the end of that year, though, 300 stores were selling all sorts of things, including joints and edibles. That pushed prices down — and sales up, with monthly sales hitting $35 million in December of that year, more than double January's total.

Trouble getting cannabis markets off the ground

Other states have had a tougher time getting their industries off the ground. In Oregon, for instance, which started selling legal cannabis in 2015, an unlimited number of retail licenses were handed out, causing prices to fall too fast too quickly, according to Willis. That hurt business growth and resulted in a major oversupply of pot, with excess cannabis reportedly being sold to the black market. A recently signed bill will allow state regulators to deny cultivation licenses in the state, but it will take a while before its supply-and-demand issues are worked out.

In California, a state that should have swiftly raised millions in revenue, considering the size of its population, cannabis legalization has mostly been a dud. Cannabis consumers can't purchase pot in 75% of the state's city and counties, while high taxes are impeding legal growth and allowing the black market to expand.

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California Gov. Gavin Newsom's recent state budget plan slashed cannabis tax-revenue projections by $223 million. In the first half of 2018, revenue was $101 million below what was expected. According to reports, California charges a 45% tax on legal cannabis businesses when all taxes are taken into account, a finding that led to calls for a major tax rethink to better compete with the black market.

In Colorado, growers have to pay a 15% excise tax when their product is transferred from cultivation facility to retail store, while consumers have to pay a 15% sales tax on the purchase of cannabis. That's mostly in line with other states, though Washington has a 37% sales tax.

Vince Chandler | Denver Post | Getty Images
A budtender organizes and inventories marijuana flower at The Health Center, a medical cannabis and recreational marijuana dispensary in Denver.

Other states simply haven't gotten their act together when it comes to selling cannabis. For instance, Maine had passed its Marijuana Legalization Act in 2016, only to have it vetoed in 2017. That veto was overturned in 2018. In April the state finally issued its first draft regulations on recreational use. It's not clear when cannabis will be available in stores.

Unlike most other areas, Colorado jumped at the opportunity to grow a legal market, says Morgan Fox, a spokesperson for the National Cannabis Industry Association. "Colorado really embraced the industry, while other states, like Washington, didn't in quite the same way," he said. "The regulatory structure is more conducive to business."

One example of Colorado's cannabis embrace is tourism. Marijuana-related travel became a big focus for the state, with cannabis wellness retreats, cooking classes and private smoking lounges all eagerly accepting out-of-state visitors. According to a report from SMARInsights, 25% of people who traveled to Colorado between 2013 and 2018 listed cannabis as one of the reasons they chose to visit the state. "It was more cannabis tourism friendly than Washington and saw a massive influx of people coming in to see what it was all about," Fox said.

Now businesses are selling higher-value products, like vape pens and topical creams, than other locales. "It's further ahead when it comes to selling higher-revenue things," Willis said. "That makes its per-person revenue look good."

"We're breaking down barriers to raising money and supporting the operation of new and creative cannabis businesses." -Jared Polis, Colorado governor

As well as the state has done in managing and growing its industry, it's going to have to find new avenues for growth. The marijuana market is now a mature industry with more competition — cannabis tourists can visit other states, or even Canada, to get their fix, while there are some signs indicating that growth is starting to level off. "The Colorado market is maturing at this point. Which isn't a bad thing — they've accomplished their goals," Willis said.

Concerns remain. A focus from the national press on reports of a rise in emergency-room visits, and public concerns about just how quickly cannabis use has become a normal part of everyday life in the state, provide a counterpoint to the economic success story. But Gov. Polis is focused on ways to push the industry forward. In May he signed a bill legalizing consumption in social-use businesses that will allow people to create marijuana cafes, lounges and dispensary tastings. Hotels, restaurants and music venues can also apply for permits that will allow for on-premises smoking and limited sales.

He also signed a bill that will kickstart home cannabis delivery starting in 2020 for medical marijuana, and 2021 for recreational, while another passed bill allows out-of-state investors, including publicly traded companies, to buy into Colorado's cannabis companies.

"We have a very customer-focused approach to regulation," Polis said. "One of the big goals of our administration was to move to a culture of empowerment. We're breaking down barriers to raising money and supporting the operation of new and creative cannabis businesses."

The next big boost of growth for the state, though, could depend on an event much more uncertain: President Donald Trump, or his successor, legalizing marijuana federally. While competition would quickly increase, companies in the state could branch out into other locales, while smaller companies might find banks more willing to offer loans to help fund expansions. "If companies can conduct business legally under federal law, then it will be easier to stay viable even with more competition," Fox said.

For now, though, Colorado will do what it can to lead the way and keep revenues coming in. "We have the most forward-looking approach (to cannabis)," Polis said. "And we're going to remain at the center of this growing national industry."

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