WASHINGTON: The story of recreational marijuana’s first fourteen months in Washington state is a story of supply and demand imbalances, with recreational price points impacted by competition from medical and black markets unfettered by high taxation and strict regulation.
By all accounts the first year of I-502 was successful, with retail sales now topping $35 million a month. Still, recreational marijuana only accounts for approximately 30% of the projected $1.3 billion industry in 2015, with the black market and medical marijuana representing the remaining 70%. I-502 retailers have tried very hard to bring the out-the-door price of the recreational marijuana down to be competitive with the black and medical markets. However, those markets remain robust, in part because they have not been handcuffed by the high taxes and cumbersome regulations put in place for I-502.
When I-502 retailers were allowed to open in July of 2014, there was a major supply shortage resulting from an inadequate number of licensed producers and processors. This caused the initial cost of a gram of recreational marijuana to be sold out the door for over $25 dollars, in contrast to less than $10/per gram for the medical and black market consumer. However, over the course of the year, the number of licensed producers and processors grew at a much faster pace than that of I-502 retailers. This caused supply to heavily outweigh the demand, as there simply were not enough retailers open for business to accommodate the increased amount of product in the marketplace. Over the course of the year, prices began to drop to under $4/per gram wholesale, allowing retailers to lower their prices to the end consumer. Retail prices dropped quickly – more than a $1/per gram each month from August 2014 to February 2015 – before they began to stabilize, dropping less than $.50/per gram from February through June.
In June 2015, the average cost of a retail gram of flower was $12.66. On July 1, a new law, HB 2136, went into effect replacing the existing 25% excise tax at all three levels of I-502 – producer, processors, and retailer – with a 37% excise tax applied at retail. Producers and processors were no longer forced to give up 25% of their revenue to the state tax system. The result: wholesale prices dropped 10%, to a low of $3.39/per gram. Retailers followed suit, and the average cost per gram of flower at the retail level dropped to $9.22, under the magic $10/per gram price point.
The drop in prices starting July 1 caused the first drop in retail revenue since the opening of Washington’s recreational marijuana marketplace. Dropping from $25 million in June to just under $24 million in July, revenues fell even while the amount of product purchased increased from 4.8k pounds in June to just over 6k pounds in July – thus showing that the drop in prices directly caused the drop in revenue.
The monthly growth rate of recreational marijuana retailers is an astonishing 29.5% a month. This growth rate, due to an increase in the number of new retail stores opening monthly, will not be sustainable over the long term. However, we do expect a high growth rate to continue throughout the rest of 2015 and most of 2016, as more recreational retailers come on line, and medical marijuana is integrated into the I-502 system. Individual retailers have seen an average of a 5.63% growth rate each month. This equates to each retailer increasing their revenue approximately $10 per day.
While recreational pot sales are robust 7 days a week, Fridays and Saturdays are the highest selling days, averaging just under $1 million sold each Friday statewide and just at the $1 million mark on Saturdays. Mondays are the lowest-selling day of the week, at just above $600k, while Sunday, Tuesday, Wednesday, and Thursday are hover at ~$800k. Retailers that are closed on Sunday may be missing out on a decent day of sales, and should consider opening on Sundays.
The number of recreational retail customers has increased dramatically, while the amount they are spending has stayed constant. We saw a growth from 1,000 retail customers a day in August 2014, to a high of 40,000 customers a day in July 2015. The average ticket price balanced at approximately $40 a day for several months until dropping to just over $30 a day after the implementation of HB 2136 and the subsequent drop in prices.
The majority of all sales in Washington State are concentrated in only four counties. Western Washington sells just under three times more recreational marijuana than eastern Washington. Forty six percent of the weight sold comes from King, Pierce, and Snohomish counties, with Spokane County making up fourteen percent of all sales. The remaining 40% of sales comes from all other counties.
The outlook for recreational market remains strong. With the medical market set to be folded into I-502 in 2016, we predict that the gap will start to close between the black market and the legal market. As an added factor of prices rivaling that of the black market, we will continue to see large increases in the number of customers making purchases in I-502 retail stores.
As of early October 2015, there were 182 retail stores recording revenue in Washington. We project that by July 2016 that number will grow to between 288-294 retailers, ensuring that the high growth rate that we have seen will continue into 2016.