While cannabis is legal across a variety of states, many individual markets are at different development stages. Yet there is one key issue that unites all of these disparate markets and that is how the illicit market and legacy business will unfold in the wake of legalization.
Currently, the New York Office of Cannabis Management, is setting up a framework of laws that include awarding licenses to those with business backgrounds who were adversely affected by the “War on Drugs.” Will their efforts be enough to squelch the state’s illicit market, arguably the largest in the country, when recreational sales begin?
Chris Beals, CEO of top online cannabis marketplace Weedmaps, answers this question while offering his thoughts on the markets he feels are working and why, in the end, it all boils down to selling quality products.
This Q&A was edited for conciseness and clarity.
Iris Dorbian: What does New York need to do to crush the illicit market when recreational sales begin?
Chris Beals: There is no doubt that New York’s legal, adult-use cannabis market will create competition for the currently robust illicit market, but the change is not going to happen overnight. The single biggest determiner to the success of legal cannabis markets is retail license density. As a rule of thumb, if you have one retail license per 10,000 people, you will see the licensed market gain sufficient market share. In New York, this means you need 1,800 licenses in the New York City metro area alone.
Another component to success in New York will be delivery. It will need to be set-up and operational as early as possible, particularly within New York City limits. The legacy market already has delivery and quality products, so the legal alternative needs to be a fantastic, out-of-the-box solution to make real change in consumer behavior.
Dorbian: What other markets should New York look to for lessons learned on how to run an effective legal adult-use market and what not to do?
Beals: Massachusetts can be a real-time case study for New York. Currently, the state is demonstrating why social equity operators need to have delivery-only dispensary licenses versus forcing them to act as Uber-esque couriers for third-party dispensary operators. The model is logistically difficult, making it even more challenging for social equity couriers to create enough margin to survive — and that’s an important experience New York can draw from.
Outside of the East Coast, New Mexico, which legalized adult-use cannabis in April 2021, and started selling recreationally early this year, has certainly set themselves up for success in a number of ways. They have no cap on the number of licenses available. [This is] a win for the success of the legal market and for the sizable medical consumer market there. New Mexico also has no local bans on cannabis businesses, which means local governments cannot ban cannabis businesses within their communities. This is notable especially when you look at states like California where roughly 70% of cities still have bans on cannabis licensing and correspondingly, have almost all cannabis demand met on the illicit market.
Dorbian: Right now, New York is losing a lot of revenue in this space to neighbor New Jersey, which rolled out its legal market this past April. Do you feel this may be an issue once New York launches its legal adult-use market?
Beals: Accessibility, competitive pricing and convenience are probably the most important factors for where cannabis consumers will shop, and this is why retail density is so important. Given that, it’s more likely that New Yorkers are continuing to shop within the legacy market versus shopping out of state in New Jersey. We do know a number of cities in Northern New Jersey are looking to increase license density near New York, which could draw consumers to New Jersey.
However, the greater differentiator will be which market is making compelling and innovative cannabis products, and who has quality, high-end cannabis flower. We know that regular cannabis consumers will consistently travel farther for better quality products. As of right now, I would say the crown for quality product is up for grabs in the East Coast states surrounding New York. But it’s also just as likely that New Jersey’s decision to severely limit the number of initial cultivation licenses will materially hurt the viability of that market when it comes to high quality cannabis. That said, I have no doubt that any state with adult-use sales located next to a prohibition state is benefiting from cross-state sales. Again, New Mexico is a great example here with its neighbor, Texas.