Comparing US medical and recreational market development

Introduction

While there are a few markets that have made the jump directly from cannabis prohibition to full adult-use legalization, the usual pattern is a predictable three-step process: prohibition, then medical access, then adult-use legalization. For example California was the first US state to provide access to cannabis for medical use in 1996, but didn't approve adult-use cannabis for another twenty years in 2016. This process has moved faster in other markets. Illinois, for example, allowed medical use in 2013 and then recreational sales in 2019, only six years later. However, the pattern tends to maintain from state to state: a medical market is established first, followed later by a transition to an adult-use market.

Because of this pattern, and because it has now repeated itself many times, it is possible to make assumptions about future adult-use cannabis markets based on their medical predecessors. In this report, we will analyze sales patterns in US cannabis markets that have transitioned from medical-only to medical and recreational and look for any unifying trends between them. These universal trends may be used to better forecast sales patterns in upcoming legal markets such as New York, New Jersey, and Montana as they make the transition from medical to recreational in the next year.

In the rest of this report we will analyze the Illinois, Michigan, Colorado, and Oregon cannabis markets. Michigan and Illinois provide examples of markets that have made the transition from medical-only to medical and recreational fairly recently, having both launched adult-use sales within the last two years. Oregon and Colorado, on the other hand, offer views of markets that made the same transition much earlier.

We will look at total medical and adult-use sales growth trends after the transition to a hybrid market, proportional sales to each market, item pricing and basket sizes, as well as category affinity. Let's dive in!

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Executive summary

New adult-use markets usually see tremendous growth when sales begin. For example, sales in Illinois have grown by 226% from $39.2M when they first began in January 2020 to $127.8M in July 2021. The impact on medical sales depends on the market. In Illinois, medical sales have remained fairly consistent since adult-use sales began. In Michigan, however, medical sales grew by 75% from January 2020 to July 2021. One key difference we found between medical and adult-use consumers in the same market is in their basket sizes. Medical patients tend to purchase more at once, resulting in significantly lower average basket sizes for recreational customers. For example in Oregon, the pre-tax average basket size of medical patients over the previous 90 days was 99% larger than that of recreational customers. We also found that medical patients are more likely to purchase Concentrates (especially in Illinois), while recreational customers are more likely to purchase Edibles and Pre-Rolls.

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Methodology

Data for this report comes from real-time sales reporting by participating cannabis retailers via their point-of-sale systems, which are linked up with Headset’s business intelligence software. Headset’s data is very reliable, as it comes digitally direct from our partner retailers. However, the potential does exist for misreporting in the instance of duplicates, incorrectly classified products, inaccurate entry of products into point-of-sale systems, or even simple human error at the point of purchase. Thus, there is a slight margin of error to consider.

Total market sales data is sourced from corresponding state regulatory agencies. The time frame for any analyses labelled 'T90' are for the most recent 90 days at the time of the analysis: August 30, 2021. Headset reports pricing less any consumer-payed taxes.

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Adult-use sales growth after recreational transition

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Let's begin by taking a look at the monthly adult-use cannabis sales totals in Illinois and Michigan since their transitions from medical-only to recreational and medical. As has become the expectation with any newly opened market, both Michigan and Illinois have seen tremendous sales growth since launching their adult-use cannabis programs. Sales in Illinois have grown by 226% from $39.2M in January 2020 to $127.8M in July 2021. Michigan's recreational program got off to a slower start, resulting in even greater proportional growth over the same time period. Michigan's total adult-use sales grew from only $9.8M in January 2020 to $115.3M in July 2021. That's an increase of 1077%!

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Medical sales growth after recreational transition

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We know that adult-use sales tend to grow quickly, especially soon after the opening of any new market, but what happens to medical sales? Here we can see that the answer may not be quite as straight-forward. In Illinois, medical sales have held fairly steady over the last two years, with a total increase of only 35% from $23.4M in January 2020 to $31.5M in July 2021. Michigan's medical sales have been slightly more volatile, growing quickly over the first half of 2020, then decreasing through the second half of the year, only to increase again in 2021. Medical sales in Michigan grew by 75% from January 2020 to July 2021 - a very respectable increase in most industries, but nothing in comparison to the state's own astronomical growth in recreational sales.

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Medical & adult-use proportional cannabis sales in Michigan

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Over the next several graphs we will look at the proportion of total cannabis sales in each example market. Here in Michigan, we can see that the proportion of total cannabis sales to medical patients has steadily declined since the introduction of adult-use sales. It is possible that the rate of decline is slowing now in mid-2021, but time will tell. In July 2021, the proportion of total sales to medical cannabis had dropped to 27.7%.

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Medical & adult-use proportional cannabis sales in Illinois

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In Illinois, a slightly different pattern surfaced at the beginning of adult-use sales in that state. Adult-use access launched with well over half of total cannabis sales (62.7% in January 2020), then quickly declined through the first quarter. After stabilizing in April 2020, the proportion of medical sales steadily declined, reaching an all time low of 20.9% in July 2021.

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Proportional sales in more mature markets

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As shown on the previous slides, medical sales, as a proportion of a total market, tend to decline quickly after adult-use legalization. One might wonder if they continue to drop all the way down to zero and become totally irrelevant. With Oregon and Colorado's medical markets providing evidence, the answer is a strong no. With adult-use sales beginning in 2014 in Colorado and 2015 in Oregon, these are two of the most mature US recreational markets. As shown in the graph above, both have medical programs that seem to have found equilibrium within each state's total cannabis market. Oregon's medical sales have contributed 8-12% of total sales each month since the beginning of 2020. Colorado's medical sales have been even more stable, staying between 18% and 20% over the previous twelve months.

When anyone 21 and over can purchase cannabis recreationally, why do patients still use medical programs? There are several advantages that medical cannabis patients enjoy:

• Lower taxes: In general, medical cannabis purchases are taxed at much lower rates, if they are taxed at all. For example in Michigan, adult-use purchases are taxed with the state-wide 6% sales tax as well as a 10% marijuana excise tax, whereas medical purchases are only subject to the 6% sales tax. In Oregon, medical purchases aren't taxed at all while recreational purchases are subject to a 17% cannabis excise tax.
• Higher THC potency products: In some markets there are different product THC potency limits for medical and recreational customers. For example, in Washington a recreational edible is limited to 100mg THC per package and 10mg THC per serving, whereas a 'High THC' product available only to medical patients may contain up to 500mg THC per package and 50mg THC per serving.
• More knowledgeable staff: Medical cannabis patients may wish to seek out cannabis retail staff who have additional training that better prepares them to assist medicinal cannabis users. In Washington, there is a program for cannabis retail employees to become certified medical marijuana consultants. This program requires 20 hours of training and enables recreational cannabis retailers to earn medical endorsements.

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Medical vs adult-use basket analysis

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Now let's shift our timeline from the past several years to the more recent past. Here we're comparing two important metrics over the trailing 90 days across Illinois', Michigan's, and Oregon's medical and adult-use cannabis markets.

First we'll look at average item price. Here we can see that, in general, there is no consistent trend of significant difference in item pricing between adult-use and medical cannabis markets. In Illinois and Michigan, average item prices are nearly identical. In Oregon however, the average price of a recreational product is nearly 50% greater than that of a medical product. It is important to note that these prices are pre-tax, so the effective amount a recreational customer would pay is higher than that of a medical patient in all examples.

When we look at the average basket size of adult-use customers and medical patients however, there is a clear pattern: medical patients tend to spend more at once. For example in Oregon,  the pre-tax average basket size of medical patients over the previous 90 days was 99% larger than that of recreational customers. This should tell operators in upcoming recreational markets to expect a drop in average basket size as they make the transition from medical to recreational sales.

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Recreational and medical cannabis category trends

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Another aspect of cannabis sales that is beneficial to monitor during a transition from medical to recreational sales is product category preference. While there are some product categories with no clear trends between recreational and medical markets, there are others where the two different customer types clearly have different affinities. For example, it appears that medical patients are more likely to purchase Concentrates (especially in Illinois), while recreational customers are more likely to purchase Edibles and Pre-Rolls. The appeal of Concentrates to medical patients makes sense, as this product format is often considered one of the most intense in effect. Pre-Rolls and Edibles, on the other hand, appeal due to their portability and shareability, which may be less important to medical patients.

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The trends are less clear in the two highest revenue product categories: Flower and Vapor Pens. In Illinois and Michigan, Flower sees slightly higher market share in the recreational market than in the medical market, but in Oregon, Flower market share is much higher. For Vapor Pens, recreational market share is higher than medical market share in Oregon and Illinois, but the opposite is true in Michigan. These titanic categories may simply have universal appeal.

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Conclusion

In the above report, we saw that there are key differences between the preferences of medical and adult-use consumers and there is a lot we can learn from markets that have gone through the transition from a medical-only market to a hybrid medical and recreational market. Headset Insights can help you keep track of the ever-changing cannabis industry as it continues to grow and more markets develop. Sign up for a demo to learn how you can stay ahead of the opportunities in the industry.

Key takeaways

• In any newly opened adult-use market, recreational sales can be expected to realize incredible growth over the first several years after legalization.
• Medical sales may continue to grow or stagnate, but their proportional relevance within the total market will certainly decrease as recreational sales grow.
• After the initial tumult of rapid recreational growth, the proportion of total sales to medical cannabis can be expected to settle somewhere between ten and twenty percent in medical and recreational markets.
• Recreational customers and medical patients tend to choose individual products that are similarly priced (before taxes), but medical patients tend to purchase more at once, resulting in significantly lower average basket sizes for recreational customers.
• Some product categories (like Concentrates and Pre-Rolls) attract medical and recreational customers at different rates, while there isn't much difference in others.

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