A new Arizona adult-use cannabis market may offer limited business opportunities

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Even if Arizona voters back recreational marijuana legalization on Nov. 3, don’t expect a wide-open cannabis market with lots of new business licenses immediately up for grabs in the Southwest state.

That could change over time, depending on the state’s population growth and other factors.

But at the outset, Proposition 207 would allow only the existing 130 vertically integrated medical marijuana companies, along with 26 new social equity businesses, to comprise Arizona’s entire plant-touching marijuana industry.

“One of the things we found in our outreach to voters … is they liked the medical market and how it functions. They liked the footprint. Voters weren’t freaked out,” said Stacy Pearson, a spokeswoman for the Smart and Safe campaign.

“They liked how the medical program was operating, so this tracks very closely to Arizona’s successful medical program.”

That also means the existing businesses – including multistate operators Harvest Health & Recreation and Curaleaf – stand to reap a windfall if the ballot measure passes because they would get first crack at the rec licenses.

Both MSOs are among the campaign’s biggest funders.

If Prop 207 is approved – which is far from certain based on recent polling – Pearson estimates Arizona could become “close to a $2 billion market” with both recreational and medical marijuana.

Marijuana Business Daily projects recreational sales in the first year could total $375 million-$400 million and reach $700 million-$760 million by 2024.

Key provisions

Prop 207 – also called the Smart and Safe Arizona Act – would leave much of the industry rulemaking to the state’s Department of Health Services, which already oversees medical cannabis.

Still, the initiative spells out certain parameters.

For instance, the number of licenses would not be set in stone. Rather, the amount of licenses would be tied to the number of pharmacies operating in Arizona as well as the locations of existing MMJ businesses.

Prop 207 also calls for one vertically integrated marijuana company for every 10 pharmacies, and it allows for additional adult-use cannabis business licenses to be issued in any county that has fewer than two existing MMJ operators.

Pearson said the former number would grow over time as Arizona’s population increases, meaning additional business permits would be available depending on the state’s head count.

Already, many rural MMJ license holders have been relocating to more urban venues to take advantage of larger populations in cities such as Phoenix and its suburbs.

“We expect that number to grow some in anticipation of (Prop) 207 passing,” Pearson said of the total number of MMJ businesses relocating. “Some of the rural dispensaries are moving closer to Phoenix or Tucson or where the population centers are.”

Pearson noted that one dispensary just opened in Glendale, a Phoenix suburb, over the weekend of Sept. 26.

And she knows more have been moving.

That, Pearson suggested, could immediately create additional openings next year for adult-use business permits – assuming Prop 207 passes – as additional licenses become available in venues with fewer than two MMJ operators.

“Part of this initiative includes backfilling those rural communities,” she said.

Any licenses that become available in such fashion would be awarded via lottery.

Some opportunities for entrepreneurs

There also would likely be openings for entrepreneurs to work with license holders in some capacity, either as growers or manufacturers.

That’s because each business permit would allow for one retail location, one manufacturing kitchen and one cultivation operation.

But those three operations wouldn’t have to be housed at the same facility or even necessarily run by the same business. They simply would have to be tied to the same marijuana business permit.

That means if a particular retailer isn’t interested in running a grow or a manufacturing facility, it could be used by a third party in concert with the license holder.

“Some of the (existing) growers, and/or the kitchens, are stand-alone but operating under another license,” Pearson said. “Typically, in Arizona, if I wanted to create ‘Stacy’s Edibles,’ I’d work with a license holder who wasn’t running a kitchen.”

The initiative doesn’t require the Department of Health Services Department to begin accepting adult-use business permit applications until a window opens up Jan. 19, 2021, and ends less than two months later, on March 9.

That means, depending on how quickly the department moves, recreational sales could begin as soon as late January, Pearson said.

Social equity licenses would be issued at most six months after the department finalizes rulemaking.

Another key business aspect of the initiative: It would allow the currently not-for-profit MMJ businesses to convert to for-profit entities.

Also, the initiative would eventually allow for marijuana delivery but not until 2023 at the earliest. That was a political concession to law enforcement, Pearson said.

Getting around local bans

While Prop 207 wouldn’t forbid Arizona cities or counties from banning adult-use marijuana businesses, it does contain a workaround to ensure there wouldn’t be a wave of local bans – as has happened in other states.

Pearson noted that localities would retain the right to ban the industry if they so choose, but the key is that if any existing MMJ operator is already doing business in a given city and is in good standing with regulators, then local authorities couldn’t bar that proprietor from selling recreational cannabis.

“So if you’re operating in Mesa currently … they can’t forbid you from selling adult use,” Pearson said.

That could be crucial if Prop 207 passes: A “not-in-my-backyard” attitude has prevailed in a host of towns and counties in states such as California, Colorado and Michigan.

All have so-called “cannabis deserts” where adult-use storefronts are prohibited.

Political outlook

The Smart and Safe campaign, wary of Arizona’s 2016 rec legalization failure, carefully changed a provision in the initiative that does not protect employees from “drug-free” workplace mandates by employers.

That, Pearson said, was a major motivation for businesses to oppose the 2016 initiative, because many feared they would be dealing with stoned workers.

Because of that change, Pearson said, no major well-funded opposition has emerged.

According to Ballotpedia, Smart and Safe has raised more than $3 million, while Arizonans for Health and Public Safety – the primary opposition that has emerged – has only $142,000 in its coffers.

At least one reason for that is a number of the funders of the opposition campaign in 2016 have fallen off the political radar, according to Tempe-based radio station KJZZ. And the Arizona Chamber of Commerce has decided to sit out the campaign, at least financially.

Polling, however, has been inconsistent.

While some surveys of Arizona voters earlier this year found support in the mid-60 percentile, a more recent poll conducted in September by New Jersey-based Monmouth University found 51% support and 41% oppose.

And one of the most recent voter surveys, performed Sept. 8-10 by Phoenix-based OH Predictive Insights, found rec MJ legalization in a statistical dead heat, with 46% supporting, 45% opposing and 9% undecided.

That might be worrisome for backers, considering Prop 205 failed four years ago with a near-victory, at 49% of the vote.

But yet another poll, conducted Sept. 24-29 by Denver-based Strategies 360, found 57% support and only 38% opposed. And yet another survey, conducted Sept. 26-30 by Suffolk University in Boston and USA Today, found 46% in favor, 34% opposed and 19% undecided.

Pearson said the campaign feels upbeat heading into this election.

“We’re very confident it will pass in November,” she said, noting “our polling has held steady for two years.”

John Schroyer can be reached at johns@mjbizdaily.com