Several states are transitioning from medical to recreational marijuana markets, and others will soon be in the same spot.
To learn how retail businesses can best navigate this change, MJBizMagazine spoke with retail executives from three different states to find out how they steered their stores through the shift.
Their insights touched on strategic decisions based on individual market conditions, customer forecasting, inventory, pricing, product selection, technology, training and other factors.
A Return to Medical in Colorado
- Legalized medical marijuana: 2000
- Projected MMJ dispensary sales for 2021: $370 million to $410 million
- Legalized recreational: 2012
- Projected recreational retail sales for 2021: $1.8 billion to $2.1 billion
Source: 2021 MJBizFactbook
- Find out whether the state is offering any incentives for retaining a medical marijuana business after adult-use legalization.
- Take advantage of economies of scale that often accompany increased traffic from recreational sales.
- Research whether transitioning to recreational-only sales will prevent the company from owning an MMJ license in the future.
One of the first decisions retail executives make when transitioning from a medical to recreational marijuana market is the extent to which they want to maintain a medical business. The answer often depends on the incentives each state provides patients and businesses to stay in the medical market.
In Colorado, for example, the medical marijuana market before recreational legalization was a poorly concocted mess that businesses couldn’t wait to exit, said Alex Levine, co-CEO of cannabis retailer Green Dragon. The company has
15 retail locations in Colorado—all but one of them recreational—and is opening stores in Florida.
Before Colorado’s legalization of recreational marijuana, Levine said, the number of plants a vertically integrated MMJ business could grow was tied to its patient count. To increase plant counts, businesses competed zealously to register patients, resulting in what Levine referred to as “patient wars” characterized by “patient sign-up bonuses” such as deeply discounted ounces of flower.
“Dispensaries were in the background scrambling with this constant influx and outflow of patients. … If your patient counts were constantly changing, there was almost no way to be compliant,” Levine explained.
The result, he said, was a medical marijuana system that began to “fall apart.”
Switching to Adult Use
Colorado’s adult-use marijuana system “streamlined” regulations, Levine said, and eliminated many of the problems that beset businesses under the medical program. As a result, Green Dragon, which had five dispensaries before 2014, exited the medical market to focus on recreational cannabis sales.
Cutting its medical business saved Green Dragon operational costs, while the sharp decline in the number of Colorado’s MMJ card holders after adult-use legalization seemed to bear out the wisdom of the retailer’s decision.
“It was very hard to run medical and recreational stores simultaneously because, back then, they could not be located in the same sales area like you see today in Colorado,” Levine said, adding that in the early days of regulated recreational marijuana, MMJ and recreational sales had to be kept separate. “Running both med and rec operations would have been like running two stores. … So that would have been double the cost.”
Don’t Abandon Loyalists
Levine stressed that the choice to focus on recreational stores didn’t mean Green Dragon neglected its medical consumers. The company was able to serve consumers who use cannabis for medical and wellness reasons with products from its lineup of recreational marijuana.
And because the expanded recreational market allowed Green Dragon to increase production, the company was able to use economies of scale to keep costs down.
“We actually were able to offer products cheaper than we were before,” Levine said. “We had a wider variety of products, and we were selling them at a better price. The only difference in Colorado was that, on the medical side, the edibles could be stronger, and you could buy more of them.
“The high-dose products are pretty advanced, and over 90% of patients don’t need anything like that,” he added.
Back to the Beginning
While Green Dragon has been all-in on recreational marijuana, it could be reawakening to the medical market.
In April 2020, the company acquired a store in Denver’s tony Cherry Creek neighborhood that was licensed for both adult-use and medical sales.
Levine said Green Dragon plans to keep serving medical patients at that location. The shift coincided with MMJ patient numbers in Colorado jumping about 30% between 2019 and 2020.
“A lot of the kinks have been worked out, and it’s a lot easier to operate on the medical side now,” Levine said. “It still is more difficult than recreational—there are definitely more things to keep track of. But the reason we keep (the medical license) is, if you ever get rid of it, you can’t ever get it back.
“We don’t really know what the future of medical in Colorado is, so we’d like to keep our options open.”
Mindful Moves in Massachusetts
- Legalized medical marijuana: 2012
- Projected MMJ dispensary sales for 2021: $250 million to $305 million
- Legalized recreational: 2016
- Projected recreational retail sales for 2021: $1.1 billion to $1.4 billion
Source: 2021 MJBizFactbook
- Look for markets likely to legalize adult-use marijuana and secure medical cannabis licenses in areas that are hospitable to the industry.
- Hire a legal team to advise your company on location scouting, regulations and compliance.
- Don’t rush into opening additional adult-use stores if your medical marijuana retail model is working.
Regulations that allowed Massachusetts businesses to have up to three medical and three recreational licenses played a major role in the state’s transition from an MMJ to an adult-use market. Where businesses chose to locate was contingent on what was permitted by local municipalities.
Sanctuary Medicinals, for example, started in New Hampshire’s small medical marijuana market. But company executives decided that expanding to Massachusetts would be necessary to create a thriving cannabis business.
“We knew that adult-use (legalization) there was inevitable and that we had to participate in it to be competitive,” Sanctuary Chief Operating Officer Nick Satmary said. In 2016, the company started scouting towns to gauge local sentiment and search for real estate.
A Good Bet
Ultimately, Satmary and his team settled on Gardner, a town of 20,000, where they found a storefront near major highways with ample parking and where the local government licensed MMJ businesses and was expected to permit adult use as well.
Sanctuary received approval to begin a medical business first, started cultivating in 2017 and opened its Gardner dispensary on Nov. 23, 2018—about the same time Massachusetts’ recreational market was coming online.
Leadership’s expectation that Gardner would be one of few locales to approve recreational businesses proved correct. Because Massachusetts allows medical and recreational sales to co-locate, Sanctuary opened an adult-use operation under the same roof on March 6, 2019.
At that point, Sanctuary was still one of the few recreational stores in Massachusetts, and its opening was greeted with long lines of customers.
But rather than rushing to open more recreational stores, Sanctuary opened two more medical outlets—one in Danvers on July 6, 2019, and the other in Woburn on Sept. 9, 2019. Sanctuary chose the locations because the towns had opted out of adult-use sales and there were only a small number of medical license holders to compete with in the area.
“We picked those locations because we knew that they were going to opt out of adult use but also because of the access for patients,” Satmary said.
Sanctuary opened its second adult-use retail location in Brookline, Massachusetts, on Aug. 1, 2020, and is currently considering locations for its third recreational license.
Ready, Set, Sell
Satmary said that, so far, the transition from medical marijuana to adult use has been successful because of preparation. This includes meticulous location scouting, staying in close contact with state regulators, careful product selection, compliance and hiring “good lawyers”—in this case, the Boston office of cannabis law firm Vicente Sederberg.
“We trained all of our team on safety, compliance, product knowledge,” Satmary said. “We studied established adult-use markets, where they priced products and what the bestsellers were. At the start, we kept everything very basic: flower, pre-rolls, vapes, concentrates, shatters, crumbles, sauce and then edibles like lozenges, fruit chews and chocolate.”
As in other markets, Massachusetts had a much lower THC cap for adult use than for MMJ. Recreational edibles, for example, can contain no more than 100 milligrams per package and 10 milligrams per piece versus 1,000 milligrams per package and 100 milligrams per piece for medical edibles.
The discrepancy required adjusting dosages for some products but nothing that was especially costly or labor-intensive, Satmary said.
Another challenge was integrating Sanctuary’s seed-to-sale platform, BioTrack THC, with the new Metrc system that Massachusetts mandated for recreational retailers.
“The biggest thing was just integrating our seed-to-sale with Metrc to make sure they kept up in real time with each other,” Satmary said. “This was new for us—it was also new for the commonwealth and new for the regulators here.
“Everybody was learning Metrc here at the same exact time. So the little nuances that came with Metrc—the tracking surrounding it, the inventory, compliance—all of that was a big challenge.”
Product Education Is Key in Arizona
- Legalized medical marijuana: 2010
- Projected MMJ dispensary sales for 2021: $1.0 billion to $1.2 billion
- Legalized recreational: 2020
- Projected recreational retail sales for 2021: $250 million to $300 million
Source: 2021 MJBizFactbook
- Research how much store traffic increased in states that launched adult-use marijuana markets.
- Educate budtenders about how to serve customers who are new to cannabis.
- Adjust THC levels in popular medical products so recreational consumers can try them.
The staff at two-store Arizona cannabis company Hana correctly projected state voters would legalize a recreational market during the 2020 general election.
Adult-use sales began in January of this year. Anticipating an influx of canna-curious customers, Matt Pinchera, president of the cannabis business launched in 2015, tried to estimate how the company’s traffic might increase and staff appropriately.
“We tried to look at other states that went from med to rec and what their customer traffic counts were. Today, every day is different,” Pinchera said, noting that adult-use customers greatly outnumber medical customers some days, but on others, they are more evenly split.
While Hana’s recreational customers outnumber the business’ medical patients, Pinchera said there are more than enough patients to justify keeping medical sales open. The company also has a 20,000-square-foot grow that it plans to expand to 60,000 square feet this fall.
Educating Staff and Consumers
In a market expecting an influx of inexperienced consumers, it’s critical that staff are thoroughly trained on the store’s products and how to educate customers about them, Pinchera said. Hana also invites product vendors to train staff about their offerings so that budtenders can present them to consumers safely and competently.
“We knew there were going to be some new customers who once were cannabis users, but perhaps there are new products on the shelves that they’re not familiar with,” Pinchera said. “It’s kind of a continuation of being able to educate both the medical patients and the new adult-use customers.”
Retooling Product Lines
Hana, formerly known as Hana Meds, also had to reevaluate the products it offered on each side of the business and make some adjustments.
In Arizona, where the state mandates that medical and recreational stores be co-located if an owner has licenses for both, the amount of THC allowed in edibles is capped at 100 milligrams per package and 10 milligrams per piece. The amount of THC allowed on the medical side is higher.
Hana had a 40-milligram lollipop that was popular with medical patients, but the product had too many milligrams of THC to be sold on the recreational side. To offer the product to adult-use consumers, Hana started making a 10-milligram version.
“There was an initial R&D cost to work on the formula, but once it was dialed in, there is no cost to make the switch,” Pinchera said.
Predicting Inventory Issues
Another concern was having enough inventory.
“There were shortages across the state, across the board,” Pinchera said of the early days of adult-use sales. “We followed what the bestselling products were and just did our best to have them.
“The most popular items were flower, but we saw upticks also in (vape cartridges) and edibles, which were two categories that adult-use consumers gravitated toward.”
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