Chart: How much consolidation awaits Colorado’s retail marijuana market?

Colorado’s retail marijuana sector has seen more consolidation as it’s matured, but relative to more established industries, it remains a highly competitive and open market.

It’s a reminder that the dust has yet to settle in the nation’s most developed legal marijuana market – and there will likely be far more consolidation in the years ahead.

In a joint report from the Denver-based Marijuana Policy Group and the University of Colorado Leeds School of Business, researchers combined sales data from the state’s marijuana inventory tracking system (Metrc) with the number of licensed retail businesses in Colorado, allowing them to measure the level of competition and consolidation within the sector.

That measurement – known as the Herfindahl–Hirschman Index (HHI) – is a widely accepted metric used by the U.S. Department of Justice and the Federal Trade Commission to determine the effects of mergers and acquisitions on an industry.

Based on the HHI, markets are generally classified into three types:

  • Unconcentrated (HHI below 1,500)
  • Moderately concentrated (HHI between 1,500 and 2,500)
  • Highly concentrated (HHI above 2,500)

In highly concentrated markets, a handful of companies dominate the landscape, making it very difficult for new players to enter and potentially leading to anticompetitive behavior – like price fixing or collusion.

An unconcentrated market is typically very competitive, populated with many smaller players and no dominant force that would keep a new company from entering the space.

In the aircraft manufacturing business – a highly concentrated sector – just four companies capture 80% of the U.S. market.

By contrast, Colorado’s retail marijuana sector is highly unconcentrated, taking approximately 364 businesses to reach 80% of the market.

Adam Orens, a founding partner of Marijuana Policy Group, believes limitations on out-of-state ownership and investment in Colorado marijuana businesses, as well as legal uncertainty at the federal level, have kept the state’s nascent industry from further consolidation.

But Orens also believes that more investment – and more consolidation – in Colorado’s retail marijuana market is forthcoming amid signs that MJ reform efforts in Washington DC may be gathering momentum.

“More investment comes once you get stronger federal signals,” he said. “I’ve seen over the last year the types of investment, the types of capital coming into the market are getting more and more organized.”

And given how fragmented the market is now, Orens contends that – although not without some negative impacts – consolidation could bring about some positive developments for the consumer.

“What this consolidation does is it brings better products and services at better prices as the larger businesses compete,” he said. “Businesses would also be more compliant and have more professional operations, as they have more riding on it.”

Eli McVey can be reached at [email protected]

4 comments on “Chart: How much consolidation awaits Colorado’s retail marijuana market?
  1. Brett Roper on

    There may be other influencers, one in particular in that out of state investment is highly restricted only allowing those with the necessary residency requirements to invest (small out of state ownership elements via one exception that is very rarely used due to difficulties with the application process as well as control element restrictions), the other being a restriction of no public company ownership which also reduce the competitive landscape and options for capital raise options via the OTC as well as the CSE marketplaces. I would suggest that once these two elements are relaxed this will have a substantial impact on any such index positioning reflective of the present. There will also be a strong likelihood of consolidation as these brands expand their reach nationally as well as internationally, something we are already seeing thru inquiry and licensing of IP and brands outside of Colorado.

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  2. tridehydro on

    Why not just allow ANY business to get a license in Colorado? Do we not have a majority public support for cannabis in Colorado? Waiting for people who believe in the “Free Market” to start complaining about a “lack of access” within the cannabis sector? How many breweries/liquor stores licensed does Colorado have compared to cannabis “dispensaries”? Cannabis is non toxic and LOWERS RISK, which cannot be said of alcohol. (Which is licensed, sanctioned just about everywhere.. Well heres the TRUTH people. The “little guys” would CRUSH the current set of industry big guys IF they had access to a legal market. EXAMPLE, look at the medical market. 50% lower prices, much higher quality product, and all grown by the “small farmer”.. Wonder why the price of concentrates is 10$ per gram in medical, while its 45$ per gram in REC? Answer: GOVERNMENT..

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  3. Norton from downstairs on

    However…
    As Federal regulation will inevitably lessen is some form or another in the years ahead, as will state regulation on who can and cannot invest in Colorado MJ businesses, you will undoubtedly see consolidation begin to occur and, rapidly. What many tend to overlook is that that consolidation usually takes the form of acquisitions. They cost someone (some entity, typically) money. They will want to make that money back somehow, and quickly. It’s NOT likely they will do so by lowering prices. And, as this article deftly points out, the more concentrated the Colorado markets becomes with ever-larger players, the more prone we become to price fixing.

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  4. Stefan Drewes on

    It is so interesting to see the meeting of economic theory and reality.
    Consolidation can only go so far when the product is extremely common,
    so Heinz could buy 80% of tomato farms, but we can still grow our own.
    I may choose to buy Coors beer one weekend and brew my own and go to a neighborhood brewpub. Try modeling that kind of consumer demand.

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