Portal - Metro - California Bay Area
(San Francisco, Santa Clara, and Alameda Counties)

California Bay Area
(San Francisco, Santa Clara, and Alameda Counties)

Regulatory Environment Overview

The Medical Marijuana Safety and Regulation Act (AB 243, AB 266, and SB 643) was signed into law in October 2015 and sets forth the establishment of a formal marijuana dispensary system with regulations regarding dispensary licensing and taxation, medical and commercial cultivation, quality assurance testing, and numerous other industry aspects. The bill also requires local city and county jurisdictions to adopt their own regulations regarding medical marijuana cultivation and sales. Accordingly, San Francisco, Santa Clara, and Alameda Counties are expected to finalize their own set of regulations regarding medical marijuana cultivation, processing, and sale by January 2018.

Official California Medical Marijuana Program ID cards may be issued after an in-person appointment at the patients’ local County Health Department. The San Francisco Department of Public Health charges an application fee of $120, while the same application fee is $103 in Alameda County and $150 in Santa Clara County. These fees are in addition to a $66 fee paid to the State of California. Medi-Cal patients receive a 50% discount on all fees. Proof of residency is required.

San Francisco County

 

San Francisco is the only incorporated city-county in California so there is no variance in medical marijuana regulations at the county and municipal levels. Registered patients are allowed to grow up to 24 plants, or up to 25 square feet of canopy area, with a personal possession limit of eight ounces.

Medical Cannabis Dispensaries (MCDs) are permitted in what the City Planning Department refers to as the “Green Zone”, which is based on the land use restrictions outlined in the 2005 Medical Cannabis Act. The vast majority of these are located in the northeastern section of the city. The following restrictions currently apply to all MCDs in San Francisco:

  • The parcel containing the MCD cannot be located within 1,000 feet from a parcel containing an elementary or secondary school, or a community facility and/or recreation center that primarily serves persons under 18 years of age.
  • The MCD is not located on the same parcel as a facility providing substance abuse services that is licensed or certified by the State of California or funded by the Department of Public Health.
  • No alcohol may be sold or distributed on the premises.
  • If medical cannabis is smoked on the premises, the dispensary shall provide adequate ventilation within the structure such that the doors and windows are not left open for such purposes, resulting in odor emission from the premises.

Additionally, the San Francisco Department of Public Health places extensive operational requirements on all MCDs, including the following:

  • MCDs may only sell or distribute cannabis manufactured and processed in California.
  • MCDS must be closed between the hours of 10 p.m. and 8 a.m.
  • MCDS may not dispense more than one ounce of dried cannabis per patient per visit.
  • MCDs may not maintain more than 99 cannabis plants in up to 100 square feet of total garden canopy measured by the combined vegetative growth area.
  • No medical cannabis shall be smoked, ingested or otherwise consumed in the public right-of-way within 50 feet of a medical cannabis dispensary.
  • Cultivation of medical cannabis on the premises of an MCD must be conducted indoors.

In March 2014, the City Planning Commission voted 6-1 in favor of several changes to the existing MCD location requirements. These included reducing the buffer zone around schools from 1,000 to 600 feet, eliminating the buffer zone around recreational facilities entirely, and allowing MCDs to operate on the second floor of buildings. The buffer zone amendment was passed in July 2016.

As of August 2016, the city was also considering a system to formally legalize, regulate, and tax indoor grow operations.

 

Taxation

 

San Francisco has no specific tax on marijuana. There is an 8.5% sales tax rate in the city, coming from a 7.25% California sales tax and a 1% local sales tax that goes to the general municipal fund, plus a 0.25% sales tax that goes into other funds. This tax applies to all cannabis transactions as well.

 

Law Enforcement and Government Attitudes

 

Former San Francisco County Supervisor Tom Ammiano introduced legislation in August 2006 that directed police to essentially ignore all marijuana crimes except those involving minors, driving under the influence, or the sale of marijuana in public areas. Throughout his political career, Mr. Ammiano has been one of the most consistent supporters of the development of a regulated medical marijuana industry in California.

Law enforcement officials in San Francisco are significantly more tolerant of cannabis use than in other counties in California. In general, police have been more focused on mitigating any negative effects on the community that cannabis use may create, such as cracking down on patients who drive under the influence. For example, during 2014’s “4/20 Celebration” in Golden Gate Park, officers chiefly targeted illegal parking, camping, drug sales, underage drinking and open alcohol containers rather than the thousands of people openly smoking marijuana.

In June 2015, an outdoor food festival called the “Get Baked Sale” showcased cannabis-infused edibles of all varieties in an event open to the general public. Although only individuals with a valid doctor’s recommendation are able to consume such products, the San Francisco Police Department (SFPD) did not have officers at the event checking IDs or stopping people from consuming cannabis in public.

This is reflective of the extent to which local law enforcement has accepted cannabis consumption as long as it is done in compliance with State law and those doing it in public behave themselves. However, the SFPD actively encourages residents to contact police if they suspect that illegal cultivation is taking place in a residential area.

Santa Clara County

The Santa Clara County Board of Supervisors voted unanimously in August 2014 to ban all medical cannabis dispensaries in unincorporated Santa Clara County. Many cities in Santa Clara County have affirmed their bans in light of the passage of the MMRSA, which allows local bans on marijuana cultivation and dispensaries. Most dispensaries are concentrated in and around San Jose.

In June 2014, the San Jose City Council voted to implement a strict, 65-page ordinance that places severe restrictions on all existing cannabis businesses, which many proprietors consider a de facto ban on new businesses. The restrictions include the following:

  • Dispensaries must be located at least 1,000 feet from schools, parks or anywhere children gather.
  • Dispensaries must be located at least 500 feet from drug rehab clinics and at least 150 feet from residential homes.
  • Dispensaries must have 24-hour surveillance and a 24-hour complaint hotline.
  • No collective may distribute medical marijuana at more than one dispensary location.
  • Outdoor cultivation of medical cannabis is prohibited.
  • No cannabis may be consumed on-site or within 300 feet of the premises.
  • Any existing medical marijuana collective, dispensary, operator, establishment, or provider at the time of the effective date of the ordinance is not in compliance with the San José Municipal Code, and must immediately cease operations.
  • Any city official charged with enforcing the provisions of the ordinance may enter any cannabis business at any time during the hours of operation, without notice, and inspect its location, recordings, and records maintained.

Medical marijuana dispensaries are currently banned in the cities of Palo Alto, Mountain View, Sunnyvale, and Cupertino.

 

Taxation

 

In May 2013 the San Jose City Council voted to raise the sales tax on all medical cannabis dispensaries from 7% to 10%.

 

Law Enforcement and Government Attitudes

 

Officials in Santa Clara are less accepting of cannabis, particularly in San Jose. The city has been reluctant to allow medical marijuana businesses to operate and have only done so under a set of regulations that are severely restrictive, limiting their location options to less than 1% of the city. This has been an ongoing source of friction as dispensary owners find it difficult and costly to bring their businesses into compliance. San Jose Mayor Sam Liccardo has shown no signs of relenting in his efforts to immediately close down all dispensaries that are in violation of the new ordinance.

Alameda County

A maximum of three permits are issued to operate a medical marijuana dispensary in unincorporated Alameda County, one in each of three specially designated areas. Such permits are valid for two years, after which time they must be renewed. Each of the three permitted dispensaries must comply with the following guidelines:

  • No cooperative may be closer than 3,000 feet from any other cooperative.
  • No cooperative may be closer than 1,000 feet from any school, public park or playground, drug recovery facility or recreation center.
  • No cooperative shall be located in a residential zone.

Unincorporated Alameda County adheres to California’s official state cultivation guidelines, limiting personal cultivation to six mature or 12 immature plants per patient. While the cities of Alameda, Pleasanton and Hayward have all enacted permanent bans on dispensaries and commercial cultivation, attitudes toward marijuana businesses in other regions are changing. Oakland has removed its cap on the number of marijuana businesses within city limits, and as of July 2016 the Berkeley City Council was considered increasing the number of dispensaries allowed within the city from 4 to 6. Emeryville and San Leandro have also passed ordinances ending bans on medical marijuana businesses.

The City of Berkeley defines a medical cannabis collective as “an affiliation, association, or collective of persons comprised exclusively and entirely of qualified patients and the primary caregivers of those patients, the purpose of which is to collectively provide for or assist in the cultivation and distribution of medical cannabis to its members.” Any collective that cultivates cannabis outdoors may cultivate no more than 10 plants on any single parcel of property. However, there is no specific limit on the amount of cannabis individuals can possess as long as, “said possession is undertaken solely for the personal medical purposes of qualified patients”.

In November of 2010, Berkeley voters passed Measure T to clarify and formalize the municipal regulations governing cannabis collectives. The provisions of the measure included the following:

  • A fourth registered dispensary will be allowed to open. This permit was awarded in May 2016.
  • All dispensaries must be located in commercial districts only, at least 600 feet away from public schools and other dispensaries as per California law.
  • Residential medical cannabis collectives are allowed with a maximum of 200 square feet of cultivation space.
  • Commercial cultivation and edibles development facilities are restricted to six locations in industrial zones only (No such facilities were in operation as of November 2014)
  • The use of pesticides and herbicides is restricted.
  • Free, safe cannabis must be provided to low-income patients at medical marijuana dispensaries.
  • The Berkeley Medical Marijuana Commission is reconstituted as an official city commission rather than an autonomous organization.

As of July 2016, the Berkeley City Council was considering increasing the number of dispensary licenses from 4 to 6.

In Oakland, no qualified patient or caregiver may cultivate more than 32 square feet of medical cannabis, either indoors or on a single parcel of land, without belonging to a cooperative or collective. Collectives or cooperatives may grow up to 216 plants indoors in an area of no more than 96 square feet, or up to 60 plants per parcel of land outdoors. Any cultivation of more than 96 square feet of cannabis is considered industrial cultivation and requires a special permit.

Collective gardens may possess up to three pounds of dried marijuana per patient, with a limit of three patients. Dispensaries serving four or more patients are allowed up to six mature and 12 immature plants, and half a pound per patient. All must operate on a non-profit basis.

The cap on dispensary licenses in Oakland has been removed.  No cannabis may be consumed on dispensary premises and they are prohibited from selling alcohol. Unless expressly authorized by the City Administrator, all Oakland dispensaries must be located in a commercial or industrial zone at least 600 feet from of a public or private school, public library, youth center (serving youth age 18 and under), parks and recreation facilities, residential zone or another dispensary.

 

Taxation

 

The City of Oakland passed Measure V in November 2010 levying a 5% tax on gross receipts at medical marijuana growers, dispensaries, and processing facilities. The additional revenue will go into the City’s General Fund. The City of Berkeley passed a similar tax of 2.5% with Measure S the same month.

 

Law Enforcement and Government Attitudes

 

The Alameda County Council appears fully committed to defending the access to medical marijuana under the terms of California law. In October 2013, the council sent a letter to President Obama to, “end federal interference with the municipal and state laws governing medical marijuana”. They also called for discussion to begin concerning, “the potential benefits of reforming federal laws on marijuana use in all forms, including medicinal and recreational uses.”[1]

[1] http://www.acgov.org/board/bos_calendar/documents/DocsAgendaReg_11_05_13/PAL/CAO_10607.pdf

MARKET DYNAMICS

Growth Rates

 

Due to its small geographical size and restrictions limiting the number of dispensaries, San Francisco is the smallest market of the three counties. The value of the San Francisco market is expected to grow from $67 million in 2016 to $194 million in 2020, a growth rate of 190% and a Compound Annual Growth Rate (CAGR) of 27.71%. This is a lower expected growth than the Central California region, which is forecast to grow 213% (CAGR 30.47%) from 2016 to 2020. This is due to San Francisco already having a well-established market with limited possibilities for additional dispensaries.

Santa Clara and Alameda counties are similarly sized, with the value of the Santa Clara market coming in at $149 million and Alameda at $128 million in 2016. However, Alameda is expected to grow more quickly over the forecast period, by a CAGR of 29% compared with 21.8% for Santa Clara, overtaking the latter to reach sales of $355 million in 2020 compared with Alameda’s $328 million. This is due largely to the recent loosening of some permitting restrictions and the cyclical flow of university students in the Alameda area.

In all three counties, flower is expected to decrease in popularity with edibles and concentrates making up an increasing market share through the forecast period. While the opportunities for opening more dispensaries in the area are limited unless recreational use is legalized, the Bay Area should be a focus for edibles and concentrates manufacturers looking to establish their brands.

2016 Headlines

The biggest story for the San Francisco market is the development and proliferation of technology for legal cannabis. San Francisco is the birthplace of the largely popular cannabis delivery app Eaze. In April 2015 Eaze raised $10 million in funding and as of August 2016 is fully operational in most California cities. The service plans to expand to Colorado in the near future. As the legal cannabis market continues to expand, more comprehensive business solutions will be needed and tech-savvy entrepreneurs in the Bay Area are well equipped and positioned to capitalize on the burgeoning industry’s growing needs.

The biggest story for Santa Clara County has been the continued strict regulations against medical marijuana. In 2014 San Jose approved an ordinance designating new zoning restrictions limiting the area dispensaries could operate in to about 1% of the city. At that time, San Jose had approximately 80 dispensaries but as of August 2016 only 10 remain.

Around the same time San Jose passed its ordinance, the Board of Supervisors for unincorporated Santa Clara County also imposed a prohibition against cultivation. However, in 2015, regulations were changed to allow for limited indoor and outdoor cultivation for patients’ personal use. Large-scale cultivation, such as the kind usually meant to supply dispensaries, remains prohibited.

The biggest story impacting Alameda County has been the easing of numerous restrictions against the medical marijuana industry. In May 2016, the local District Attorney finally dropped its long-standing case against prominent local dispensary, Harborside Health Center.

Regarding the recent passage of the MMRSA, Oakland has updated its local marijuana licensing regulations, removing limits on the number of marijuana businesses that may operate in the city. The Oakland City Council has also adopted the “Equity Permit Program,” in which those previously convicted of marijuana felonies will be favored during the application process for medical marijuana business permits.

Industry Challenges

The biggest challenge for cannabis businesses in the Bay Area are the ordinances that severely restrict or ban the sale and/or cultivation of medical marijuana. Despite gains for the medical marijuana industry in places such as Oakland, Berkeley, Emeryville, and San Leandro, many other local jurisdictions continue to ban all aspects of the medical marijuana industry, limiting market access.

This regulatory environment reduces what could be a significantly larger market (even if recreational use remains illegal) and has allowed those fortunate enough to be granted licenses to become some of the biggest and most sophisticated players in the state. This makes it extremely difficult to find market entry points for new dispensaries. As a result, many smaller scale entrepreneurs have decided to take the risk and open delivery businesses that operate either illegally or in legal gray areas. 

SUPPLY CHAIN

 

Cultivation 

The Bay Area is home to a significant amount of indoor and (to a lesser extent) outdoor marijuana cultivation operations. The exact scale of these operations may depend on local municipal regulations. Currently, only Oakland, San Francisco, and Berkeley allow cultivation beyond the limits outlined in Senate Bill 420, although formal local regulations for cultivation are expected to be determined by January 2018, the time limit set by the MMRSA.

Oakland Municipal Code allows for indoor cultivation of up to 72 plants in a maximum 32 square foot growing area, or outdoor cultivation of up to 20 plants. Collective gardens are limited to three patients and dispensaries serving four or more patients are allowed a maximum of 6 mature or 12 immature plants per patient (the amount stipulated under state law). While large-scale indoor commercial cultivation exists, it is not currently regulated by the city and commercial grow operations occasionally fall victim to shutdowns by federal authorities. Most of the city’s dispensaries, including Harborside Health Center (the nation’s largest dispensary) source their marijuana from indoor grow operations in and around the city, even though outdoor farms operate in rural areas of Alameda County.

In San Francisco, qualified patients are allowed to cultivate up to 24 plants while dispensaries are allowed to cultivate up to 99 plants in a growing area no large than 100 square feet. As a result, a significant portion of the city’s cultivation is conducted by several large dispensaries, many of which sell their harvest to smaller dispensaries. Other city dispensaries source their product from commercial grow operations in Central or Northern California. The vast majority of local cultivation is conducted indoors.

In 2008, Berkeley repealed plant and possession limits on indoor medical marijuana cultivation and limited visible outdoor cultivation to no more than 10 plants. The city also approved large-scale commercial cultivation in certain industrial zones of the city, but as of August 2016 no regulated and licensed commercial grow operations have been successfully established.

Processing

Medical marijuana processing is not regulated by state law so most California processors operate in a legal grey area. Currently, San Francisco is the only city in the state to regulate marijuana edibles, allowing licensed dispensaries to produce infused products for edible consumption. Legal ambiguity aside, many major California edibles and concentrates brands are based in the Bay Area.

The infused chocolate producer Kiva is headquartered in San Francisco and the nationally recognized edibles and concentrates brand Bhang is based in Oakland. Korova Edibles and Auntie Dolores, two other brands whose products are distributed throughout the state, are also based in the Bay Area. Numerous concentrate manufacturers are located in the region such as Absolute Extracts and Guild Extracts.

Dispensary System

Collectively, San Francisco County, Alameda County, and Santa Clara County contain 64 medical dispensaries and 19 delivery services. Considering many municipalities in the area have enacted prohibitions against dispensaries and marijuana cultivation, and licensed dispensaries in the area have faced strong opposition from federal authorities, it is likely the market will see significant growth should the state legalize recreational marijuana or regulations change.  Unsuccessful attempts by Oakland and Berkeley to facilitate the establishment of licensed commercial grow operations highlight strong regional demand for marijuana that is most likely not met by the area’s limited number of licensed dispensaries. 

Quality Assurance

Beginning in 2018, cultivators and processors will be required to submit their marijuana products to licensed distributors, who will then submit the marijuana for quality testing at licensed testing facilities. Statewide testing standards will be determined by the Department of Food and Agriculture as well as the Department of Pesticide Regulation. The cost of testing will fall on cultivators. Demand for lab tested medication and quality assurance labs will continue to grow at impressive rates and represents an excellent investment opportunity. The impending mandate of testing regulations and the prevalence of untested edibles and concentrates in the market also creates demand for lab-tested products, like those produced by well-known manufacturers such as Korova Edibles.

Currently, there are several commercial testing labs in the Bay Area, including: CW Analytical Laboratories in San Francisco, which carries out testing for Kiva, Korova, Bhang, and other notable manufacturers; Steep Hill, an Oakland laboratory associated with Harborside Health Center; and Excelsior Analytical, which conducts testing for clients in the East Bay Area. 

DEMAND FACTORS

Demographics

Due to its location at the heart of the “Silicon Valley”, the headquarters of some of the world´s largest high-tech corporations and employers of thousands of well-paid, brilliant and innovative minds, the region boasts several unique demographic characteristics, including:

High Education Levels:

  • San Francisco County boasts the highest education rate of the three counties, with 54% of its population holding a Bachelor´s degree or higher in 2015, nearly double the state of California´s 28% rate.
  • Santa Clara County has nearly as high an education rate, with 48% of its population holding a Bachelor´s degree or higher.
  • Alameda County’s education rate is also well above the California average, with over 43% of its population holding a Bachelor´s degree or higher.

High Income Levels:

  • Santa Clara County’s mean income of nearly $132,000 is 60% higher than that of California. The county has the second highest median income in the state at $96,264, a staggering $37,000 higher than the median state income.
  • San Francisco County also has a very high mean and median income; at $127,000, San Francisco´s mean income is 55% higher than California´s. The county´s median income is also $24,000 higher than that of the state.
  • While not as impressive as those of its Bay Area neighbors, Alameda County’s income levels are still substantially higher than those of the state. Its mean income is nearly $105,000 and median income is $75,563, each approximately $20,000 above the state numbers.
  • All three of these counties are among the top ten California counties with the highest incomes.

Unique Ethnic Makeup:

The Bay Area has a dramatically different demographic makeup than California and the southern and northern regions studied, with comparatively small Hispanic and very large Asian populations.

  • A third of San Francisco and Santa Clara Counties’ populations are Asian, as is 27% of Alameda’s population. California State’s entire population is only approximately 13% Asian.
  • San Francisco County´s population is 16% Hispanic, Alameda’s 23%, and Santa Clara’s 27%, all substantially lower Hispanic populations than California´s 39%.
  • A third of Santa Clara and Alameda’s populations are white, which is 8% less compared to San Francisco County’s 41% and 5% less than the state’s 38.5% white population.

Small Population of Young Residents:

  • California has a much larger population under the age of 20 than San Francisco does (26% versus San Francisco´s 16%), and the state´s under-20 population is also slightly higher than Alameda’s 23% and Santa Clara’s 25%.
  • Above the age of 20, the three counties age groups look very similar to those of the state. In fact, the numbers come within a margin of roughly 2% of each other in each category.

Demographic Influences on Demand

The income and education levels in this region have been distorted by Silicon Valley´s tremendous economic success and global recruitment of many very intelligent innovators, engineers and entrepreneurs – making the Bay Area´s profile atypically marijuana-friendly for a region with these demographic characteristics.

On average, those with a family income above the $75,000 range or holding a Bachelor´s degree (or higher) are much less likely to use marijuana than those who fall into lower income ranges or who have less formal education. However, in the case of wealthy and educated San Francisco, Santa Clara and Alameda Counties, marijuana use appears to not only be accepted, but abundant. According to Mark Johnson, the CEO of San Francisco-based tech company Zite, marijuana use is “extremely common” among tech workers in Silicon Valley. Bloomberg´s Businessweek also quoted Johnson as saying he “sees good days ahead” for the marijuana industry.[1]

In terms of ethnicity, nationally Asian people are the race least likely to use marijuana at moderate or frequent levels and Hispanic people are much less likely to support marijuana than white or black people (according to NSDUH 2014 data). However, when considering the Bay Area´s ethnic composition it is important to remember this is a unique region known for its youthful culture and tolerant values. In this atypical social and economic environment it appears the regular rules do not apply. The Asian and Hispanic populations in the region may be non-traditional and given the innovative and unconventional context they live in, are likely more pro-marijuana than their counterparts outside the Bay Area.

Though these demographic groups may not appear to fit the typical profiles of medical marijuana users, and if San Francisco County’s tendencies are indicative of those of the entire Bay Area, residents show great demand for medical marijuana and this number can only be expected to grow if recreational marijuana is legalized in the state.

San Francisco County has had the greatest number of medical marijuana card registrants in the state since 2005 with over 21,000 cards issued. During the same time period, the entire state of California has issued a total of approximately 80,000 cards. While this is certainly not representative of the total number of medical marijuana users in the county as access requires only a medical recommendation and not necessarily a medical marijuana card, it is indicative of the interest in medical cannabis in the county.

Other Bay Area counties such as Santa Clara and Alameda do not have as high a demand for medical cards. This is likely a result of their local governments’ discouragement of medical marijuana and establishment of strict regulations, ordinances and even bans on dispensaries. This has driven residents of these counties to seek medical marijuana outside their jurisdiction when it is not available locally. This is a well-documented phenomenon that may be distorting the true figures for medical marijuana demand originating from these counties.

Political Influences

According to Forbes, the Silicon Valley-San Francisco corridor has become one of the most liberal regions in the country. The leading tech companies based in the area send over four-fifths of their contributions to Democratic candidates. In 2012, Democratic candidate Barack Obama won the presidential election by 49 percentage points in the Bay Area, more than double his 22-point margin throughout California.

Because Democrats are much more likely to support marijuana decriminalization and legalization than Republicans and given its far-left leaning political climate, the Bay Area is more likely to vote pro-marijuana as well as socially accept the substance. This creates an environment that is extremely conducive to marijuana market growth.

The map to the left documents how California counties voted on Proposition 215 to legalize medical marijuana, furthering confirming the Bay Area residents’ widespread support for marijuana. Although this vote took place nearly 20 years ago, the map is indicative of where general backing of the measure and medical marijuana is concentrated in the state.

Despite popular support of medical marijuana, local governments have been relatively restrictive toward dispensaries in San Francisco County, and have likewise established severe restrictions and even outright bans within Santa Clara and Alameda Counties.

San Francisco County has been the most marijuana-friendly of the three Bay Area counties, but after federal crackdowns and lingering uncertainty around zoning ordinances, many dispensaries have been forced into more suburban parts of the county (or out of it altogether).

In September, 2014, a Santa Clara ban on cannabis clubs in unincorporated parts of the county went into effect. Similar laws have been passed in cities within the county, such as Gilroy, Los Gatos, Milpitas, Morgan Hill and Sunnyvale. Likewise, San Jose’s new rules limit collectives to approximately 1% of the city and require all products to be grown and manufactured on-site. However, a proposed initiative spearheaded by a group called Sensible San Jose seeks to overturn the bulk of regulations enacted by city leaders.

Similar to Santa Clara, much of Alameda County has banned medical marijuana dispensaries. Patients, as a result, are now commuting long distances to find dispensaries, calling up unlicensed mobile dispensaries they find on WeedMaps and Craigslist, or growing their own marijuana.

While popular support for marijuana appears to be prevalent in the region, prohibitive local zoning laws and regulations in the three Bay Area counties are not dispensary-friendly. Because restrictions make it difficult (or impossible) for medical marijuana patients to purchase their medication within their own counties, they travel elsewhere to access it or go without. The restrictions placed on dispensaries and the Bay Area political climate is encouraging patients to seek marijuana in counties where it is permitted and accessible. Thus, the highest Bay Area demand for medical marijuana is likely continue to come from San Francisco County (versus Alameda and Santa Clara) because it offers the most politically and socially friendly environment.

[1] http://www.bloomberg.com/bw/articles/2013-02-28/silicon-valley-is-high-on-innovation-dot-and-pot

COMPETITIVE ENVIRONMENT

 

Major Players - Dispensaries

The Bay Area features some of the most well-established and highest-grossing dispensaries in the state, including the nation’s largest dispensary, Harborside Health Center, and the nation’s oldest dispensary, Berkley Patient’s Collective. In general, relatively liberal municipal regulations regarding medical marijuana have led to a more stable and developed dispensary scene when compared to other California regions, though substantial opposition from the local US District Attorney’s office continues to pose an obstacle to the continued growth.  Nevertheless, due to an amicable political environment and generally favorable public attitude toward the use of marijuana, the region continues to demonstrate potential for continued development.

Harborside Health Center, founded in 2006 by noted medical marijuana advocate Steve DeAngelo, has locations in both Oakland and San Jose that gross a combined revenue of approximately $30 million a year. Harborside is also an active contributor to advocacy efforts and has successfully warded off numerous attempts at forced closure by federal authorities.

Berkeley Patients Group is the oldest continuous operating medical dispensary in the United States, currently in its fifteenth year of operation. A landmark of the Berkeley community, the dispensary has a history of philanthropic contribution to local schools and community improvement projects. The dispensary also has historically reserved a small percentage of its stock for distribution to low-income patients free of charge and offers a range of non-medicinal “life-enhancing services” such as massage and support groups.

In addition to Harborside Health Center and Berkeley Patients Group, the Bay Area is home to numerous other fully licensed, well-established and highly reviewed dispensaries. Barbary Coast in San Francisco is noted for its distinguished interior design and Elemental Wellness in San Jose is a four-time winner at the High Times US Cannabis Cup.

Major Players - Edibles and Concentrates

The Bay Area edibles and concentrates markets are comprised of a wide variety of both brand name and unbranded products, therefore no single brand dominates a significant share of the market. Major in-state and out-of-state brands are stocked next to locally manufactured brands in dispensaries across the region. Currently, the top edible brands by market share in the Bay Area include Kiva, Korova, Bhang, Cheeba Chews, and Trikom Treats. However, the portion of the market occupied by unbranded edible products presents a sizeable opportunity for further expansion of brand name products into the region.

Although all but a small portion of the Bay Area concentrates market is comprised of unbranded products, name brand concentrates can be usually found at most of the region’s dispensaries. Brand names found throughout the region include Pop Naturals, Guild Extracts, and Absolute Extracts. It is expected brand name products will continue to grow in popularity as demand for lab-tested concentrates increases.

Local Brands

The Bay Area is home to several of the state’s major edible manufacturers including Kiva, Korova, and Bhang, which are the region’s top three edible brands by market share respectively.  Nevertheless, many smaller manufacturers such as Auntie Dolores and On the Rise Edibles are also based in the area and serve dispensaries throughout Central and Northern California.

GROWTH POTENTIAL

 

Outlook

Despite the relative maturity of the medical market in the Bay Area, strong growth is expected during the forecast period with CAGRs ranging from 21.8% in Santa Clara to 29% in Alameda, with San Francisco at 30.5%. Of course, should recreational marijuana be legalized in November 2016 and recreational shops open in 2018, there will be massive market potential for the region. If recreational use is legalized, sales for the three counties combined set to exceed $879 million by the third year of operation (2020).

In each of the three counties, flower will remain a strong product category but is expected to lose market share throughout the forecast period, falling from nearly 2/3 of the market to approximately 1/3 of the market in each county. The dollar value of flower sales is expected to increase as the overall market increases with CAGRs ranging from 9.38% for Santa Clara County to 16% for Alameda over the forecast period. If recreational markets come online in 2018, flower will remain important as users migrate from the black market to the legal market, but edibles and concentrates will grow quickly.

For San Francisco and Santa Clara, edibles will be the fastest growing segment of the industry with market share increasing to 38.5% and 34.1% respectively by 2020. The popularity of edibles among new, occasional and older users are helping to drive popularity for the category in these regions, as well as the strong presence of well-established and well respected brands such as Kiva and Korova.

Concentrates will see impressive growth in each county thanks to the prevalence of younger consumers living in the county and the relatively undeveloped nature of the market in 2015. Sales are expected to grow by a CAGR of 46% for Alameda County, 48% for San Francisco and 35% for Santa Clara County.

While products such as topicals and tinctures are expected to remain small in each county, they will grow quite rapidly and by the end of the forecast period should become highly lucrative industries. Market shares are expected to reach around 2% (4% in San Francisco) for each county and sales will surpass $1 million in all three counties in 2016 and will reach from between nearly $6-9 million in sales for 2020.

Opportunities

New products should fare relatively well in the San Francisco market given the anticipated increase in market share for edibles, concentrates, and “others” (topical/pills/tinctures/etc.), all of which cater to new product offerings. This provides opportunities for brands to enter and gain traction in these markets. However, because San Francisco is the only city in the state to regulate marijuana edibles, many major California edibles and concentrates brands are headquartered there creating more competition.

Infused chocolate producer Kiva is headquartered in San Francisco while nationally recognized edibles and concentrates brand Bhang is based in Oakland. Korova Edibles and Auntie Dolores, two brands whose products are distributed throughout the state, are also based in the Bay Area. Numerous concentrate manufacturers are also located in the region such as Absolute Extracts and Stagecoach Extracts. Because these companies already have a strong presence in San Francisco it could be a more difficult market for new products to enter than other areas of California.

However, despite the somewhat increased competition, the industry’s most promising opportunities in the market are for the development of branded products. Rapid expected growth in edibles, concentrates, and “others” (even if recreational use isn’t legalized) means there is ample room for new players, particularly in the underdeveloped concentrates market in which few major brands exist.

There are also opportunities for new quality assurance laboratories as patients continue to push for more laboratory-tested medicines and products. It is likely laboratory-tested products will become an industry standard (if not a legal requirement).

Entrepreneurs wishing to enter the Santa Clara market who are unable to obtain one of the very limited permits should consider a delivery service. In the past year alone, San Jose has closed 75% of the city’s dispensaries. The county is also home to many colleges and universities including Stanford, Santa Clara University, and San Jose State University. Decreased legal access coupled with a steady population of college students presents ample opportunity for new market entrants, especially those who can offer quality products at competitive prices.

While Alameda County is a huge market for medical marijuana it presents many challenges for entrepreneurs. Many municipalities in the area ban dispensaries entirely or severely restrict the number permitted, making it difficult to find market entry points for new dispensaries. However, Oakland’s removal of caps on the number of medical marijuana businesses should ease market entry for new firms.

The city of Berkeley has approved large-scale commercial cultivation in designated industrial zones of the city, but to date no commercial grow operations have been successfully established. This presents an opportunity for risk-taking, ambitious entrepreneurs to set up large-scale indoor cultivation operations. These could be a source of product for many of the area’s dispensaries, including nearby Harborside Health Center (the nation’s largest dispensary).

Located in Oakland, Harborside Health Center largely procures their marijuana from indoor grow operations in and around Oakland. However, because large-scale indoor commercial cultivation is not currently regulated in Oakland, operations occasionally fall victim to shutdowns by federal authorities. Any commercial cultivation operation able to become a trusted and preferred vendor to well-known Bay Area dispensaries could likely expand into other California markets. It is possible Berkeley’s local regulations could deter federal government involvement, thereby allowing large-scale commercial growers to operate hassle free.

Threats

The biggest threat to the Bay Area is the limited opportunities due to local restrictions and the serious on-going drought in the state of California. The state of California has been dealing with a drought over the past four years and as it worsens it threatens the supply of outdoor cultivated cannabis.

The cannabis plant requires significant amounts of water each day and as the state’s water supply is stretched thinner and thinner, access to abundant water supply for cannabis crops decreases. As outdoor growers utilize already stressed local waterways (creeks, streams, lakes) this draws the attention of state fish and wildlife agencies and increases the chances of law enforcement involvement. 

In Alameda and Santa Clara, bans and increasingly strict restrictions on the cultivation/sale of medical marijuana may pose a threat to many cannabis businesses in the area. With the passage of the MMRSA in 2015, many jurisdictions that don’t already have local regulations have been quick to propose their own. Many of the proposed ordinances seek to ban or restrict cultivation/sales so the threat to the growth of legal markets remains strong.

Moving Forward

Regulatory Environment

The San Francisco market is regulated based on zoning restrictions and although some of the restrictions were loosened in 2014, those changes have not yet been implemented and there are no indications the zoning restrictions will change in the short term. Recreational legalization would put more pressure on the city to allow dispensaries over a larger area, but it is impossible to estimate what the timeline for such changes would be.

Regulatory changes in Santa Clara County have moved both ways in recent years. For example, in 2014 San Jose approved tougher zoning restrictions that reduced the number of operating dispensaries in the city. More recently, the Board of Supervisors for unincorporated Santa Clara County introduced a new ordinance to allow for indoor cultivation and limited outdoor cultivation. As California moves toward a more uniform set of statewide regulations it remains to be seen what changes, if any, the jurisdictions of Santa Clara County will implement.

In Alameda County there are many areas where dispensaries are prohibited and in areas where dispensaries are allowed to operate, the market is heavily regulated based on zoning restrictions. In recent years there has been a slight loosening of the restrictions in several municipalities such as Emeryville and San Leandro, but there are no indications the zoning restrictions will be addressed again in the short term. Recreational legalization, as well as the impending deadline on regulations set by the MMRSA, would put more pressure on cities and municipalities to allow dispensaries over a larger area, but it is impossible to determine the exact effect recreational legalization would have or how quickly changes would be implemented.

Supply

Currently supply for the Bay Area is sufficient but could be stressed in the future due to the worsening drought and the growing water use restrictions. In San Francisco and Alameda Counties this is not a significant issue at this time because most crops are grown indoors. Some areas in Santa Clara County are beginning to relax their restrictions on cultivation which should have a positive impact on supply.

With regards to the black market, lack of access to legal marijuana keeps the black market share higher than it would be otherwise. Therefore, recreational legalization would almost certainly lead to an increase in production and supply as some black market growers would likely enter the legal supply chain.

Demand

Based on analysis of the National Survey on Drug Use and Health (NSDUH) from the Substance Abuse and Mental Health Services Administration (SAMHSA), the already high prevalence of marijuana consumption is on the rise in the Bay Area, leading to an overall increase in demand of 10-20% over the forecast period. If recreational use is legalized, the increase in demand will certainly be much higher.

The Bay Area is known for its liberal attitudes and tolerant views on marijuana use. While Santa Clara County has usage rates similar to those of the state overall, Alameda is almost 20% higher and San Francisco is almost 80% higher than the state. The area also has a unique demographic makeup that both influences and is influenced by broader cultural attitudes. This leaves San Francisco, Oakland and Berkeley as an area with residents, businesses, and government leaders more accepting of cannabis use.

The prevalence of cannabis use amongst older residents is also much higher in this area, and as Baby Boomers enter retirement and develop more conditions treated by medical marijuana, they are quite likely to look to cannabis for medical treatment. Furthermore, the abundance of college students in the Bay Area and young people living mostly in Alameda and Santa Clara counties (the cost of living in San Francisco makes it prohibitive for many young people) will also contribute to a steady demand over the forecast period.

Tourism is an important element of San Francisco's economy. If recreational use is legalized, cannabis tourism could have a significant impact on sales in the legal markets depending on how the legislation is formulated.

Competition

Changes in competition in the medical markets for the Bay Area will depend largely on the changes in regulations ahead of the MMRSA deadline on regulations set for January 2018. If the jurisdictions within Santa Clara or Alameda Counties move to loosen their restrictions in anticipation of possible recreational legalization in 2016, it would allow for more competition. However, if the jurisdictions move to lock in bans or restrictive policies, the limited legal access would benefit existing dispensaries and the black market.

The development of large-scale commercial cultivation in Berkeley could create a more competitive environment for large indoor grow operations located primarily in Oakland, as well as outdoor operations in the more remote areas of the county. This could certainly help to stabilize or decrease prices as well as incentivize more product diversification.

If recreational use is legalized, most in the nationwide industry will likely look to enter the California market, thus creating strong competition. Established medical dispensaries, manufacturers and grow operations will fight for preference above new entrants into the market, many of whom will undoubtedly include some of the bigger players from other states as well as entrepreneurs with substantial financial backing. While this isn’t likely to occur in the near term, those who wait too long might find entry points a challenge as the market matures and dominant players develop very quickly (some cultivators are already attempting to differentiate their products or create niche markets such as organically grown cannabis).

Competition is expected to grow among edibles, concentrates, and topicals companies as more patients begin using these products because they are perceived as healthier, less conspicuous, or more convenient when compared to smoking flower. Companies targeting the more health conscious consumer are expected to perform quite well in the Bay Area (which is known for its fondness for organics, gluten free and/or all natural products). Similarly, companies who build their brand around ecological sustainability are likely to build a loyal following in the Bay Area, where composting is the norm and plastic bags have been banned for nearly a decade.

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