Portal - State - Central California

Central California

Regulatory Environment Overview

Medical or Recreational Legal Since Requires Cards Accepts other States Cards Fee Dispensary System
Medical 1996 No No $66/$33 Yes; Nonprofit

Cannabis Legalization

Proposition 215 (Prop 215) was approved by 55.6% of California voters in 1996, legalizing medical marijuana in the state. It was the nation's first medical marijuana law.

Senate Bill 420 (SB 420) went into effect in January 2004. It expands on Prop 215 by allowing patients to form medical cultivation “collectives” or “cooperatives”. It also established a voluntary state ID card system administered by county health departments as well as guidelines on how much patients can possess and cultivate.

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. 

Legal Consumption

In order to buy medical marijuana legally, eligible patients must present a "written or oral recommendation" from their physician confirming a diagnosis of one or more of the following conditions: arthritis, Cachexia, cancer, chronic pain, HIV/AIDS, epilepsy, migraines, or Multiple Sclerosis. Physicians may also recommend medical marijuana for other illnesses. Patients under 18 must have parental consent.

Although the state issues medical marijuana identification cards, registration is not mandatory for compliance. Patients and caregivers can obtain state ID cards at their county health department, with the exception of Sutter County and Colusa County. The state Medical Marijuana Identification Card (MMIC) application fee is currently $66.00 per card or $33.00 per card for Medi-Cal patients. Each county then adds an administration fee to the state cost. Out-of-state cards are not accepted.

Prop 215 applies to anyone with a recommendation from a California physician, regardless of whether they’re a resident. However, most California physicians and dispensaries refuse to serve out-of-staters.

Possession Regulations

Under current state law, patients and caregivers may possess up to eight ounces of usable marijuana (or more if recommended by a doctor), and cultivate up to six mature or 12 immature marijuana plants. They may not distribute or sell marijuana to others.

However, SB 420 authorizes patient "cooperatives" or "collectives" to grow, distribute and sell medical marijuana on a non-profit basis to their members.

The MMRSA allows individual jurisdictions to establish their own regulations regarding cultivation by cooperatives, collectives, and dispensaries. Jurisdictions that fail to establish local regulations by January 2018 must ascribe to a new set of state regulations to be established by January 1, 2018.

Regulatory Authority

In October 2015, the California state government enacted the California Medical Marijuana Regulation and Safety Act (MMRSA), introducing the first comprehensive regulatory framework for the California medical marijuana market.  The legislation establishes the Bureau of Medical Marijuana Regulation (BMMR), which will fall under the Department of Consumer Affairs.  While the BMMR will oversee the statewide medical marijuana industry, MMRSA allows county and city governments the authority to further regulate, tax, or even ban medical marijuana businesses within their own jurisdictions.  In order to begin operations, license holders will be required to meet not only all state requirements but also all local regulations.  The new legislation also involves existing agencies in the rule-making process: cultivators will be licensed and regulated by the California Department of Food and Agriculture, while cultivation operations will also require the additional oversight of the Department of Fish and Wildlife and the State Water Resources Control Board.  Finally, the new bill stipulates that existing state agencies establish regulations for various aspects of the industry, such as product tracking, testing standards, labeling, and dispensary security.

Industry Regulation by Region 

Central California's counties have widely banned the cultivation and sale of marijuana, and have been much more successful than Southern Californian counties at controlling the number of illegal dispensaries that have been allowed to operate.

Alameda County

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, while 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.

Contra Costa County

In May 2014, San Pablo passed an ordinance banning all cultivation. In January 2016, Antioch and Oakley enacted bans on marijuana cultivation, following the passage of the MMRSA in October.

Fresno County

In January 2014, Fresno County voted to ban all medical marijuana cultivation in unincorporated areas of Fresno County. Violations are considered misdemeanor crimes.  In June 2016, Coalinga voted to allow marijuana dispensaries and cultivation, and announced plans to sell the city’s defunct prison, Claremont Custody Center, to processor Ocean Grown Extracts in an effort to revive the local economy.

Kings County

A ban on outdoor medical marijuana cultivation and marijuana dispensaries was enacted by Kings County in November 2011. In January 2016, the county moved to ban mobile dispensaries and delivery services.

San Francisco

The City and County of San Francisco permit and regulate dispensaries. However, under the city of San Francisco’s 2005 Medical Cannabis Act, strict zoning rules on where marijuana outlets are prohibited mean as much as 95% of the city is off-limits to dispensaries (according to the Planning Department). As of August 2016, the city was considering a system to formally legalize, regulate, and tax indoor grow operations. 

San Joaquin County

In April 2015, the San Joaquin County Board of Supervisors unanimously approved the introduction of an ordinance banning all cultivation of medical marijuana. Fines of $500 per day for violations and a misdemeanor charge were set for violations.

Santa Clara County

San Jose is the only municipality in Santa Clara County that hasn't succeeded in banning marijuana shops outright, but a June 2014 ordinance imposes strict new rules on medical marijuana businesses within the city - so strict in fact, some have called the move a de facto ban. Most 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.

Santa Cruz County

In March 2015, Santa Cruz County supervisors passed an ordinance allowing 100 square feet of medical marijuana cultivation on any parcel in unincorporated areas of Santa Cruz. The ordinance bans outdoor cultivation in some areas of the county. However, Santa Cruz does permit dispensaries and has one of the most thriving medical marijuana markets in the nation. In August 2016, the county launched an online registry and licensing system for cultivators in an effort to regulate local marijuana cultivation ahead of possible legalization in November 2016.

Tulare County

As of March 2015, a Tulare County ordinance prohibiting medical marijuana collectives, cooperatives and dispensaries established two years ago will remain in effect. In January 2016, the city of Tulare banned commercial cultivation, transportation, and the sale of medical marijuana.  Similar bans were enacted in Woodlake and Lindsay in February.

Dispensary System

The 2008 guidelines for medical marijuana enforcement issued by the California Attorney General´s office, as per interpretation of SB 420 and Prop 215, note that storefront "dispensaries" are not explicitly recognized by state law. However, a "properly organized collective or cooperative" may legally dispense medical marijuana through a storefront, provided it complies with certain conditions and does not operate for a profit.

These guidelines are set to change as various state agencies begin to craft industry regulation following the passage of the MMRSA.  AB 266, one of three bills that make up the MMRSA, allows for-profit medical dispensaries to obtain licenses from the state.  The bill also allows licensed delivery services to operate in jurisdictions that have not banned the commercial sales of marijuana.  The bill also requires that marijuana sold in dispensaries be tested and tracked.  Currently, no regulations regarding a maximum number of state licensed dispensaries have been defined, although under AB 266 local jurisdictions retain the authority to limit dispensary activity if they so desire.  Dispensaries will pay taxes to the state government, and may also be required to pay state and local taxes. Formal licensing of marijuana businesses by the state is set to begin in January 2018.

Under the MMRSA, dispensaries must obtain both a state and local license to operate legally. Originally, the MMRSA had given local jurisdictions until March 1, 2016, to draft local regulations regarding medical marijuana cultivation and sales. Jurisdictions failing to meet this deadline would be required to follow state licensing regulations. However, following emergency legislation (AB 21) signed into law in January 2016, the March 1, 2016 deadline was extended until January 1, 2018.

Dispensary Restrictions

Bill AB2650 (2010) prohibits medical marijuana collectives from operating within 600 feet of a school. This regulation, continued under the MMRSA, applies to all activities carried out by dispensaries or other providers that have storefront locations or mobile outlets and requires them to have a business license. The bill grandfathers in dispensaries that are currently allowed to operate under existing local regulations. Dispensaries must abide by local zoning ordinances and local governments are legally authorized to ban them.

The MMRSA also sets up strict regulations for marijuana license applicants regarding their criminal history.  The state may deny licenses to felons if they determine past offenses are “substantially related” to the qualifications, functions, or duties of the type of business for which they are applying.  Those with a history of violating local ordinances or laws may also face the denial of their application.

Vertical Integration

The MMRSA establishes 17 different kinds of medical marijuana licenses, and prohibits vertical integration by disallowing multiple licenses with the exception of several specific combinations involving separate types of cultivation licenses.  Vertical integration will only be permitted for businesses registered with the Board of Equalization in cities or counties where vertical integration was required prior to July 1, 2015. This exception was set to expire on January 1, 2026, but following the passage of AB 1 in January 2016, will instead by reviewed by the BMMR in 2025.

Consumer Taxes (at state level or local level)

Currently, there is a 7.5% state sales tax, although local taxes vary by region. District tax rates range from 0.1% to 2.0% per district. In some areas, there is more than one district tax in effect while in others there is none.  Under the MMRSA, local governments will retain the authority to tax marijuana businesses on top of the state sales tax.

Business Taxes (levied on dispensary owners, manufacturers, etc.)

Dispensaries must pay sales tax on products sold, which is regulated through California State Seller Permits. Many cities and counties require additional permits, such as a business license and/or zoning permits, at varying costs.  New MMRSA regulation calls for the creation of licensed marijuana distributors to facilitate the flow of marijuana through the supply chain and to prevent tax diversion or evasion.

Market Dynamics

2015 2016 2017 Forecast 2020 Forecast
Total Medical Marijuana Sales $453,398,850 $488,700,769 $520,177,196 $465,036,502
Sales Growth 0.07 0.077 0.064 -1.23% (2016-2020 CAGR)
Avg. Price/Ounce $340 $340 $290 $300
Total Recreational Marijuana Sales 0 0 0 $1,085,423,067
Sales Growth n/a
Avg. Price/Ounce 0 0 0 $345

Note: The growth rates and projected sales numbers in this report have been determined under the assumption recreational adult use will be legalized in 2016 with the recreational use market opening in 2018.

2016 Growth Drivers

Growth in 2016 came from steady development in the medical market, estimated at 7.8%. Edibles and concentrates grew slowly in terms of market share but both categories experienced better than total market gains, with edibles increasing 26% to over $97 million and concentrates increasing more than 18.5% to over $102 million.

Topical products (creams, lotions, etc.), THC pills, tinctures (liquid cannabis extracts) and other infused products are growing in popularity among both medical and recreational marijuana users across the nation. However, all these products combined made up less market share (1.68%) than any of the three primary cannabis categories (flower, edibles and concentrates) and represented just under $8.2 million in sales.

Flower remained the single dominant product category both in terms of market share and dollar value of sales with just over $281 million, although this amount is a decline from 2014 sales of $306 million.  On the other hand, edibles and concentrates are expected to continue making slow and steady gains in market share and both will continue their trend of outgrowing the market overall. However, despite a relative decline in sales, flower is expected to continue as the leading product category both in terms of market share and in terms of dollar value of sales through the end of 2019, after which it will be overtaken by edibles.

2016 Headlines

The biggest story for the marijuana market in California for 2016 is the state-wide legalization of recreational use passed in the November election. The Adult Use of Marijuana Act (AUMA), also known as Proposition 64, decriminalizes the possession and recreational cultivation of marijuana statewide. The act establishes 17 different types of marijuana business licenses to mirror the medical licenses proposed in the MMRSA, and, in addition to local sales taxes, would levy a 15% excise tax on recreational sales. Taxes on commercial cultivation would also be levied: $9.25 per ounce of dried flowers, and $2.75 per ounce of dried leaves.

The AUMA is also one of the first legalization initiatives to lay out specific guidelines for advertisements, barring packaging and advertisements aimed at children but also potentially allowing broadcast advertisements as long as three-quarters of the viewing audience are adults. However, such advertisements are not likely to be aired given current federal regulations against marijuana.

This was preceded by the MMRSA, set to begin January 2018, bringing much-needed regulation to one of the largest medical marijuana markets in the country. The establishment of “robust regulations” like those in place in Washington and Colorado will likely result in fewer interventions from the federal Department of Justice and other federal authorities against local marijuana businesses. Although many of the specific details of the new regulatory regime have yet to be determined by the relevant state agencies, it is expected that new licensing may result in significant financial burden on existing marijuana businesses. However, allowance for licensing of for-profit marijuana dispensaries may present new business opportunities for current dispensary owners. Overall, MMRSA and the introduction of comprehensive regulation is expected to transform the industry throughout California.

The MMRSA stipulates marijuana businesses receive a local license in addition to a state license in order to operate legally. Local jurisdictions are required to establish their own licensing and regulation systems or be forced to abide by state licensing regulations. Accordingly, numerous cities and counties have recently moved either to restrict local marijuana cultivation and dispensaries or draft licensing systems for marijuana businesses. The deadline for the establishment of local regulations was originally March 1, 2016, but following fears local jurisdictions would be inclined to simply ban medical marijuana rather than invest in developing regulations, the deadline was postponed until January 2018.

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 individuals who, within the last ten (10) years, have been previously incarcerated for a marijuana-related offense as a result of a conviction arising out of Oakland, California will be favored during the application process for medical marijuana business permits. Federal authories have finally dropped the case against Oakland dispensary Harborside Health Center, paving the way for Oakland one of the leading cities in the state’s medical marijuana industry.

Category Performance

Flower

Flower is the dominant product category in Central California's market, comprising a 57% market share in 2016. However, flower's market share is expected to decline through the forecast period (2016 to 2020) due to product innovation in the edible and concentrate market segments that cater to consumer preferences for healthier, less conspicuous, or more convenient products, leading to increased market shares. The dollar value of flower sales is expected to increase from $281 million to $545 million between 2016 and 2020, comprising an increase of over 94% (and an estimated Compound Annual Growth Rate of 18.04% over the forecast period).

Edibles

Edibles are expected to perform exceptionally, with market share increasing to 29% by 2020. This growth will stem from the variety of products within this product category that cater to different consumer tastes and consumption preferences. Much of the growth of this market segment will be fueled by consumers who prefer eating or drinking to smoking. Growth in the edibles market looks even more impressive when viewed in dollar value terms, with an increase from just over $97 million in 2016 to $446 million in 2020, a growth rate of 359%.  The category is expected to exhibit and estimated CAGR of 46% over the forecast period.

Concentrates

Concentrates are expected to perform almost as well as edibles with their market share forecasted to grow to 33% by 2020. In dollar value terms, concentrates will see strong growth moving from $102 million in 2016 to $506 million by 2020, a total growth of over 396% (and an estimated CAGR of 49% over the forecast period). Growth will be fueled by many factors, including a proliferation of concentrate products manufactured to contain only CBD, the medicinally beneficial compounds that are often preferred by users in the medical market. Potency, convenience, and the odorless vapor of many concentrates will also be very important factors making them an attractive alternative to traditional flower.

Other

Topical products, THC pills, tinctures, etc. combined represent the smallest “category” of cannabis products with their market share forecasted to grow to 3.35% by 2020. In dollar value terms, these products are expected to see strong growth and increase from $8.2 million in 2016 to just under $52 million by 2020, a total growth of nearly 532% (and an estimated CAGR of 58.5% over the forecast period).

Unit Price Performance

Production influence on unit prices

The legal medical market maintained growth over 2016 by gradually pulling sales from the black market. Black market sales, however, are still quite prevalent in Central California. As legal production increases, an abundance of demand mitigates price drops that would be normally anticipated from an increase in supply, thereby keeping prices relatively constant.

Tax policy influence on unit prices

The tax regime is not particularly burdensome, with a 7.5% state sales tax and local taxes varying by region. Tax rates for districts range from 0.1% to 2.0% per district. Some districts impose more than one such tax while others refrain from local taxation entirely. Higher tax districts might tax sales by 10%, which is significant, but this upward pressure on unit prices is relieved by the non-profit nature of dispensaries. Many dispensary operators try to keep prices modest to ease the financial burden for patients with medical necessity.

Industry Challenges

Federal tax law prohibits dispensaries from deducting many common business expenses and the uncertainty surrounding the legality of banks doing business with dispensaries create significant pain points for the legal marijuana industry. Operating an all-cash business generates safety concerns and the unavailability of traditional business financing strains a company's bottom line and limits expansion potential.

Furthermore, the lack of clear industry regulations has left many dispensaries and delivery services operating in a legal gray area with the risk of being shut down by either city or federal officials.  The recent passage of MMRSA will provide clear regulatory guidelines that should bring a measure of relief for the state’s many businesses currently operating in a legal gray area.

Another issue is the constant adjustment to new competition that pops up in their area after being shut down in another. These constant changes and uncertainties make it exceptionally difficult to run a legitimate business. However, the advent of the MMRSA’s licensing system in 2018 will likely stabilize the market in this regard.

Supply Chain

Cultivation

Number and size of grow operations

California utilizes a model of “collectives” and “cooperatives” which insures the statewide cultivation industry will be largely characterized by smaller operations. However, there are numerous large operations that dominate the Central California market and produce enough to serve other areas in and outside of California. These operations are so large they are often reluctant to supply smaller local dispensaries and delivery services and prefer to service only large volume purchasers. 

There is no tracking system in place and therefore no official records of the number of grow operations.  However, the MMRSA calls for the establishment of a state tracking system, the specifics of which will be determined by an independent state agency.  Depending on the length of the rule-making process, a tracking system is expected to be in place by early 2018.

Regulations on grow operations

There is no statewide standard for regulation of marijuana cultivators. Grow operations are regulated by local government and regulations vary by city and county.  However, beginning in 2018, all state cultivators will be required to possess state licenses and will also be subject to guidelines regarding location and the number of plants under cultivation.  Growers will also be subject to rules regarding pesticides determined by the California Department of Pesticide Regulation. 

Medical marijuana patients and their primary caregivers may cultivate up to six mature marijuana plants or 12 immature marijuana plants. Members of collectives or cooperatives may also cultivate marijuana to give (or sell “at cost”) to their members, limited to the number of plants listed above per member. However, several cities and counties prohibit collective growing for more than two or three patients, or have banned cultivation altogether.  New growing regulations developed under MMRSA will not apply to qualifying patients engaged in personal cultivation provided the cultivation area does not exceed 100 square feet and the patient does not sell or otherwise distribute to any other person.  Designated primary caregivers are also exempt, provided their grow operation does not exceed 500 square feet, they only provide to up to 5 qualifying patients, and do not receive any remuneration for their services. 

Adequacy of supply

In recent years there has been an increase in illegal cannabis cultivation operations throughout the Central Valley region, particularly in Shasta (Northern California), Fresno (Central California) and Tulare (Central California). This coupled with Central California’s proximity to “The Emerald Triangle” (Mendocino County, Humboldt County, and Trinity County) guarantees the region produces enough marijuana to far exceed local demand, and also exports to others parts of California as well as illegally across state lines.

Central California experiences a glut of product during the outdoor harvest season, which significantly affects the legal medicinal market as a large amount of cheap “sun grown” product is sold through illicit channels in lieu of the legal medicinal marketplace. Dispensaries in the area can see a drop in flower sales as high as 40% during this time.

Annual changes

Marijuana production in Central California will continue to exceed local demand for the foreseeable future. Although, with a potential increase in operational dispensaries following the establishment of a medical and recreational licensing systems in 2018, legal demand may rise to meet supply. Legal markets in Oregon and Washington may also continue to draw on excess supply from Northern California, albeit through illicit channels.

Processing

Number of processing facilities

There is no tracking system in place and therefore no official record of the number of processing operations. A clearer picture of the processing market is expected once processor licenses established under MMRSA are distributed.

Regulations on processing

Like vendors who dispense flowers to storefront collectives, makers of edibles, salves, tinctures, and other concentrates must be patients themselves and a member of any collective with which they share their product. Specific regulations regarding processing of concentrates, edibles, and other infused products are expected to be finalized by early 2018.

Annual changes

While the total number of processing facilities is unknown, the growing popularity of edibles and concentrates indicates a high rate of year over year growth and suggests this trend will continue in the coming years.  The establishment of a commercial licensing system will likely encourage the expansion of existing process and lead to a certain degree of market consolidation.

Size of operations

While the total number of processing facilities is unknown, the Central California processing market appears to be made up predominantly of smaller, independent operations throughout the region. However, there are several larger companies who account for a large portion of the market share. The top five edibles manufacturers, for example, companies account for roughly 12% and the top ten companies account for 18%.  Some of these companies do their own processing, while others rely on third parties or even white label companies to process their products.

Major players

There are several large edibles manufacturers in the area. One of the largest is Korova Edibles, which focuses primarily on infused baked goods such as cookies and brownies. The state's leader in infused drinks, House of Jane (Jane’s Brew brand) focuses on gourmet coffees, teas, hot chocolates, creamers, sweeteners and medi-mixes. The leading edibles brand in Central California is Kiva Confections, an Oakland based company that focuses primarily on infused chocolate products. Auntie Dolores is another Bay Area favorite, as the Oakland based company offers edibles in gluten-free, sugar-free and even paleo friendly varieties. Popular concentrates companies include Brite Labs, and Elephant Extracts.

Distribution

Per SB 420, authorized patient "cooperatives" or "collectives" distribute medical marijuana on a non-profit basis to their members. Designated primary caregivers who attend to their patients' needs charge for their labor and services in providing marijuana. Under the MMRSA, medical dispensaries will be allowed to operate under a for-profit basis, selling to all patients with a valid state medical card.

Producer-Dispensary Relationship

Under the MMRSA, 17 different types of marijuana business licenses will be established, including licenses for cultivators, processors, distributors, and even transporters.  All cultivation and manufacturing licensees will be required to send their products to a licensed distributor for quality insurance and inspection before passing them on to the next stage of manufacturing or retailing.  Distributors must then submit received product to licensed testing labs for quality testing and certification.  Distributors charge producers and cultivators a fee that covers testing plus applicable taxes.  Only licensed transporters may carry cannabis between licensees, although it is not yet clear whether existing producers or distributors will be allowed to carry their own transport licenses, or whether the license will create an independent category of transportation services. 

Regulation

While overall regulation falls under the authority of the new Bureau of Medical Marijuana Regulation and several other state agencies including the Department of Food and Agriculture and the Department of Public Health, the MMRSA allows local governments to establish their own licensing and regulation systems on top of existing state regulations.  Individual counties will also retain the right to levy additional taxes against marijuana business operating within their jurisdictions. Local jurisdictions must implement regulations by January 1, 2018, or be forced to abide by state regulations instead.

Quality Assurance

Number of QA operations

At time of this publication there were at least 15 known testing facilities in the state of California, with 5 of them operating in the Central California region.   The number of testing facilities is expected to increase with the establishment of statewide quality standards and mandatory testing.

State QA requirements

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.

Major players

As is the case in all the states with some degree of legalized marijuana use, state laboratory chains have not yet developed. However, multi-state chains are starting to become a reality. The most notable example of this is Steep Hill, a testing lab native to California and owned by Harborside Health Founder Steve DeAngelo. The company now has labs in California, Colorado, Washington and Nevada.

The laboratories operating in the Central California area are CW Analytical Laboratories, SC Laboratories, Green Style Consulting (DBA Green Style Analytics), Excelsior Analytical Lab, and of course Steep Hill.

Retail Environment

Dispensary systems

California has the most mature dispensary system in the country, which has been in place since 1996. However, the number of dispensaries statewide is unknown and fluctuates year by year due to the lack of a statewide tracking and a regulatory system that empowers local municipalities to create and enforce their own regulations. This environment creates a large degree of uncertainty for the dispensary operators as regulations governing their operation can change during each election cycle. Numerous local jurisdictions are set to implement concrete regulations regarding marijuana dispensaries in 2016 and 2017 in accordance with the MMRSA, adding an extra element of uncertainty to the industry until 2018.

Lounges

Lounges and clubs are present in this market. However, the law on this is vague so they operate in a legal gray area. The restrictions placed on lounges vary as they are put in place by local governments. If passed, the AUMA would prohibit marijuana consumption in any public place except licensed dispensaries where allowed by local law.

Number and size of operations

As of August 2016, the number of medical dispensaries operating statewide was estimated to be 1,061, with 163 of those dispensaries located in Central California.  The Central California dispensary system is characterized predominately by independent stores and delivery services, with several of the larger shops dominating the marketplace. The most notable of these is Harborside Health, which is one of only a small number of “chain stores” operating with more than one location. With a lack of both a legalized recreational adult use market and a for-profit business model, consolidation is unlikely to occur in the short term.

Demand Factors

Category (for Central California) For Calendar Year 2016
Total Population                                                             5,743,889
Estimated medical marijuana patients                                                                105,121

Demographic Influences on Demand

University Students

According to the Institute for College Access & Success, California had the greatest number of university students enrolled of any U.S. state for the 2012-2013 school year. The state has several large, influential public universities such as the 10 campuses of the University of California (UC) system, which include more than 238,000 students throughout California. Likewise, the 23 campuses of the California State University system have 460,200 students enrolled as of fall 2014. California also has a tremendous private school presence, with renowned schools such as the California Institute of Technology (CalTech), Chapman University and University of Southern California (USC) in the south, as well as Stanford University in central California. These and dozens more provide university educations for over 2.7 million California students.

California State University has a system-wide, zero-tolerance policy for marijuana use of any kind with no accommodations and no exceptions. The atmosphere at the University of California is slightly more relaxed with administrators who may be willing to "accommodate" students in serious need of medication. While the University of California "would never implement a policy going against a federal law," a UC student desiring to use medical marijuana might find him or herself "accommodated," Jerlena Griffin-Desta, director of student services for the UC System told SF Weekly. As for the student wishing to medicate discretely using edibles, sprays, or tinctures, Griffin-Desta says "we don't monitor what students eat anyway.” In the private sphere, many universities (including those less dependent on federal grants than public universities) are nonetheless maintaining campus codes of conduct in line with federal law as well.

Despite their official stances, in reality California universities from north to south appear to be marijuana friendly.  In Central California, Stanford University has decided to leave its policy vague with a code of conduct that leaves it unclear which sanctions apply to which drug and alcohol infractions.

Based on the sheer number of college students in the state and the unofficial (but clear) willingness of California´s universities to allow marijuana use to go relatively unpunished on-campus, the university student market is large and stands to grow significantly now that recreational marijuana has will be legalized.

Senior Citizens

While California is a relatively young state with a median age of 35 and only 14.7% of the population 65 or older, due to its size the state has more than 5.7 million elderly residents.  This number will surely grow as the baby boomer generation continues to age.

According to an article by The Atlantic, medical marijuana usage is on the rise amongst seniors in California. Ailments ranging from chemotherapy side effects, arthritis, glaucoma, chronic pain and even malnutrition are being treated with cannabis. As education and awareness of the medicinal benefits of marijuana increases, more and more seniors are realizing medicinal marijuana offers a promising alternative to the dangerous side effects and growing dependency of multiple prescription medications.

The article by The Atlantic indicates the fastest growing population in the U.S. also comprises a significant portion of medical marijuana users, amounting to as much as 50 percent, according to Kris Hermes of Americans for Safe Access. But as many of these baby boomers move into assisted living facilities, questions arise on the use of medical marijuana behind their doors. Muddied by its illegal status at the federal level, social stigma, and often hesitant attitudes of administrators, medical marijuana presents a list of challenges for seniors and the people who care for them. Thus, in a state that enacted the first medical marijuana voter initiative in the U.S., the group that stands to perhaps benefit the most from medical marijuana has the hardest time gaining access to it.

Regardless of the challenges presented within assisted living facilities, the size of the aging baby boomer generation and the possibility they make up roughly half of the market for marijuana in California should make this a strong target market for medical marijuana.

Prevalence of Conditions

HIV and AIDS rates in California are very high at 362.7 and 229.6 per 100,000 people, respectively. As of 2014 Southern California’s Los Angeles, San Diego, Orange, San Bernardino, and Riverside counties constituted five of the top ten counties in the state that were hardest hit by both HIV and AIDS. Most of the other top ten counties, including San Francisco and Alameda, were in Central California. Furthermore, California ranked first among the 50 states in the number of HIV diagnoses in 2011.

California is the state with the highest number of cancer patients at roughly 1.34 million. However, this makes up only 3.46% of the population which is less than the national average. The state also has a large presence of Alzheimer´s with approximately 580,000 cases among residents 65 or older. Also, over 300,000 Californians have been diagnosed with Glaucoma.

California also has a very high prevalence of HIV and AIDS. In the top ten counties alone, approximately 200,000 people are suffering from these conditions. However, with the help of modern medicine their life expectancy has increased considerably.

Thus, the market for medical marijuana to treat these (and other conditions) is robust and is expected to continue to grow.

Patient Recomendations

While it is best to consult a primary care physician for medical marijuana recommendations in California, many physicians are hesitant or unwilling to do so for fear of federal prosecution. This is despite the fact that California’s law protects physicians from federal prosecution for recommending cannabis.

Medical marijuana clinics are widespread throughout the state. However, California NORML’s Guide to Medical Marijuana Physicians warns of bogus clinics. Some go as far as selling “cultivation licenses” that purportedly permit the patient to grow more than the allowed quantity of marijuana plants. For these reasons patients must be cautious of inexpensive or on-the-fly venues when choosing a medical clinic in California.

Political Influences

Both of California’s U.S. senators, as well as the majority of its congressional representatives are Democrats. Democrats also hold strong majorities in both the Assembly and Senate of the California State Legislature and President Obama won 61 percent of the statewide vote in 2008 and 60 percent in 2012.

Although they vote solidly Democratic, Californians (including non-voters) hold important elements of conservative beliefs in most parts of the state. On an ideological scale ranging from strong conservative to strong liberal, public opinion data shows the average Californian falling in the middle and leaning slightly conservative. In fact, growth in Democratic support over time has not been uniform across the state but has had a strong geographic dimension. It is common to say that a north-south divide (with the north voting Democratic and the south voting Republican) has been replaced with an east-west, or coastal-inland divide (with the densely populated coast voting Democratic and inland voting Republican).

This political makeup largely influences the local government regulation of the medical marijuana industry, leading some counties to vehemently disagree with marijuana´s legalization and others to welcome it wholeheartedly. Although California is expected to legalize recreational marijuana based on its progressive nature as a state, its ideological division between counties will undoubtedly influence the regulation and implementation of that legislation at the local level.

Competitive Environment

 

Companies – Small vs. Large

While much of region’s dispensary market is characterized by smaller, independent operations, Central California is home to some of the largest and most sophisticated dispensaries in the country. The most notable example of this is Harborside Health, which is generally considered to be the first large-scale, professional cannabis dispensary in the country. Harborside has two locations (Oakland and San Jose) and sales of over $30 million per year.

Due to a large number of medical patients and local restrictions on the number of dispensaries in the Bay Area, the average sales and the average number of patients per outlet is more than double what is being seen in Southern California’s highly fragmented market. Therefore, while there are few major chains of the sort that are seen in Colorado, many dispensaries in Central California have more polished stores, a wider product selection and a market for more gourmet products.

Investment Flow into the Supply Chain

Investment is starting to enter the Central California cannabis industry, though firms continue to be highly strategic about where it goes. One notable example is the $10 million raised by Eaze, a company that offers an on-demand cannabis delivery app. This massive investment is not surprising considering the importance of delivery services in California, especially as the product connects patients with distributors without touching the cannabis itself. This allows investors to avoid breaking federal law. As of August 2016, Eaze was serving medical marijuana customers statewide.

This trend is being seen time and again in the cannabis industry – while interest in investment is high, no one wants to risk federal prosecution. As a result, outside investment is targeted at businesses whose model does not actually touch the product.

Another major investment has been the establishment of Gateway Incubator, a business incubator for the marijuana industry, by Gateway LLC in Oakland. The project has significant backing from MJIC, a major marijuana investment group, and as of May 2016 has attracted additional investment from Crescent Cove Capital, a California investment firms with ties to Silicon Valley. Given Oakland has lifted the current limits on the number of marijuana businesses located within city boundaries, the city is likely to become a major hub of local industry.

Much of the investment in the industry is coming from self-funded entrepreneurs, or those working with a small but growing number of cannabis venture capital firms. A significant source of expansion and investment from Central California comes from Steve DeAngelo, the owner of Harborside Health. Mr. DeAngelo is also responsible for Steep Hill testing laboratories, which began in Oakland and has since expanded to Washington, Colorado and Nevada. He is also the president of The Arc View Group cannabis investor network.

Vertical Integration

Under the MMRSA, vertical integration will be prohibited in a majority of cases. New regulations establish 17 different kinds of medical marijuana licenses, and prohibit vertical integration by disallowing multiple licenses with the exception of several specific combinations involving separate types of cultivation licenses.  For example, holders of a 10A retail license, which allows up to three dispensaries, may also hold a type 1 or type 2 small cultivation license, provided total area under cultivation does not exceed 4 acres.  Vertical integration will also only be permitted for businesses registered with the Board of Equalization in cities or counties where vertical integration was required prior to July 1, 2015. This exception will be reviewed for renewal by the state in 2025.

Branding

While products sold to patients are increasingly branded, the market for edibles is quite fragmented. No brand captures more than 4% of the total market, and the ten largest companies account for less than 18% of the total. As in other parts of California, favored brands include Kiva Confections, Bhang and Cheeba Chews, as well as Korova’s chocolate bars and Auntie Dolores’ edibles (which cater to vegan, diabetic, gluten-free and even paleo consumers).

Dispensary owners must currently work directly with each edibles company for distribution.  However, beginning in 2018, retailers will work with licensed distributors to procure marijuana products.  This will likely simplify the procurement process and expand the variety of branded products available to consumers, and essentially eliminate the unbranded, homemade products that had previously been commonly found throughout the state. 

Popular Brands

The Central California edibles market includes three large brand-name manufacturers who control a significant part of the market: Kiva Confections, Korova and Cheeba Chews. Together these three brands make up more than 20% of the total edibles market in the region.

Kiva Confections is a California based edibles company that specializes in high quality infused chocolate bars and small, fruit flavored chocolate bites. Kiva is extremely selective on where they source their cocoa beans, and considers the premium quality of their chocolate to be a top selling point for the company. Kiva has won several awards at statewide marijuana edibles competitions and accounts for 8.47% of total edibles sales in the region.

Korova is a native California edibles producer that specializes in cookies, brownies, and popcorn.  The company was established 2011 and runs frequent sample promotions at many dispensaries across the state. A popular product is the infamous Korova Black Bar, a dark chocolate bar that contains 1000mg of THC. Other products as well are known for their strong potency - one standard Korova serving contains 50mg of THC. Korovat is the third largest brand in Central California and accounts for 3.58% of total edibles sales as of September 2016.

Originating in Colorado, Cheeba Chews is one of the oldest and most widespread edibles brands in the country. Specializing in chocolate taffy with products separated by flavor and strain (Indica, Sativa, Hybrid, or CBD), the company claims to be stocked in over 550 dispensaries nationwide. One of its main selling points is an emphasis on consistent quality and the THC content of their products when compared with smaller competitors. Given their small size, Cheeba Chews are seen as a very discreet way to consume marijuana. Cheeba Chews is the largest edibles brand in the region with a 6.89% market share.

Consumer Marketing

Producers and processors in Central California mainly utilize online methods for marketing, whether through individual company websites that feature product descriptions and user testimonials, or through social media sites such as Instagram or Twitter. Further advertising is done at the point of sale in some dispensaries in the region.

Growth Potential

Outlook

Central California’s market is estimated to grow 217% over the forecast period (CAGR 33.4%) from $488 million in 2016 to $1.55 billion in 2020.

Flower will still be the dominant product category but is expected to decline through the forecast period from a market share of 57.5% in 2016 to 31.78% by 2020. The dollar value of flower sales is expected to increase from $281 million to $545 million between 2016 and 2020, with total growth of nearly 94% (and an estimated CAGR of 18.04% over the forecast period).

Edibles and concentrates are expected to be the fastest growing segments of the industry with edibles market share increasing to 29% by 2020. The dollar value of edibles sales is expected to increase from nearly $97 million in 2016 to $446 million in 2020, with total growth of 359% (and an estimated CAGR of 46% over the forecast period).

The market share of concentrates is expected to increase to 33% by 2020 with the dollar value of sales estimated to increase from $102 million in 2016 to $506 million in 2020, with total growth of 396% (and a CAGR of 49% over the forecast period).

The market share of Topical products, THC pills, tinctures, etc. is expected to increase to 3.35% by 2020 with the dollar value of sales estimated to increase from just under $8.2 million in 2016 to just under $52 million in 2020, with total growth of 532% (and a CAGR of 58.5% over the forecast period).

Perhaps the biggest weakness of Central California's market is the number of county and local ordinances that severely restrict or ban the sale and/or cultivation of medical marijuana. This regulatory environment reduces what could be a significantly bigger market even if recreational use was still prohibited.

Opportunities

 

While Central California is a huge market for medical marijuana it presents many challenges for entrepreneurs. Most counties in the region either ban dispensaries entirely, or severely restrict the number allowed. This has allowed those with the coveted licenses in areas like San Francisco, Berkeley, and Oakland to become some of the largest and most sophisticated players in the state. This makes it extremely difficult to find market entry points for new dispensaries, though there are certainly some opportunities in some of the mid-sized cities (such as Santa Cruz) where the market is more fragmented. Many smaller scale entrepreneurs have been able to develop successful delivery operations.  The establishment of new statewide regulations may also incline cities with current limits on dispensaries such as Oakland and Berkeley to enlarge or even do away with such limits, creating new opportunities for investors.

New products should fare well given the anticipated increase in market share for edibles and concentrates, both of which cater to new product offerings. Edibles and concentrates are expected to grow by a CAGR of 46.4% and 49.2% respectively, between 2016 and 2020. This provides opportunities for brands to enter and gain traction in these markets. Products seen as healthier, less conspicuous, or more convenient are expected to perform particularly well.

The most promising opportunities in the market are for the development of branded concentrates, edibles, or even flower, all made possible by the new licensing regime and industry regulations established by the MMRSA.  Due to rapid expected growth in edibles and concentrates (even if recreational use fails to be legalized) there is room for new players to make their mark, particularly in the underdeveloped concentrates market in which few major brands exist.  Although new rules and regulations may hurt the performance of a number of small, unregulated processors and dispensaries, the MMRSA is generally expected to facilitate the continued growth of infused product makers by encouraging outside investment and providing market stability.

There are also opportunities for new quality assurance laboratories in both Northern and Central California, as the MMRSA stipulates testing for all marijuana products produced and sold throughout the state.  Given the large number of dispensaries expected to be licensed under the MMRSA, demand for testing facilities is expected to increase dramatically.

Threats

The biggest threat to Central California is the limited market opportunities due to county or municipal prohibitions.   The MMRSA grants these local governments to uphold regulations against marijuana businesses and will do little to expand market access in these areas.  Even though recreational use passed in November, many cities and counties may fight to keep such bans in place. Business owners who operate in legal areas will certainly be able to draw customers from those areas where it remains illegal, but a more likely outcome is that the black market will remain strong in the region.

The MMRSA could also spell the end for a large number of existing, unregulated dispensaries that have been delinquent on tax payments, are unable to relocate out of zones where dispensaries are not permitted, or that cannot afford licensing fees.   Dispensaries that primarily relied on products grown or made in-house could also face hardship due to the new law’s regulations against vertical integration. 

Evolution of the Industry

Regulatory Environment

Much of the Central California region is heavily regulated with many localities outright banning medical marijuana dispensaries. There are no indications this situation will change in the short term, especially since new statewide regulations explicitly allow local governments to continue restrictions against marijuana businesses.  Recreational legalization would put more pressure on these localities to allow dispensaries, but it is anticipated they will be given the choice of whether or not to allow cultivation and sales within their jurisdictions.

Supply

The strength of the black market suggests that supply in Central California is not a significant issue, although a lack of access to legal marijuana keeps the black market share higher than it would otherwise be. Recreational legalization may lead to an increase in production, and the resulting decline of the black market may incentivize growers to find markets for their product outside of Central California.

Demand

Based on the National Survey on Drug Use and Health (NSDUH) from the Substance Abuse and Mental Health Services Administration (SAMHSA), it is estimated that California’s total volume demanded will increase more than 25% over the period 2014-2019. The legal markets will absorb roughly 55% with the black market meeting the remaining 45%. If local jurisdictions that now prohibit marijuana sales either decide or are forced to allow them, this would allow the legal market to meet an even greater percentage of demand.  

Likewise, tourism is a huge part of California's economy. Depending on how legislation is formulated now that recreational use is legalized, cannabis tourism could have a significant impact on sales in the legal markets.

Competition

Competition will intensify as the legal markets continue to expand. Recreational use will create competition among established grow operations and those attempting to enter the market, especially from large out-of-state investors and established brand names from states such as Washington and Colorado. Many cultivators are expected to differentiate their products or create niche markets such as organically grown cannabis, for example. Similar competition is expected to develop among edibles and concentrates companies as these segments grow.

Likewise, as more local jurisdictions allow marijuana sales there will be greater opportunity for established retailers and producers to expand, as well as new ones to enter the market. More product diversification is expected to continue with more niche segments developing, such as sugar-free or gluten-free edibles for the health-conscious consumer.

As the market for legal marijuana develops in other states around the country, several strong brands of edibles and concentrates are expected to emerge – many of which will see the California recreational market as the prime target for their operations.  Major brands from Colorado and Washington are already exploring investment into the California market that will likely be facilitated by the continued development of a comprehensive regulatory system.

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