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Denver

Regulatory Environment Overview

Medical marijuana has been legal in Colorado since 2001, after Ballot 40 was passed in 2000 decriminalizing the possession, use and cultivation by registered medical patients. Retail (recreational) marijuana was legalized for individuals 21 and over after voters approved Amendment 64 in November 2012, which went into effect on January 1, 2014.

Different municipalities in Colorado have different marijuana sale and consumption laws. In Denver, the following restrictions apply to both retail and medical cannabis:

  • Individuals 21 and over may possess up to one ounce of retail marijuana at a time.
  • Residents of Colorado may purchase up to one ounce of marijuana per transaction.
  • Non-residents 21 and over may purchase up to ¼ ounce of retail marijuana per transaction.
  • Marijuana may not be consumed openly or publicly, including on public transportation.
  • Marijuana may not be consumes in or around a licensed retail store, bars, restaurants, or common areas in buildings.
  • Cannabis clubs and “coffee shops” are not permitted.
  • Marijuana cannot be consumed in a motor vehicle, and driving under the influence of marijuana may be punishable by a DUI offense. The allowable limit of THC in the bloodstream while driving is 5 nanograms per milliliter.
  • Marijuana may not be consumed, used, displayed, transferred, distributed, sold or grown in any park, recreational facility, or within 1,000 feet of a public or private elementary, middle, junior high or high school, or on the 16th Street Mall (including any city street or sidewalk one block in either direction from the mall).
  • The possession, use, display and transfer of marijuana is prohibited at Denver International Airport.
  • Retail marijuana consumption in any outdoor location is illegal on residential private property unless the person is the property owner or lessee or has been granted express or implied permission by the property owner or lessee.
  • Marijuana consumption is illegal in any private non-residential property if it is clearly visible from a public place.

Possession and consumption laws are the same for flower, edibles, and concentrates products.

Licenses for retail marijuana stores, manufacturing facilities, cultivation facilities, and testing labs, as well as medical marijuana centers, cultivation facilities and manufacturing facilities all require licensing by the State of Colorado as well as the City of Denver. Medical facilities can convert to a retail license or add a retail license to their existing medical marijuana license. A retail marijuana store may only sell products from licensed cultivation or manufacturing facilities, and may not sell alcohol, tobacco, or unrelated food products.

In Denver, all cannabis retail stores must close by 7:00pm.

Taxation

Both recreational and medical marijuana are subject to a 2.9% sales tax in the State of Colorado. Recreational marijuana is also subject to an additional 10% state marijuana tax. An additional excise tax of 15% is levied on recreational marijuana at the first point of exchange, from the cultivator to the retailer.

In addition, all medical marijuana and medical marijuana products sold in Denver are subject to a municipal sales tax of 3.65%. All retail marijuana and retail marijuana products are subject to the same tax of 3.65% as well as a “special” sales tax of 3.5%, for a combined rate of 7.15%. The 7.15% applies regardless of the form in which the retail marijuana is sold.

Law Enforcement and Government Attitudes

The Denver Police Department has been more focused on advocating responsible consumption than arresting marijuana users. This was particularly evident during the “4/20” celebrations during the weekend of April 20, 2015, when they issued a now famous tweet about the festivities. The message implied support of legal cannabis, but also cautioned partygoers to “consume responsibly”.

However, police have not hesitated to act swiftly when individuals cross the line into illegal behavior demonstrating a strong commitment to enforcing the regulations currently in place. In April 2016, Denver law enforcement carried out a series of 30 raids against illicit grow operations within city limits, arresting 40 people. In cracking down on black market activities, Denver authorities provide an example of what cannabis law enforcement might look like in the future, choosing to work within the framework set by Colorado’s marijuana legalization measures.

The Denver City Council has demonstrated a similar attitude and has been both supportive and cautious in their approach to developing the industry. Some council members have expressed an interest in a further liberalization of existing cannabis laws, including extending the allowable hours of operation for city dispensaries. However, they are fully committed to adhering to the provisions established in Amendment 64.

MARKET DYNAMICS

Growth Rates

Denver, like all markets in Colorado, experienced explosive market growth after the legalization of recreational marijuana in 2014. However, Denver had slightly smaller growth compared to the state overall with sales in the statewide legal marijuana market increasing by 82% in 2014, while sales in Denver increased by 79% during the same year. This slight gap in growth is most likely due to larger proportions of recreational and out-of-state users in tourist areas such as Aspen and in markets closer to state borders, as well as competition from neighboring counties in the Denver metro area. Nevertheless, sales in Denver County accounted for approximately 23% of statewide recreational sales and 40% of statewide medical sales in 2016, although these numbers are expected to fall by 1% to 2% annually as market growth continues in other parts of the state.

Denver’s legal marijuana markets are expected to exhibit steady growth into the near future, even if the region’s growth rate is slightly lower than the statewide growth rate. Recreational sales in Denver are expected to pass $239 million in 2016, and will likely surpass $310 million in 2020. An important driver of rapid growth in the recreational market for Denver will be a continued influx of consumers from regions outside of Denver, including a substantial number of tourists from out-of-state.

Medical marijuana sales are expected to pass $178 million in 2016, and will likely increase by several million each year reaching just under $188 million in 2020.

2016 Headlines

The biggest story impacting the Denver market for 2016 is the continued development and consolidation of the recreational market in Denver, with all of its new business opportunities and continued legal difficulties.

In early September 2016, a campaign to allow businesses such as bars to permit public cannabis use on their property has officially made the November 2016 ballet. The initiative, called the Neighborhood-Supported Cannabis Consumption Pilot Program, has the support so far of at least 50 businesses in the city. The bill would allow business to establish marijuana consumption areas on their premises, although consumers would have to bring their own marijuana. Allowing public use would be a boon for the recreational market, as one of the current limitations to marijuana tourism is the fact recreational users from out of town have no place to consume marijuana legally.

Denver cannabis companies are seeking out more innovative forms of marketing. In May 2016, the Denver-based concentrates company O.penVAPE announced it had submitted a proposal to purchase the naming rights to the former Sports Authority Field at Mile High, home of the Denver Broncos football team. The renaming proposal is the second by a cannabis company, following a submission by dispensary chain Native Roots in April. The success of either submission would increase the visibility of the marijuana industry in the eyes of the general public.

Industry Challenges

Denver cannabis businesses still face formidable legal and financial challenges to expansion. Perhaps the most difficult challenge is the lack of financial services available to business that cultivate, process, or sell marijuana. Under federal law, cannabis is still classified as a controlled substance and since federal banking regulations prohibit banks from accepting deposits linked to drug activity, cannabis businesses are effectively forced to conduct all business in cash. This aspect of the Denver market occasionally leads to employee theft, tax invasion, and increased risk of robbery.

The Fourth Corner Credit Union, located in Denver, recently sought to become the first credit union in the country to serve marijuana businesses. However, the Federal Reserve denied the credit union’s application for a master account, demonstrating continued federal opposition to legal marijuana. Likewise, IRS taxation guidelines pose another challenge. Under section 280E of the federal tax code, the IRS classifies cannabis businesses as drug traffickers and forbids them listing business expenses as tax deductions, creating a significant financial burden.

Another challenge to cannabis businesses is the current prohibition against public use in bars, nightclubs, and other venues, depriving marijuana tourists and other non-residents of a social setting in which to consume marijuana. Although Denver municipal code does not prohibit marijuana consumption in private marijuana clubs, local law enforcement has been known to carry out raids against such clubs. The passage of an initiative allowing onsite marijuana consumption in November would be a boon to local cannabis tourism.

SUPPLY CHAIN

Cultivation

Denver is the largest market for marijuana in Colorado and is home to approximately 600 licensed grow operations. The state of Colorado allows medical dispensaries to cultivate marijuana under a separate type of license that permits cultivation on dispensary premises or by a designated grower. Regulations allow both indoor and outdoor cultivation as long as the plants are kept in a fully secured area.

Currently, most retail cultivation license holders in the city are growers transitioning from the medical and black markets who grow indoors. Indoor cultivation is advantageous for Denver dispensaries and processors as it provides a nearby, year-round source of marijuana that can be grown out of public sight. Some of the larger grow operations in the city are run by large dispensaries such as Medicine Man and Native Roots.

Processing

Currently, there are 54 recreational and 115 medical marijuana processing facilities in Denver. The city is home to a multitude of major marijuana manufacturers who operate some of the largest processing facilities in the country.

Dixie Elixirs & Edibles, one of the biggest marijuana processors in Colorado, maintains its 30,000 square foot headquarters in Denver where it both grows marijuana and produces a wide variety of infused products. Medically Correct LLC, which produces the popular edibles brand Incredibles is also based in Denver. Other major processors located in Denver include Blue Kudu (which also grows its own marijuana) Sweet Grass Kitchen, Edipure, Native Roots Extracts, Evolab, and Mahatma Extreme Concentrates.

Dispensary System

There are currently 214 medical dispensaries and 159 recreational stores located in Denver. Since the establishment of the dispensary system in 2010, the number of operating dispensaries has consistently increased year by year.

Growth is expected to continue, though slowing as the market matures, throughout the forecast period. Most dispensaries in Denver are small, independent operations, but the past year has seen the development of large chains in response to strong consumer demands. Trends toward growth and consolidation of the market are expected to continue as the recreational industry matures.

Quality Assurance

Lab testing has been mandatory for all recreational marijuana products sold in Colorado since October 2014. Currently, there are 12 commercial testing facilities operating in Denver, many of which were established in the past year. One of the city’s oldest testing facilities is CMT Laboratories, founded in 2011. Other notable facilities include CannLabs Inc., whose StrainData platform provides certified testing data to the Amercanex Cannabis Exchange, and Steep Hill, the laboratory chain founded by Harborside Health Center owner Steve DeAngelo. Many Denver marijuana labs also provide hemp testing services as well.

DEMAND FACTORS

Demographics

In terms of ethnicity, the county of Denver and state of Colorado have quite different makeups. Denver is just over 50% white, whereas Colorado is nearly 70% white. Also, Denver is over 30% Hispanic, while Colorado is only 23% Hispanic and Denver has a 9% black population, versus Colorado’s 4% black population.

Denver has higher education levels than the state of Colorado as a whole, with 46% of its residents holding Bachelor’s degrees or higher, versus Colorado’s 39%.

Median household income in Denver ($53,536) is approximately $10,000 lower than in the state, at $63,475, though mean income levels in the state and county are similarly high. This may indicate greater income inequality in Denver than statewide.

Denver has a relatively young population, with a larger proportion between the ages of 25 and 45 than the state has, particularly in the 30-35 year-old age category which makes up 11% of Denver’s population. Colorado has a larger proportion of its population under the age of 25, and over the age of 50, than does Denver. Marijuana use in all age groups in Colorado has exceeded the national average during the past year, according to a new report by Smart Approaches to Marijuana (SAM).

Demographic Influences on Demand

With regard to race, Denver’s slightly larger Hispanic demographic may have a slight negative influence on the marijuana market and its growth trajectory in the county due to the ideologically conservative nature of the Hispanic community, the majority of which does not believe marijuana should be legal. The differences in Denver’s white and black population should not influence the demand for marijuana in the county, as these and most other races tend to use and purchase marijuana at similar rates.

The greater education levels in Denver may also correspond with lower demand for marijuana, as college graduates are less likely to use marijuana than those with little or no college education. Those holding advanced degrees account for only 17% of marijuana use, even though they make up about 29% of the adult population. On the other hand, the average age of medical marijuana patients in Colorado is 42, and given that Denver has a large younger population between 25 and 45, this may indicate a higher demand for medical marijuana in Denver than on average in the state.

However, Colorado has a larger proportion of its population under 25 than does Denver, and this tends to be the demographic most likely to use marijuana (both recreational and medicinal). Marijuana use among residents ages 25 and under is extremely high in the state, which ranks third nationally in terms of percentage of people having used marijuana in the past month. According to data released by the National Survey on Drug Use and Health, Colorado also leads the nation in reported marijuana use in the last month among those 12 and over, with over 21% reporting recent marijuana use.

Conversely, Denver’s lower median household income and greater inequality versus the state (which indicates more low-income and high-income residents and a smaller middle-class) may signify greater demand for marijuana in the county, as low-income residents are much more likely to use moderately or heavily when compared to those with greater incomes.

Political Influences

Denver County voted overwhelmingly in support of Amendment 64 legalizing marijuana in 2012, with 66% supporting the measure and 34% opposed, whereas the amendment received support from only 55% of the voters statewide. Because Democrats are much more likely to support marijuana decriminalization and legalization than Republicans are, this lines up with regional and state-level voting propensities as well. Colorado is a swing state that leans slightly left, whereas Denver is among the top 50 most liberal cities in the United States.

Given the county’s left-lean and pro-marijuana track record versus the state, Denver´s local politics are likely to continue supporting the deregulation and expansion of marijuana products and operations around the county, thus facilitating the growth of this market.

Denver

COMPETITIVE ENVIRONMENT

Major Players - Dispensaries

Denver is one of the nation’s largest and most developed legal cannabis markets. Currently, there are over 200 licensed medical dispensaries and over 150 licensed recreational dispensaries operating within city limits. Although the majority of Denver’s dispensaries tend to be smaller, independently owned stores, the city is also home to a significant number of statewide dispensary chain locations. The legalization of recreational marijuana in 2014 has also made the city a popular destination for marijuana tourism, although regulations against cannabis use remain in place. The market is likely to see continued growth as the recreational sector matures.

One of Denver’s largest and most recognizable dispensary chains is Native Roots, a statewide chain with three locations in Denver. The chain’s Denver locations are well known for being frequented by musicians on tour in the area, such as Jason Mraz and Warren G. Native Roots also produces its own line of award winning concentrates, Native Roots Extracts, and occasionally releases new strains in collaboration with high-profile users such as funk musician GRiZ.

One of the largest chains in Denver is Strainwise, a brand created by Utah-based marijuana consulting firm Strainwise Inc., who franchises the brand to independent operators. The chain achieved nationwide fame in 2013 when its Central City location, known as The Annie’s, became the first dispensary in the country to receive a license to sell recreational marijuana. There are currently 9 Colorado dispensaries operating under the Strainwise brand, 5 of which are located in Denver.

The Green Solution is another influential Colorado chain that boasts 13 different locations throughout the state, 2 of which are located in Denver. Established in 2010, the family-owned and operated chain produces over 100 different strains, claims the widest selection of marijuana products in the state, and employs over 400 people. In July 2015, the chain nearly became the first to film and air a commercial for medical marijuana products, but the ad’s broadcast was canceled, with Denver ABC affiliate KGMH citing the potential legal ramifications of allowing dispensaries to advertise.

Not all of the major players in the Denver dispensary scene are chains. Founded in 2010, family-owned Medicine Man bills itself as the largest medical marijuana dispensary in Denver and is located only minutes from Denver International Airport, making it a popular choice for recreational marijuana tourism. Medicine Man also runs its own consulting firm, Medicine Man Technologies, which holds business seminars and provides assistance to marijuana firms at all levels of the supply chain.

Major Players - Edibles and Concentrates

Colorado is home to some of the nation’s most well established brands, many of which have a significant presence in the Denver market. Accordingly, the majority of the edibles market is comprised of branded products, nearly all of which are produced by Colorado manufacturers.

The brand with the largest market share in the Denver edibles market is Incredibles, a line of flavored chocolate bars and gummy candies produced by Denver-based manufacturer Medically Correct, LLC. Incredibles accounts for approximately 19% of the Denver edibles market.

Among other edible brands, the Boulder-based Cheeba Chews line of infused taffies claims the second-largest share, with 11.75%. Several other brands with top shares in both markets include Dixie Elixirs & Edibles, a prolific manufacturer of edible concentrates, tinctures, and other infused products; Blue Kudu, a Denver-based infused chocolate manufacturer; Sweet Grass Kitchen, a Denver manufacturer that specializes in baked goods; and Love’s Oven, a Denver manufacturer specializing in high-quality baked goods. For concentrates, no brand accounted for more than 2% of the market, illustrating continued potential for the development of recreational concentrate brands.

Local Brands

As the largest market in the state of Colorado, Denver is home to a large number of edible and concentrates manufacturers. Perhaps the area’s largest brand is Dixie Elixirs & Edibles, which manufacturers over 100 different marijuana products and seeks to become the nation’s most recognizable marijuana brand. Denver is also home to Medically Correct LLC., owner of the popular Incredibles and Incredible Extracts brands. One of the older edible brands in Denver is Wana Brands, a maker of infused hard candies that has been in business in 2007.

Denver also has no shortage of concentrates manufacturers with notable companies including Evolab, an extraction company that also offers consulting services and equipment leases; market leaders TC Labs and Mahatma Concentrates; and Generation Health Laboratories, which specializes in vape pens in addition to waxes.

GROWTH POTENTIAL

Outlook

Denver is Colorado’s oldest, largest, and most developed market, accounting for approximately 23% of recreational marijuana sales and 40% of medical marijuana sales for the entire state. Over one-third of all Colorado dispensaries (at the time of publication, 373 of 964), recreational grow operations (205 of 572), and processing facilities (169 of 430) are located in Denver, comprising a market that generated approximately $330 million in sales in 2014 and is forecasted to surpass sales of $500 million by 2020. Much of this growth will be driven by the expansion of the recreational market, which is expected to increase by approximately 8-5% annually through 2020, when sales are expected to reach nearly $500 million. This is estimated to account for over a quarter of all legal marijuana sales in the state. Despite a projected decrease in size due to medical users switching over to the recreational market, the Denver medical market is expected to recover and grow about 1% each year.

Edibles and concentrates are projected to comprise larger shares of the recreational market and to a lesser extent the medical market, with branded, lab-tested products from Denver-area processors continuing to grow in popularity. Within the next five years, edibles are expected to claim 31.2% and concentrates 29.1% of the medical market, while in the recreational market edibles and concentrates are both expected to claim market shares of approximately 30%. Increased demand for edibles and concentrates in both markets should generate ample opportunity for new brands to enter the Denver market. Finally, Denver’s position as a center of marijuana tourism is likely to sustain demand for high-quality, specialty marijuana strains and infused products.

Opportunities

The legal marijuana market in Denver is expected to grow more slowly than markets in the rest of Colorado, due to Denver’s status as the largest and most developed market in the state. Specifically, the Denver market is project to grow by approximately 4.5% each year over the next five years, compared to 7% each year over the same period for Colorado. Nevertheless, Denver is expected to maintain its position as Colorado’s dominant market for the foreseeable future.

Given the large number of dispensaries currently present, further growth in Denver’s legal marijuana market is likely to take the form of consolidation among the area’s larger dispensaries. The removal of the vertical integration requirement will allow successful dispensaries to focus their efforts on retail business operations, and recreational legalization has allowed larger medical dispensaries to increase revenues by tapping into the recreational market.

The existing dispensary scene is quite competitive with a number of chain dispensaries located in key areas around the city. Most dispensaries established in the years to come will likely be new branch locations of existing chains rather than independent establishments. Increasing specialization by dispensaries, cultivators, and processors should lead to the development of a larger and more efficient market.

Although Denver’s legal marijuana market is projected to grow slightly slower than other areas, secondary businesses related to marijuana will likely present a wide variety of avenues for economic growth in Denver. These businesses include tour companies that showcase the region’s main grow operations and notable dispensaries; hotels and other accommodations that cater to marijuana users; and taxi services that ferry tourists between Denver International Airport and local dispensaries. Marijuana tourism is likely to be a prime driver of growth in the Denver market for the foreseeable future.

Threats

The most significant threat to the Denver market continues to be the discrepancy between state and federal laws regarding the production, sale, and consumption of marijuana and marijuana-infused products. Marijuana’s status as a controlled substance at the federal level denies cannabis businesses access to financial services, prevents them from making tax deductions, and puts them at risk of prosecution from federal authorities.

Moving Forward

Regulatory Environment

A likely next step in the evolution of the region’s regulatory environment is the implementation of statewide uniform testing standards. The majority of Colorado testing facilities are located in Denver, indicating that local laboratories and testing experts are likely to be at the center of future Colorado testing policy.

Denver may also be at the forefront of potential regulatory reform that would allow limited public consumption of cannabis at establishments such as bars and nightclubs serving only patrons 21 and older. Denver voters will decide on a ballot initiative regarding cannabis consumption at public businesses in November 2016. Legalization of public consumption in Denver would create a precedent for other Colorado communities to set their own public consumption laws, boosting the recreational market statewide.

Supply

Although many dispensaries continue to grow their own marijuana, removal of the vertical integration restriction has led to an increasing number of dispensaries that specialize only in marijuana sales, sourcing their product from grow operations in and around Denver. This specialization indicates an abundance of supply suggesting dispensaries don’t need to burden themselves with maintaining their own grow operations unless they are unable to source product from other producers.

Specialized grow operations will continue to develop in Denver as the market grows, and will contribute to a growing variety of products available to Denver consumers. The Denver area will also continue to be a prime supplier for Colorado brands seeking to expand nationally, such as Dixie Elixirs.

Demand

Since a large part of the recreational market in Denver consists of purchases by tourists and other nonresidents, it is somewhat difficult to quantify by how much total demanded volume will increase over the next few years. Nevertheless, it is expected growth in total marijuana volume demanded will closely follow statewide estimates predicting an increase of 22% over the period 2016-2020.

As the Denver market saturates, the ability of Denver cannabis businesses to attract consumers from out-of-state will be crucial in sustaining demand that drives continued market growth. Secondary businesses related to marijuana, such as cannabis friendly hotels, are expected to play a key role in strengthening the area’s tourist appeal. The legalization of limited public consumption would cement Denver’s position as a leading destination for marijuana tourism.

Competition

Competition in Denver will strengthen as the number of dispensaries, grow operations, and processors continues to increase. With the removal of the vertical integration requirement, grow operations will seek to distinguish themselves from competitors in a number of ways, such as offering specialty strains, adhering to organic cultivation standards, or developing niche brands of pre-rolls, tinctures, and other products.

Dispensaries will also seek to differentiate themselves in an increasingly saturated market by focusing on high quality, specialty marijuana strains and products that cater to different sectors of the consumer market. Dispensaries will also pay increasing attention to interior and storefront design as they step up efforts to attract more customers. Should prohibitions on public consumption be lifted, some dispensaries may also choose to invest in on-site amenities such as lounges, bars, or entertainment centers in order to attract social users.

An increasing trend towards the growth and expansion of dispensary chains is also likely as the market matures, as evident in the success of firms such as Native Roots, with 17 locations, and LivWell, with 14 locations. As organizations such as these develop economies of scale, it is expected the number of independent dispensaries decreases in favor of larger chains. The key to success for independent dispensaries will lie in differentiation of their market product and the ability to develop loyal customer bases in niche markets.

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