The Board of Supervisors established an outright ban on medical marijuana dispensaries throughout unincorporated Los Angeles County, which went into effect in January 2011.
Proposition D, a measure passed by with 62.6% of the vote in May 2013, limits medical marijuana dispensaries in the city of Los Angeles to the 135 that were registered in 2007. It also raised the business tax on gross receipts from $50 to $60 per $1,000 of sales. At the time of passing, there were as many as 1,000 dispensaries operating in the city according to a 2012 study done by UCLA. As of August 2016, there were an estimated 506 dispensaries, licensed an unlicensed, operating in Los Angeles.
In order to be protected under Proposition D, a medical marijuana business within Los Angeles city limits must not:
Marijuana delivery services are currently prohibited by Proposition D.
Medical marijuana ID cards may be issued after an in-person appointment at the L.A. County Department of Public Health and payment of a $153 application fee ($76.50 for Medi-Cal patients) in addition to a $66 ($33 for Medi-Cal patients) fee paid to the State of California. Two forms of proof of residency in L.A. County are required.
For California, 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. Los Angeles officials are expected to decide in 2017 whether to update the regulations set forth under Proposition D.
As the sale or distribution of marijuana is prohibited in unincorporated Los Angeles County, no additional tax applies. In the city, a business tax of $60 per $1,000 of gross receipts (or fraction thereof) is levied at dispensaries.
Most Los Angeles residents, including law enforcement officials, feel there have been far too many medical marijuana dispensaries operating in the city since 2007 and have been supportive of Proposition D. Since the law took effect, the Los Angeles City Attorney's office has gone to great lengths to shut down illegal dispensaries and has claimed to shut down more than 500 between November 2013 and April 2015. However, new dispensaries are opening every day, and some of those forced to close simply open up days later elsewhere.
Delivery services are another mounting issue for Los Angeles law enforcement. Proposition D expressly prohibits medical marijuana delivery services and allows only caregivers to transport marijuana to patients. The Los Angeles City Attorney’s office has enacted a crackdown on marijuana delivery services, and in 2016 forced popular delivery services SpeedWeed and Nestdrop to cease operations claiming marijuana delivery was in violation of regulations laid out under Proposition D.
Conflicting attitudes towards medical marijuana reach all levels of government and law enforcement, and can changed from year to year depending on the existing political environment. In a January 2010 interview with the L.A. Daily News, L.A. Police Chief Charlie Beck openly supported the City Council’s efforts to regulate collectives and cooperatives. However, he reversed his position two years later in a letter to the same council, supporting an outright ban on dispensaries. This is reflective of the shifting opinions towards medical marijuana in general as well as the ever-changing legal landscape that hampers regulation efforts.
The value of the Los Angeles market is expected to grow from $451.95 million in 2016 to just over $1.4 billion in 2020, a growth rate of 211% and a Compound Annual Growth Rate (CAGR) of 32.77%. This is lower expected growth than the Southern California region, which is forecast to grow 286% (CAGR 40.13%) from 2016 to 2020. This isn’t unexpected given the current size of the Los Angeles market compared to other locales in the Southern California region that have much more room for growth.
Flower will continue to be an important product category but the real growth will come from edibles, concentrates, and “others” (pills/tinctures/topicals/etc.) which will all see significant increases in market share and drive Los Angeles’s growth.
The biggest story out of Los Angeles is the passage of the MMRSA, which finally brings statewide regulations to the medical marijuana industry. The legislation proposes to create the Governor's Office of Medical Cannabis Regulation, which would have oversight of the regulatory system, but the work of licensing and enforcement would be handled by seven state agencies. The MMRSA allows individual jurisdictions to establish their own regulations regarding cultivation by cooperatives, collectives, and dispensaries. Jurisdictions that fail to establish local regulations must adhere to a new set of state regulations to be established by January 1, 2018.
The state would grant conditional licenses but local governments would have final authority to grant operating licenses. This would still allow city bans and restrictions on cultivation and sale but it should greatly decrease federal government raids and, over time, would put pressure on cities to loosen their restrictions or do away with their bans. Accordingly, Los Angeles is expected to place the reformation of Proposition D before voters in 2017, paving the way to the loosening of local restrictions.
In addition, having statewide regulations for the medical marijuana industry would help local jurisdictions in Los Angeles be more confident in the system and enable them to take advantage of cannabis industry tax revenue, as well as strengthen the case for recreational legalization which is sure to be put before voters in 2016.
The biggest challenge for cannabis businesses in Los Angeles is the passage of Proposition D that limits medical marijuana dispensaries in Los Angeles to 135. Since implementation of Proposition D, Los Angeles law enforcement claims to have shut down over 500 dispensaries. However, many dispensaries continue to operate without a permit and there is no doubt demand in Los Angeles is strong enough to support hundreds more dispensaries. This is driving some entrepreneurs to avoid the risk of a physical storefront location and instead opt to open delivery businesses that, although are also not approved for operation in Los Angeles, require less start-up capital and draw less attention from local law enforcement. Nevertheless, local law enforcement has begun shutting down local delivery services as of 2016, and the number of operational services has decreased from over 500 in 2015 to less than 50 in 2016.
The County of Los Angeles makes no special provision for marijuana cultivation, and what legal cultivation that occurs within the county falls under the guidelines laid out in Senate Bill 420, which allows qualified patients or their caregivers to grow up to 6 mature or 12 immature marijuana plants. In 2013, voters in Los Angeles approved Proposition D, which allows three-patient collective grow operations by qualified patients or their primary caregivers, although the proposition does not specify plant limits. Under state law, the maximum number of plants permitted under such an arrangement would be 18. Consequently, legal cultivation in Los Angeles County takes the form of small, indoor, personal or collective operations.
Since the majority of medical marijuana dispensaries in Los Angeles County are currently unlicensed and unregulated, discerning the exact scale and capacity of local grow operations is a difficult task. It is likely that some dispensaries grow and even sell their own marijuana under the guidelines of Proposition D. However, due to strong consumer demand the majority of the region’s marijuana is imported from other parts of the state and Mexico.
Although marijuana processing is not currently regulated in Los Angeles County, there are numerous edibles and concentrates manufacturers operating in the region. Examples of edibles products processed in the area include the Venice Cookie Company, a Venice Beach edibles maker whose products are distributed throughout California and Washington, and PJ Budders, a Glendale maker of infused chocolates.
A number of concentrate extraction companies also operate within the county, including Gold Coast Extracts and BAMF Extractions. Many of the region’s dispensaries also manufacture their own unbranded edibles and concentrates.
Currently, Brightfield Group estimates show 506 medical dispensaries and 44 delivery services operating in Los Angeles County, but the exact number is difficult to discern due to the unregulated nature of the market. Although the city of Los Angeles has issued licenses to 135 medical dispensaries, the fact many more continue to operate both in the city of Los Angeles and throughout the county illustrate large potential for growth given more liberal regulations or even the legalization of recreational marijuana.
Although marijuana testing will not be required by California state law until 2018, competition among Los Angeles County dispensaries and delivery services has generated significant demand for lab testing services that is met by a number of local commercial testing facilities. Perhaps the most prominent is BudGenius, a Los Angeles laboratory owned by BG Medical Technologies, Inc. BudGenius serves a wide range of local clients, and posts testing results on its website, giving patients the ability to seek out dispensaries that carry strains and edibles that meet their preferences. Other testing facilities in the area include The Werc Shop and CannaChemistry.
In 2015, the county is experiencing slow but steady population growth, fewer young children and an increasing senior ratio. Los Angeles County has about 20 seniors for every 100 people of working age, and that ratio is projected to double by 2040. The proportion of the population in Los Angeles County ages 65 and older is smaller than the proportion of the California population in this age group, and the smallest in the Southern California region.
Ethnically, Los Angeles County has a greater proportion of Hispanic people than California as a whole (49% of the population versus California’s 39%) a figure that has been increasing year over year but is expected to level off soon. There is also a substantially smaller white population in Los Angeles than in California (about 12% less of the population) a figure that has continued decreasing for the last several years. There are very few multi-ethnic residents in Los Angeles County.
In terms of wealth distribution, Los Angeles County has a slightly higher mean income than California, and a slightly lower median income than the state. Los Angeles also has lower mean and median incomes than its neighbors to the south: San Diego and Orange Counties.
The baby boomer generation – which makes up a great proportion of current seniors and will make up an even larger percentage of seniors in the near future – comprises a significant portion of medical marijuana users. They may already constitute as much as 50% of potential users nationwide, according to Kris Hermes of Americans for Safe Access. In counties like Los Angeles where there are numerous baby boomers and seniors, there is great potential for the medical marijuana industry to thrive.
The senior ratio will continue to rise in the county as the baby boomers retire, and this age group will no longer be limited by strict employer policies or many of the social constraints put upon them as working adults. Retirement will allow them up to purchase and use more marijuana, especially because this generation is more inclined to support and use marijuana than the generation preceding it. In addition, many of the illnesses often associated with the elderly (e.g. Alzheimer’s, glaucoma) and relieved by medical marijuana will begin to affect this generation as they age, likely inspiring greater interest in the medical benefits of marijuana and expanding the market in the near future.
With regard to race, Los Angeles County’s very large Hispanic demographic may negatively impact the future growth of the marijuana market due to the ideologically conservative nature of the Hispanic community. According to the Pew Research Center´s data from 2015, while the majority of white and black people say marijuana should be made legal, only 40% of Hispanics share that view.
With regard to wealth, because low-income households are much more likely to use marijuana than high-income households, it may seem the wealth of Los Angeles County could have an adverse influence on the cannabis market. However, given that Los Angeles County has educational and income inequality, and a variety of household incomes ranging from extremely low to extremely high, there may be a great number of low-income households that will support the marijuana market in Los Angeles County.
In terms of political leanings, Los Angeles County is currently one of the most democratic regions in California. This makes it more inclined to be marijuana-friendly than other, more right-leaning counties. However, its voter base is unreliable and volatile, which can pose a great threat to those looking to pass legislation.
Though it has a growing elderly population, Los Angeles County is currently full of many immigrants, young people, renters, and students – people who tend to rotate rapidly into and out of the county and who are not necessarily committed to a life-long (or even election-cycle-long) residence there. The consequences of this make-up are two-fold:
These characteristics of Los Angeles County are significant when considering the obstacles that will be faced by the marijuana-supporting community there. The voter base may have been leaning left for several years, but there is no guarantee this political ideology will continue into the future. Los Angeles voters may also change their specific attitudes towards marijuana legalization year-over-year – especially because the county is already closely split on this topic. In a 2013 Field Survey conducted in California, approximately half (52%) of Los Angeles County registered voters who responded supported legalizing marijuana. Without reliable voter support, it could potentially be very difficult to gain or hold ground on marijuana-supporting legislation, or to legally and confidently run a marijuana operation of any sort.
For these reasons, Los Angeles County provides an interesting market for investors who are willing to take somewhat of a risk. Its large population opens up many possibilities, its aging populace may be more willing to vote for and use marijuana, but the composition of the county´s voter base poses some risks to those hoping for rapid advancement toward a market where marijuana is fully legalized and accepted.
The Los Angeles area is a large and dynamic market that is home to over two-thirds of the state’s medical marijuana dispensaries. Under Proposition D, passed in 2014, the number of dispensaries licensed to operate within the city of Los Angeles is limited to 135. However, considering these figures do not include the number of dispensaries operating in other cities within the county, it is evident the unregulated market remains quite active despite the best efforts of the city attorney's office.
The largest players in the Los Angeles dispensary scene are those who possess one of the city’s 135 licenses, which are often used as a marketing point by owners to distinguish their businesses from unlicensed competitors. Many of these licensees are established operations that have been doing business in the region for many years. For example, the oldest legal dispensary in the city, California Alternative Caregivers, has been operating since 2005. Revenues for some of the region’s largest licensed dispensaries average several million dollars a year, however, the large number of unlicensed competitors seems to be preventing the establishment of large chains such as those found in other states.
It should be noted demand for brick-and-mortar dispensaries is so strong that lack of a license is no hindrance to business growth. Several of the more popular Los Angeles dispensaries on Weedmaps are not listed among the 135 medical marijuana dispensaries granted licenses by the city. Such demand illustrates significant opportunity for investment should recreational use be legalized, or for consolidation and professionalization of the market should it be allowed by the state and local regulatory environment.
City lawmakers are expected to place a measure on the local ballot in 2017 to reform existing rules by establishing a more comprehensive regulatory regime that could possibly expand the number of dispensaries in the city. However, Los Angeles remains a difficult place for marijuana businesses. In June 2016, Los Angeles County upheld a ban on marijuana cultivation in unincorporated parts of the county, and as of March 2016, delivery services remained illegal.
As in other Southern California markets, brand name edible products have been increasing in market share over the past several years. This is likely a result of organic market growth and demand for products of consistent quality in Los Angeles and other markets. Nevertheless, major California edible manufacturers, such as Bhang, Kiva, and Korova, as well as out-of-state manufacturers such as Cheeba Chews and Sensi Sweets, are carried in dispensaries across the county. Los Angeles County is also home to edible manufacturers such as the Venice Cookie Company and PJ Budders. Strong demand despite a limited number of licensed dispensaries illustrates potential for continued market growth for branded goods.
For concentrates, a wide variety of brands and competition has prevented any single manufacturer from claiming a significant portion of the market. However, some major manufacturers such as Bhang, TetraLabs, and Eureka are represented at dispensaries across the county. Given that marijuana concentrates comprise roughly half of the medical marijuana market in Los Angeles, the significant presence of unbranded concentrate products indicates numerous avenues for brand name growth in the concentrates market.
Locally manufactured edibles brand The Venice Cookie Company is ranked in the top five. Among locally produced concentrates brands, BAMF Extractions and Gold Coast Extracts enjoy market shares in the top ten.
Los Angeles’s market is expected to grow 211% over the forecast period (CAGR 32.77%) from $402.75 million in 2016 to more than $1.4 billion in 2020.
Flower will remain a strong product category but is expected to lose market share throughout the forecast period (from 57% to 36% of the medical market). The dollar value of flower sales is expected to increase as the overall market increases from $260 million to $531 million between 2016 and 2020. The growth rate of flower sales is estimated at 104% with a CAGR of 19.5%.
Edibles and concentrates will be fast growing segments of the industry with the edibles market share increasing to 20% by 2020. The dollar value of edibles sales is expected to increase from $70 million in 2016 to $281 million in 2020, with total growth of 298% and an estimated CAGR of 41.25%.
The market share of concentrates is expected to increase to 40.5% by 2020 with the dollar value of sales estimated to increase from $116 million in 2016 to $569 million in 2020, with total growth of 389% and a CAGR of 48.7% over the forecast period.
The market share of topical products, THC pills, tinctures, etc. is expected to increase to just over 1.6% by 2020 with the dollar value of sales estimated to increase from $4.2 million in 2016 to just under $23 million in 2020, with total growth of 430% and a CAGR of 52% over the forecast period.
Despite such positive forecasted growth in all product categories, Los Angeles’ most significant weaknesses are the large number of established dispensaries and the difficulties in enforcing regulations. These factors are deterrents for successful dispensaries to expand or more sophisticated dispensaries to enter the market and develop chains of the type seen in Colorado.
Branded products make up only a small portion of the edibles and concentrates markets in Los Angeles. Given that edibles, concentrates, and “others” are all expected to show phenomenal growth (even if recreational use isn’t legalized) this means there is ample opportunity for new entrants to these markets, particularly in the underdeveloped concentrates market in which few major brands exist. However, competition in these markets is expected to be strong as major brands such as Bhang, Cheeba Chews, Eureka, Kiva, Korova, PJ Budders, Sensi Sweets, TetraLabs, and Venice Cookie Company all have a presence in the Los Angeles market. However, because unbranded edibles, concentrates, and “others” account for such a large portion of the market, and because the market for these products is expected to grow significantly, there are many opportunities for companies to gain market share as patients are looking for brands they can trust (especially for companies whose products offer reliability and consistency of experience).
One of the most exciting aspects of the industry is the development of technological products that can help connect consumers to various parts of the industry. There are already more than 250 marijuana related mobile apps in the iTunes store; apps for in-home delivery services, cannabis quality guides, cooking guides, dating apps for marijuana users, and websites that cater specifically to those interested in jobs in the medical marijuana industry. As the industry continues its growth there are a myriad of opportunities for tech savvy entrepreneurs to enter the market with products or services that fulfill consumer needs.
There are also opportunities for new certified testing laboratories as patients with diverse needs seek trustworthy and reliable information about products. Passage of the MMRSA has mandated testing and tracking and has laid the foundation for a complete testing regime to begin in 2018. Beyond the government’s potential role, market forces are already pushing the industry in this direction. As tested products gain greater market share there will be increasing incentive for laboratory-tested products to become the standard.
The biggest threat to the Los Angeles market is the serious and on-going drought in the state of California. California has been dealing with a worsening drought over the past five years and it threatens the supply of both outdoor and indoor 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 supplies for cannabis crops decreases. The state government has placed water use restrictions on cities and as outdoor growers attempt to 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.
Another threat for Los Angeles dispensaries is the constant fear of being shut down and arrested by local or federal law enforcement. Local law enforcement authorities are stepping up efforts to shut down unregulated dispensaries, and have also forced two local delivery services to shut down. As local restrictions are to remain in place under the MMRSA, the only hope for change lies in favorable legislation from city governments.
Regulatory Environment
City lawmakers are expected to place a measure on the local ballot in 2017 to reform existing rules by establishing a more comprehensive regulatory regime that could possibly expand the number of dispensaries in the city. The city has until January 1, 2018, to finalize local regulations concerning marijuana cultivation, processing, and sales.
Supply
As mentioned previously, if California’s drought continues to worsen there could be pressure on Los Angeles’ supply, but outside of that supply changes are not expected to be an issue. The Los Angeles market is so large and lucrative there is plenty of incentive for cannabis to be brought in from outside the state or country.
Demand
Based on Brightfield Group analysis of the National Survey on Drug Use and Health (NSDUH) from the Substance Abuse and Mental Health Services Administration (SAMHSA), it is estimated that Los Angeles’ total volume demanded will increase 19% over the period 2016-2020. This is in line with expected population growth and slowly increasing prevalence rates. The area tends to be more left leaning (at least recently) which makes it more inclined to tolerant views of cannabis use.
If recreational use were to be legalized, it is estimated the legal markets would absorb roughly 41% of demand with the black market meeting the remaining 59%. If the current 135-license limit on dispensary licenses were to be lifted or loosened this would allow the legal market to meet an even greater percentage of demand.
Competition
As evidenced by the large number of dispensaries and delivery services currently operating despite the limit on licenses set at 135, the Los Angeles market exhibits strong demand and a competitive business environment. However, unless local governments choose to adopt a more favorable attitude towards marijuana businesses, such as increasing the cap on licenses and permitting cultivators and processors, large-scale investment in the market by outside investors remains difficult. Nevertheless, the success of other California metropolitan markets and a strong demand for expanded legal access from medical patients make formal regulation and expansion of the legal market a possibility for 2017.