Portal - State - Northern California

Northern 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 

In Northern California, several counties have fought to ban or tightly regulate the medical marijuana industry. The region has the most stringent regulations in California, with many counties prohibiting any cultivation or sales of medical marijuana.  Under the MMRSA, such local bans will be allowed to continue.

Sacramento County

In April 2014, outdoor medical marijuana cultivation was banned in unincorporated areas of the county. However, in February 2016, following the MMRSA’s mandating of local medical marijuana regulations, the Sacramento City Council approved an ordinance allowing medical marijuana to be cultivated inside buildings of up to 22,000 square feet. Cultivation is taxed at 4%.

Siskiyou County

In June 2016, Siskiyou County voters approved measures T and U, strengthening local ordinances 15-18 and 15-19 to include harsher restrictions on marijuana cultivation. This included a strict 12 plant limit no matter the size of the property or the plants, replacing a limit based on acreage. The measures also ban outdoor cultivation and the use of growlights and generators in greenhouses. The new regulations are seen as one part of a host of new marijuana regulations passed by local California jurisdictions following the passage of the MMRSA in October 2015.

Sutter County

In March 2016, the Sutter County Board of Supervisors passed an emergency ordinance banning all outdoor marijuana cultivation and requiring separate greenhouses for all indoor medical cultivation. The ordinance also imposed a new annual registration fee of $140, and greenhouse inspection fees of $180. The ordinance essentially circumvents the development of large commercial grow operations within the county.

Yuba County

In June 2016, Yuba County voters rejected two new measures that would have eased current restrictions on marijuana cultivation and allowed the establishment of medical marijuana dispensaries. Outdoor marijuana cultivation remains banned, and indoor cultivation remains limited to 12 plants per parcel.

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 $192,877,745 $207,895,328 $221,285,529 $197,828,450
Sales Growth 7.0% 7.8% 6.4% -1.23% (2016-2020 CAGR)
Avg. Price/Ounce $340 $290 $290 $300
Total Recreational Marijuana Sales $0 $0 $0 $461,743,459
Sales Growth n/a
Avg. Price/Ounce $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 gradual, steady growth in the medical market, estimated at just under 8%. Edibles and concentrates continued to grow in market share and together make up the majority of sales. Both product categories experienced better than total market gains, with edibles increasing over 15% to nearly $58 million and concentrates increasing 18.5% to $36.5 million.

Topical products (creams, lotions, etc.), THC pills, tinctures (liquid cannabis extracts) and so forth are growing in popularity among both medical and recreational marijuana users across the nation. However, all these products combined made up less market share (1.98%) than any of the three primary cannabis categories (flower, edibles and concentrates) representing just over $4.1 million in sales.

Flower remained the single dominant product category both in terms of market share and dollar value of sales with $109.3 million. However, trend of increasing market share and sales for edibles and concentrates is expected to continue as new product offerings enable patients to diversify their consumption choices.

2016 Headlines

The biggest story for the marijuana market in California for 2016 continues to be the impending implementation of 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” akin to 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 that 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. Originally, the deadline for the establishment of local regulations was 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.

Another significant story for the California marijuana market is the potential state-wide legalization of recreational use in November 2016. The Adult Use of Marijuana Act (AUMA) also known as Proposition 64, would decriminalize the possesion and recreational cultivation of marijuana statewide. The act would also establish 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 would also be 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.

Category Performance

Flower

Flower is the dominant product category in Northern California's market, comprising 52.6% of market share in 2016. However, this share is expected to decline through the forecast period (2016 to 2020) due to innovative products in the edibles and concentrates market segments that will enable them to capture increasing market share by catering to some consumer’s preferences for healthier, less conspicuous, or more convenient products. The dollar value of flower sales is expected to increase from $109 million to $240 million between 2016 and 2020, an increase of over 120%. The majority of this increase will be due to the expected opening of the recreational market in 2018.

Edibles

Edibles are expected to perform very well with market share increasing to 36.5% by 2020. This growth will come from the variety of products within this product category which cater to different consumer’s tastes and consumption preferences. Much of the growth of this market segment will be driven 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 $57 million in 2016 to over $210 million in 2020, total growth of over 265% and an estimated CAGR of 38% over the forecast period.

Concentrates

Concentrates are expected to perform even better than edibles, with their market share forecasted to grow to 27% by 2020. In dollar value terms, concentrates will see strong growth moving from $36 million in 2016 to over $181 million by 2020, for a total growth of close to 400%. Growth will be fueled by many factors, including a proliferation of concentrate products manufactured to contain higher concentrations of the more medicinally beneficial CBD compounds often preferred by users in the medical market, as well as a growing preference for vaping among younger consumers in social settings. Potency, convenience, and the odorless vapor of many concentrates will also be very important factors in making them an attractive alternative to traditional flower.

Others

Topical products, THC pills, tinctures, etc. combined represent the smallest “category” of cannabis products with their market share forecasted to grow to 3.95% by 2020. In dollar value terms, these products are expected to see explosive growth and increase from $4.1 million in 2016 to $26 million by 2020, a total growth of 532% and an estimated CAGR of 58.5% from 2016 to 2020.

Unit Price Performance

Production influence on unit prices

The legal medical market continued to grow in 2016 by gradually pulling sales from the black market. Black market sales, however, are still very significant in Northern California. As legal production increases, there is an abundance of demand to mitigate the drop in price that would be 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 could end up taxing 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 ensures the statewide cultivation industry will be largely characterized by smaller operations. However, there are multiple large operations that dominate the Northern California market and produce enough to supply other areas in and outside 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 record 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

Northern California is home to “The Emerald Triangle” (Mendocino County, Humboldt County, and Trinity County), the largest cannabis-producing region in the world. While marijuana production has been a way of life since the 1960s, the area saw an explosion of large-scale growers after the passage of Proposition 215. The region now produces enough marijuana to far exceed local demand and exports to others parts of California as well as illegally across state lines. Northern 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 Northern California will continue to exceed local demand for the foreseeable future. It is expected there will be a potential increase in operational dispensaries following the establishment of a medical and recreational licensing systems in 2018, therefore legal demand may rise to meet supply. Legal markets in Oregon and Washington may also continue to draw on excess supply from Northern California.

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 in 2018.

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.  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.

Size of operations

The Northern California processing market is made up predominantly of smaller, independent operations spread throughout the region, a consequence of numerous local bans and prohibitions against outdoor cultivation and processing. However, larger operations are expected to begin operations following the implementation of specific state industry regulations in 2018.

Major players

The leading edibles brands in Northern California are infused chocolate manufacturer Kiva, baked goods manufacturer Korova, and Colorado-based manufacturer Cheeba Chews.  POP Naturals is the region’s leading manufacturer of branded concentrates. 2016 has seen the decline of unbranded edibles and concentrates in favor of branded, packaged products, a trend that is likely to continue.

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

There is no regulatory tracking system in place and therefore no official record of the number of quality assurance Labs in operation. However, at time of this publication there were at least 15 known testing facilities in the state of California, with 3 of them operating in the Northern California area.  The number of testing facilities is expected to increase with the establishment of statewide quality standards, mandatory testing, and licenses for testing facilities.

While there are no laws requiring quality assurance testing in the state of California, there are several bills proposing regulations and standards currently under consideration. Separately, there is a growing demand from patients for dispensaries to lab test their medication. These two factors suggest that marijuana testing will soon be required, or that dispensaries will increasingly take it upon themselves to test their product in order to establish patient loyalty. Either way, demand for lab tested medication and quality assurance labs will continue to grow at impressive rates and represents an excellent investment opportunity.

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. Halent Laboratories was previously among the largest labs in Northern California until they merged with Steep Hill and eventually shut down as the lab consolidated its product offerings in a new facility in Berkeley. Steep Hill, owned by Harborside Health Founder Steve DeAngelo, now has labs in California, Colorado, Washington and Nevada.

The 3 Laboratories operating in the Northern California area are Pure Analytics, Sequoia Labs and Sonoma Lab Works.

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 70 of those dispensaries located in Northern California. The Northern California dispensary system is characterized by independent stores and delivery services. With the lack of both a legalized recreational adult use market and a for-profit business model, large-scale consolidation is unlikely to occur before the advent of MMRSA regulations in 2018.

Demand Factors

Category (for Northern California) For Calendar Year 2016
Total Population                                                             4,849,039
Medical Patients (estimated)                                                                   89,544

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 Northern California, Humboldt State University (HSU), a public university and one of the California State University (CSU) associated schools, has formed an academic institute devoted to marijuana. The Humboldt Institute for Interdisciplinary Marijuana Research sponsors scholarly lectures and coordinates research among 11 faculty members. Humboldt State is located in one of California's prime cannabis-growing regions, an area famous for its abundance and use of marijuana. HSU is also listed as number eight on High Times´ top ten list of cannabis colleges. This in spite of the CSU directive to its 23 member campuses (including HSU) to follow the federal law, which does not recognize or permit medical marijuana under California's Proposition 215 and requires a total ban on all marijuana on campus.

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 if recreational marijuana is 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

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 has a large medical marijuana market because of its size, relatively progressive stance toward marijuana, and the 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

Northern California is populated by small, independent dispensaries and delivery services with no significant chains. The region has a large capacity for marijuana cultivation, some of which serves the local dispensaries, some that is destined for other locations in the state, and some that feeds the black market. A hostile regulatory environment in the region has prevented significant investment in creating a larger retail market. The dispensaries in the region are generally small operations run by people passionate about helping their patients and less concerned with profit margins.  The market could see some consolidation with the establishment of clear-cut regulations under the MMRSA.  As the market continues to develop, opportunities to expand into the Oregon and Washington markets Is also likely to attract investment and generate a certain degree of market consolidation.

Currently, the majority of brick-and-mortar dispensaries in Northern California are concentrated in the Sacramento area, with smaller concentrations of dispensaries located in Santa Rosa and along the coast in cities such as Ft. Bragg and Arcata.

Investment Flow into the Supply Chain

Due to the limited number of legal dispensaries operating in Northern California and the ambivalent legal environment in which they operate, the region has yet to attract significant attention from investors. However, with recreational legalization passing this year, growing grassroots movements to have the state re-categorize cannabis as an agricultural product, as well as a growing demand for concentrates and edibles, the market is likely to experience tremendous growth in the coming years creating excellent opportunities for investment.

Cannabis product makers would be wise to establish themselves in the market before 2018 in order to ensure their specific brand is well represented as market expansion associated with the establishment of MMRSA rules and the potential future recreational market develop.  Demand for testing facilities is also expected to grow, as the MMRSA stipulates that all marijuana sold within the state must undergo testing.  Given the region’s geographic proximity to developed recreational markets in Oregon and Washington, there will be significant investment opportunities in edibles and concentrates licensing as well.

Vertical Integration

Due to the small scale of the dispensaries and the large number of cultivation operations in Northern California, vertical integration is currently not common. Most dispensaries purchase their supply from regional growers, in part due to prohibitive regulations regarding grow operations in certain areas. Accordingly, growing, production, and sales are often handled by separate, small to mid-size firms.

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

Branded edibles are quite common in Northern California. Though the selection varies, brand loyalty is not very strong and the market is not exactly concentrated with the top ten brands making up only 18% of the edibles market, 9% of the others market, and less than 7% of the concentrates market. Popular Northern California-based brands include Dutch Farms Organics, maker of topicals and tinctures, and Full Flava Extracts, a concentrates manufacturer.

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 Northern California edibles market includes three large brand-name manufacturers who control a significant part of the market: Cheeba Chews, Korova and Kiva Confections. These three brands make up nearly 15% of the total edibles market 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. As of September 2016, Korova’s market share in the region was just under 8%.

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 as of May 2015. 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. Although they are a Colorado company, Cheeba Chews is the largest edibles brand in Northern California with a 5.15% market share as of September 2016.

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 about 6.4% of total edibles sales in Northern California.

Consumer Marketing

Producers and processors in Northern 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.

For dispensaries that produce their own lines of edibles the specific marketing method relies on location; a higher concentration of sellers in the Sacramento and Santa Rosa areas use online advertising, while dispensaries in more rural areas without significant competition may simply list their products on directory sites such as WeedMaps or Leafly.

Growth Potential

Outlook

Northern California's "Emerald Triangle" fuels the region's production so supply is generally not an issue. This keeps prices as low as anywhere in the state, which is certainly an advantage when competing with the black market. Northern California has a strong, increasing demand and the market is estimated to grow 217% over the forecast period (CAGR 33.46%) from $208 million in 2016 to $660 million in 2020.

Flower will be the dominant product category but is expected to decline through the forecast period from a market share of 53% in 2016 to 36.48% by 2020. The dollar value of flower sales is expected to increase from $109 million to $240 million between 2016 and 2020, with total growth of more than 120% and an estimated CAGR of 21.8% over the forecast period.

Edibles and concentrates are expected to be the fastest growing segments of the industry, with edibles market share increasing to over 32% by 2020. The dollar value of edibles sales is expected to increase from $57 million in 2016 to $210 million in 2020, with total growth of 266% and an estimated CAGR of 38.3% over the forecast period.

The market share of concentrates is expected to increase to 27.5% by 2020 with the dollar value of sales estimated to increase from $36 million in 2016 to over $181 million in 2020, with total growth of 396% and a CAGR of 49% from 2016 to 2020.

The market share of topicals, capsules, tinctures, and pre-roll is expected to increase to 3.95% by 2020 with the dollar value of sales estimated to increase from $4.1 million in 2016 to $26 million in 2020, with total growth of 532% and CAGR of 58.5% from 2016 to 2020.

The Northern California market's biggest weakness is the number of county and local ordinances that ban the sale and/or cultivation of medical marijuana. This hostile regulatory environment reduces the Northern California market, which is already undersized relative to Southern and Central California due to a lack of large population centers.  The situation is not likely to be alleviated even with the passage of the MMRSA, as the new rules explicitly allow local jurisdictions to uphold current restrictions against medical marijuana. In areas within Northern California where medical marijuana sales are permitted, the market does quite well and is forecasted to grow as well, if not better than the other two regions over the forecast period.

Opportunities

The delivery sector is a popular target for Northern California entrepreneurs looking to enter the cannabis industry, especially delivering to areas that do not allow dispensaries. However, while they may be less at risk from law enforcement, most delivery services have a fairly limited number of transactions per day. The lack of population density in the region compared to the rest of California increases logistical costs for this model, thus limiting potential margins.  Delivery services will be allowed to continue under MMRSA regulations, provided they operate out of a licensed dispensary.

New products should fare quite well given the anticipated increase in market share for edibles and concentrates, both being categories that cater to new product offerings. Edibles and concentrates are expected to grow by a CAGR of 38% and 49% respectively between 2016 and 2020, providing vast opportunities for brands to enter and expand these markets. Products viewed by consumers as healthier, less conspicuous, or more convenient are expected to perform particularly well.

Savvy entrepreneurs looking to enter the Northern California market will be looking for a way to leverage the region’s amenable grow conditions and cheaper land to target the medical marijuana market throughout the state. These conditions make it a prime location for processing facilities and grow operations for companies looking to build branded products such as concentrates (which has the strongest market potential at present), edibles or even branded flower, which is almost unheard of throughout California. While many may be successful at building their own brands from scratch, others can benefit from becoming state producers of existing brands of edibles or concentrates that have already demonstrated their popularity in Colorado, Washington or other states.  Now that legalization has passed, the very northern areas of the state could draw business and demand from southern Oregon, if California dispensaries are able to maintain competitive prices.

Potential entrepreneurs must pay close attention to the results of the vote on the AUMA in November 2016. Now that recreational marijuana use will become legal, the dollar value of Northern California legal markets is estimated to be 100% greater in 2018 and 26% greater in 2019. Considering the competitive advantage Northern California has in marijuana production, the region offers excellent opportunities for vertically integrated businesses or businesses seeking statewide distribution.

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 receive licenses under the MMRSA, demand for testing facilities is expected to increase dramatically.

Threats

The biggest threat for Northern California is the limited market opportunities due to county or local 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 if recreational use is passed in 2016, many of these cities and counties may fight to keep their bans in place. Business owners who operate in areas where it is legal will certainly be able to draw customers from areas where it remains illegal, but a more likely outcome is that the black market remains strong in Northern California. 

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. 

In addition, the State Water Resources Control Board continues to slap cultivators with fines and notices of environmental violations for excess water consumption.  Cultivation license fees under the MMRSA would incorporate fees proportional to estimated water use, placing an addition financial burden on cultivators in Northern California.

Evolution of the Industry

Regulatory Environment

Much of Northern California is heavily regulated with many localities banning medical marijuana dispensaries and there are no indications this situation will change anytime soon, especially since new statewide regulations explicitly allow local governments to continue restrictions against marijuana businesses.   Recreational legalization could 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

Due to the strength of the black market it appears the supply in Northern California is not an issue of significant concern, although lack of access to legal marijuana keeps the black market share higher than it would otherwise be. Recreational legalization could provide room for some increase in production, though competition between growers and the resulting decline of the black market may incentivize growers to find markets for their product outside of Northern California.  New MMRSA regulations that allow for larger, licensed commercial cultivation operations may provide growers an opportunity to benefit from economies of scale without fear of attracting prosecution from law enforcement.

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 if recreational use is legalized, cannabis tourism could have a significant impact on sales in the legal markets. 

Northern California could potentially draw customers from the Oregon market, should abundant supply and a favorable tax regime make California marijuana products price competitive with Oregon.  On the other hand, should recreational marijuana in California prove to be much more expensive than in Oregon, Northern California can expect to lose a significant amount of customers in the very northern parts of the state.

Competition

Competition will intensify as the legal markets continue to expand. If legalized, 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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