The Medical Marijuana Safety and Regulation Act (AB 243, AB 266, and SB 643) was signed into law in October 2015 and sets forth the establishment of a formal marijuana dispensary system with regulations regarding dispensary licensing and taxation, medical and commercial cultivation, quality assurance testing, and numerous other industry aspects. The bill also requires local city and county jurisdictions to adopt their own regulations regarding medical marijuana cultivation and sales. Accordingly, several Orange County municipalities, such as Santa Ana, Costa Mesa, and Laguna Beach, are expected to finalize their own set of regulations regarding medical marijuana cultivation, processing, and sale by January 2018.
Santa Ana and Laguna Woods are the only two municipalities in Orange County to allow marijuana collectives to operate, though none currently operate in the latter. Santa Ana voters approved Measure BB in November 2014, which repealed a citywide ban on medical marijuana dispensaries that had been in place since 2007. In February 2015, a total of 20 permits were issued (via a lottery system) to operate dispensaries within city limits from a pool of over 600 applicants.
As of August 2016, several Orange County municipalities were considering lifting restrictions on marijuana dispensaries. In May, the Placentia City Council voted to allow cannabis dispensaries and commercial cultivation and processing, before reversing the decision in June. In November, Costa Mesa residents will vote on three different initiatives that would allow marijuana cultivation and sale within city limits, while Laguna Beach residents will vote on an initiative that would allow for two medical dispensaries.
Unincorporated Orange County currently enforces a moratorium prohibiting marijuana collectives altogether. Medical marijuana ID cards may be issued after an in-person application process and payment of a $150 application fee ($75 for Medi-Cal patients) in addition to a $66 ($33 for Medi-Cal patients) fee paid to the State of California.
In Santa Ana, the following conditions apply to all medical marijuana collectives.
Collectives must be:
Collectives are subject to all of the following operating standards:
As the sale or distribution of marijuana is prohibited in unincorporated Orange County, no additional tax applies. However, a 5% municipal sales tax on all dispensary sales is levied in Santa Ana as per the terms of Measure BB, approved by voters in November 2014.
A $1,690 application fee and a $12,086 background check fee for each applicant selected has generated over $1 million for the city, and has been earmarked for the enforcement of Measure BB.
As of May 2015, seven lawsuits have been filed challenging the constitutionality of Measure BB. In response, the Santa Ana City Council unanimously approved a resolution authorizing up to $500,000 in legal fees to defend the measure, demonstrating the city’s commitment to the development of a legitimate cannabis industry. As of August 2016, none of the seven lawsuits have been successful in overturning the measure. In March 2015, the Santa Ana Police Department police seized over 1,600 plants at an illegal grow operation valued at over $2 million, demonstrating an equally strong commitment to the eradication of the local black market. Raids have continued into 2016, with police seizing assets from cultivators and dispensaries in Brea, Costa Mesa, and Anaheim.
Most other Orange County cities have found various legal ways to prohibit the proliferation of dispensaries. In Costa Mesa, for example, the issue was tabled until 2016, when the city decided to place the legal status of dispensaries before voters in November 2016. The Westminster City Council will explore the possibility of regulation and has held at least one study session on it. Officials in Anaheim have aggressively opposed any such measures and have brought criminal and civil charges against property owners who lease to medical marijuana dispensaries. As of August 2016, Laguna Beach city officials were unsuccessful in countering a citizen-backed voter initiative to legalized dispensaries with an alternative ballot measure that would also allow dispensaries, but with much more restrictive zoning regulations.
Ironically, Rep. Dana Rohrabacher, who represents California’s 48th district (which includes much of Orange County), was the chief sponsor of the Congressional amendment banning federal prosecution of marijuana users in compliance with State laws.
The value of the Orange County market is expected to grow from $113 million in 2016 to $360 million in 2020, a growth rate of 218% and a Compound Annual Growth Rate (CAGR) of 26%. This is slightly lower expected growth than the Southern California region, which is forecast to grow 246% (CAGR 31%) from 2016 to 2020. Given the prohibitions on dispensaries in much of Orange County, having a growth rate below the regional average is not surprising. Much of the county’s growth will come from the newly legalized and regulated Santa Ana market, while many other municipalities continue to consider how to move forward. Flower will remain a growth driver in Orange County but edibles, concentrates, and “others” (pills/tinctures/topicals/etc.) will all see significant increases in market share and growth in revenue as a result.
The biggest headlines for Orange County in 2016 have been local ballot initiatives regarding the legalization of marijuana dispensaries, which hold the potential to greatly expand the legal market countywide.
In May 2016, the Placentia City Council voted 3-2 to allow marijuana businesses in the city, specifically allowing one dispensary, one delivery service, and one cultivation site. However, after considerable public outcry, the council voted to reverse its decision one month later, and marijuana businesses remain prohibited.
In August 2016, the Laguna Beach City Council voted against putting a city-backed proposal to allow a single medical marijuana dispensary under city control and prohibit recreational marijuana should full legalization occur in November 2016. Instead, the only initiative that will appear before city voters is a resident-backed initiative that calls for the repeal of current restrictions against marijuana dispensaries and the establishment of a full license system controlled by an independent entity.
In Costa Mesa, voters will choose between three competing initiatives for legalization on the November 2016 ballot. Two of the measures are proposed by law firms advocating legalization, with one calling for four dispensaries and the other for eight. The third initiative is advocated by the City Council, which claims the competing initiatives are meant to enrich the advocacy groups behind them at the expense of taxpayers.
The biggest challenge for cannabis businesses in Orange County are continuing to overcome ordinances that severely restrict or ban the sale of medical marijuana. Considering that many municipalities in the area have enacted prohibitions against dispensaries, it is likely the market will see significant growth should these municipalities change course and legalize, regulate, and tax dispensaries, especially in light of the MMRSA mandate to establish local regulations ahead of the statewide implementation of a medical marijuana dispensary system. Many municipalities including Anaheim and Santa Ana have gone to great lengths to crackdown on unlicensed and illegal dispensaries. The large number of dispensaries that operated (with some continuing to operate) in spite of municipal prohibitions against medical marijuana dispensaries suggests significant regional demand. This will continue to be a point of pressure for local government officials as local activists push for legal access.
Medical marijuana cultivation is currently permitted in Orange County under California state law and is subject to the guidelines outline by Senate Bill 420, which allows qualified patients or their primary caregivers to cultivate up to 6 mature or 12 immature marijuana plants. State law also stipulates cultivation may only take place indoors, or outdoors in a completely enclosed area or structure such as a greenhouse. Most marijuana cultivation that does take place in Orange County is carried out by medical dispensaries and falls within the boundaries of these guidelines, though raids of large indoor grow operations are not infrequent. Most dispensaries likely rely on seasonal imports from growers from other areas such as Northern California or Mexico.
Due to the limitations on medical marijuana cultivation imposed by the state, and a prohibition against medical marijuana dispensaries in all of the county’s municipalities except for Santa Ana, most marijuana processing in the county takes place at individual dispensaries, many of which are unlicensed. Most popular edibles and concentrates are imported from other areas within the state.
Currently, there are approximately 80 medical dispensaries and 22 delivery services operating in Orange County, the majority of which are unlicensed. The large number of dispensaries that operate in spite of municipal prohibitions against medical marijuana suggests significant regional demand, indicating the market may have room to grow given the advent of more favorable regulations. It should also be noted that edible products make up a relatively smaller portion of total products stocked by medical dispensaries in Orange County, indicating that local production and sales of edibles may have large potential for future growth.
There are currently no commercial marijuana testing facilities located within Orange County. Since California does not mandate lab testing, many dispensaries and delivery services choose to forgo the expense of lab testing. As a result, carrying lab-tested marijuana can give dispensaries an advantage over competitors who do not carry tested products. Orange County dispensaries usually outsource testing to testing labs in other areas of the state, such as SC Labs in Santa Cruz and Cannasafe Analytics in Temecula.
Orange County has a large population of over three million people and is growing faster year-over-year than is California. The county and state are similarly divided among age groups with California having slightly more residents under 25 as a proportion of the population, and Orange County having a slightly higher percentage of adults between the ages of 40 and 60 than the state.
Orange County has a 5.7% greater Asian population than California, and a 4% lower Hispanic/Latino population than California (35% versus 39%) despite its proximity to Los Angeles County (whose population is nearly half Hispanic). In all other aspects of race, the county and state have similar distribution.
The Orange County population is quite educated; nearly 37% of those over age 25 have Bachelor´s degree or higher, versus less than 31% in the state of California.
Orange is also an extremely wealthy county, even by southern California´s standards. Median household income is $17,000 higher in Orange than in California ($76K versus $59K), a figure that is also substantially higher than in affluent San Diego county. The mean income in the county is nearly $105,000, ranking Orange County eighth in the state by average income. Notably, the median value of owner-occupied housing units (2009-2013) is approximately $150,000 higher than the median value for California, another vast difference.
Data from the National Survey on Drug Use and Health (NSDUH) has shown nearly half of marijuana users are those with no college education, and college graduates account for only 17% of marijuana use, although they make up about 29% of the adult population. Given the propensity of college-educated people to use less marijuana, and the high education levels of Orange County residents, this may signify Orange´s residents are less likely than those in neighboring counties to support or use the substance.
Furthermore, Orange´s affluence contributes to lower demand and support for cannabis. Statistically, those who live in households with incomes above $75,000 per year (well below Orange´s mean income) are much less likely to practice frequent marijuana use than those living in lower income families. With median and mean household incomes much higher than those of the state or the rest of the region, and extremely high housing costs, generally wealthy Orange residents may be unlikely to support marijuana.
According to both NSDUH and Brightfield Group consumer survey data Asians and Asian Americans are the ethnic group least likely to use marijuana, particularly when it comes to heavy use. Given Orange County´s large Asian population, this too may decrease demand for marijuana in the county.
Therefore, based upon its demographic composition, Orange County is unlikely to have as strong of a market as other counties in the state.
Orange County is becoming less Republican than it used to be. The GOP advantage over Democrats in Orange has steadily declined from 22% points in 1990 to 9 points in late 2014, and this lead is continuing to narrow. However, Orange´s voters still lean slightly more Republican than Democrat, and today´s Republicans are still much less inclined to support marijuana than Democrats are, with only 39% expressing pro-marijuana sentiments nationwide.
Furthermore, when specifically comparing attitudes toward marijuana throughout the state, Orange County still demonstrates itself to be against the legalization of marijuana. In a 2013 Field Survey conducted in California, a majority of state voters favored legalizing marijuana for recreational use, but only 47% backed it in conservative Orange County.
At the community level, Orange´s sub-units remain divided in terms of political approach to marijuana. Its cities continue to take differing stands on dealing with the proliferation of medicinal cannabis shops, though nearly 19 years have passed since voters approved the statewide measure legalizing medical marijuana. Some cities exemplifying this variation in approach are Anaheim, which in 2015 enacted a ban on all marijuana dispensaries, Santa Ana, which has opened a lottery system to decide who will receive marijuana collective permits, and Costa Mesa, whose City Council is considering an ordinance that would regulate, tax and allow cannabis dispensaries to operate in three industrial zones.
Orange County appears to be moderately against marijuana when taken as a unit, and thus may not be an ideal market within which to promote marijuana legislation and operations. However, due to the variance of political ideology by city, marijuana operators and investors interested in this region might benefit from considering this market on a city-by-city - rather than a county-level - basis.
Currently, only two municipalities in Orange County allow the operation of medical marijuana dispensaries and collectives: Santa Ana, where the majority of the county’s brick-and-mortar dispensaries are concentrated, and Laguna Woods, where several collectives are operational and provide medical marijuana to members. Although Orange County has historically been a strong opponent of medical marijuana legalization, the passage of a measure to regulate and tax the sale of medical marijuana in Santa Ana indicates this opposition may be giving way to regional demand and represents potential opportunities for growth in the medical marijuana industry.
Perhaps the most notable winner in Santa Ana’s first dispensary license lottery, in which twenty licenses were awarded, was Cypress Hill rapper Louise Freese, better known by his stage name “B-Real.” Freese, a well-known legalization proponent, has named his dispensary after one of the group’s most famous songs, Dr. Greenthumb. As of August 2016, Dr. Greenthumb was operating on a delivery-only basis.
While the current political environment has stifled the development of large chains, there is no shortage of unlicensed dispensaries that have sprung up to meet local demand. Most of these establishments operate in Santa Ana, with smaller concentrations in the cities of Westminster, Garden Grove, and Huntington Beach. Despite opposition from local law enforcement, some dispensaries have managed to develop solid reputations for quality, such as Organix Wellness Center in Santa Ana, which was voted the county’s best dispensary by the OC Weekly in 2014. Robust demand continues to encourage the development of numerous unlicensed dispensaries and suggests significant growth with the advent of a more welcoming political environment.
Although Orange County is primarily a flower market, edible and concentrates products both have a strong presence and are expected to comprise equal shares of the market with flower in the near future, especially as recently licensed dispensaries begin operations.
Currently, dispensaries across the county stock most major California edible brands, such as Bhang, Kiva, and the Venice Cookie Company. However, unbranded products still maintain a significant market presence, reflecting further potential for the development of strong local and statewide brands.
Likewise, only 6 concentrates brands command more than a 1% market share, indicating that the market is still maturing. Given the recent rise in demand for marijuana concentrates, the Orange County concentrates market is expected to see significant development and growth.
The majority of popular brands available in Orange County are produced in other parts of California, due to local restrictions against the production of marijuana products. Nevertheless, some brands seem to be more popular in Orange County than elsewhere, such as Trikom Treats, a producer of infused chocolates and baked goods. Products from San Diego-based Chronic Catering Company and Paradise Candy Company can also be found in dispensaries throughout the county.
Orange County’s market is expected to grow 218% over the forecast period (CAGR 26%) from $113 million in 2016 to $360 million in 2020.
Flower will remain a strong product category but is expected to lose market share throughout the forecast period (from 58% to 36% of the medical market). The dollar value of flower sales is expected to increase as the overall market increases from $65.8 million to $133.5 million between 2016 and 2020. The growth rate of flower sales is estimated at 102% with a CAGR of 13%.
Edibles and concentrates will be fast growing segments of the industry with the edibles market share increasing to 35.24% by 2020. The dollar value of edibles sales is expected to increase from $24 million in 2016 to $109 million in 2020 ($43 million medical, $66 million recreational) , with total growth of 354% and an estimated CAGR of 47%.
The market share of concentrates is expected to increase to 26% by 2020 with the dollar value of sales estimated to increase from $21.5 million in 2016 to $95 million in 2020 ($31 million medical, $74 million recreational).
The market share of topical products, THC pills, tinctures, etc. is expected to increase to nearly 2.5% by 2020 with the dollar value of sales estimated to increase from $1.9 million in 2016 to $11.4 million in 2020 ($3 million medical, $8 million recreational).
The Orange County market presents strong potential for growth but the regulatory environment moving forward is unknown. If the municipalities in the county begin to relax their prohibitions then significant growth should be expected. If, however, the prohibitions are kept in place, this will stifle what otherwise would be substantial growth and may drive patients to the black market to obtain their cannabis.
In Orange County, flower has been the dominant product category over the past several years, but edibles and concentrates have recently increased presence to match shares in other California markets. As in other areas, most dispensaries offer the major edibles brands, such as Bhang, Kiva, Korova, and the Venice Cookie Company. On the other hand, there seems to be more room for development in the concentrates market, where Moxie Seeds & Extracts commands a 6.7% market share but all other brands fail to reach the 2% mark. These low market shares show that no brand has yet captured an insurmountable portion of the market and that there is opportunity for local or outside manufacturers or distributors to generate brand loyalty and capture market share. Orange’s demographics (older, wealthier, more conservative) and the negative views towards medical cannabis of many of its residents make it likely that products seen as healthier and more discreet will perform particularly well.
The state of California will not require laboratory testing of cannabis or cannabis products until 2018, and as such there are currently no commercial marijuana testing facilities located within Orange County. Patient safety and accurate product information will play an important part in convincing municipalities to move from medical marijuana prohibition to legal regulated markets. As this transition occurs an increased demand for lab-tested cannabis can be expected. Dispensaries that operated or continue to operate in the county are forced to send their cannabis to other areas of the state for lab testing. Many simply choose not to have their cannabis lab-tested at all. Local cannabis-testing companies will be an important part of the county’s transition to legal regulated markets and demand for testing services will likely be high, especially after January 2018.
The biggest threat currently in Orange County is the opposition to medical marijuana dispensaries that remains among the public and many public officials. While there is no shortage of demand in the county as evidenced by the closure of many unlicensed dispensaries over the past couple of years, it will be impossible to legally tap into the market without gaining broader approval from the public and public officials. Fortunately, medical legalization initiatives are on the ballot in Costa Mesa and Laguna Beach, indicating a possible shift in political attitudes toward the medical marijuana industry.
Regulatory Environment
There are indications that opposition to dispensaries is softening in the county. Santa Ana opening their legal regulated market and Laguna Beach and Costa Mesa residents will vote on medical legalization in November 2016. The MMRSA mandate regarding local jurisdictions and medical marijuana regulations, and the expected passage of recreational legalization statewide in November 2016 are likely to increase pressure on local officials to each regulations on cannabis businesses in the near future.
Supply
The frequency of raids against illicit grow operations in Orange County indicates a significant cultivation industry. The dispensaries that are or were operating most likely cultivate their own marijuana under the guidelines laid out at the state level in SB 420, or import cannabis from outside of the county. If prohibitions and restrictions were loosened there would almost certainly be an increased supply, meaning that legal access, rather than supply, is the main constraint on the growth of the legal market.
Demand
The large number of unlicensed and illegal dispensaries that operate or operated in the county in spite of prohibitions against dispensaries indicates significant demand. The quantity demanded in Orange is estimated to increase 19% over the forecast period and figures suggest the market is made up primarily of occasional users. Generally these are users who are more comfortable purchasing cannabis through legal markets. Should municipalities in the county move towards legal regulated markets, demand for legal cannabis is expected to increase substantially.
Competition
Competition in most parts of Orange County seems to be decreasing due to aggressive law enforcement crackdowns on dispensaries operating illegally and a decrease in the number of active dispensaries as a result. However, the competitiveness of the market will depend on decisions local government officials make regarding whether or not to move towards legal regulated markets. If city officials opt for no change and continue with their policy of prohibiting dispensaries, competition will be small. However, if dispensaries are formally allowed and regulated this would open the legal market and increase competition.