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 by January 1st, 2018. Accordingly, Sacramento County municipalities are expected to finalize their own set of regulations regarding medical marijuana cultivation, processing, and sale by this deadline.
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%. Residents are allowed to grow up to 9 indoor plants per house for medical purposes under a June 2014 county ordinance.
No laws prohibiting the cultivation of cannabis existed in the City of Sacramento until November 2012, when the City Council passed a ban on all outdoor grow operations except those in a secure greenhouse system. Though no special registration or permit is required for cultivation for personal use, the indoor cultivation of medical marijuana in residential zones (or on any premises zoned for residential use) within city limits must conform to the following standards:
A planning and design commission conditional use permit is required to establish or operate a medical marijuana dispensary in the city of Sacramento. With few exceptions, the following location requirements apply to all medical marijuana dispensaries operating within city limits:
Although marijuana delivery services are prohibited in Sacramento, there are many currently in operation. Dispensaries who participate in delivery services run the risk of losing their licenses. However, the city ordinance banning delivery services is only enforced upon the receiving of complaints. As of August 2016, 7 delivery services were still in operation.
Medical marijuana ID cards may be issued after an in-person appointment at the Sacramento County Department of Health and Human Services and payment of a $166 application fee ($83 for Medi-Cal patients) in addition to a $66 ($33 for Medi-Cal patients) fee paid to the State of California. Proof of residency in Sacramento County is also required for patients, though out-of-county physician recommendations are accepted.
The Sacramento City Council approved Measure C in 2010, which levied a 4% Business Operations Tax on all gross receipts for businesses engaged in medical marijuana transactions. As the sale or distribution of marijuana is prohibited in unincorporated Sacramento County, no additional tax applies.
There is an ongoing debate about whether medical marijuana should be regulated at the state or local level. Most cannabis business owners advocate for regulation at the state level, however, local governments want local control over the industry and are taking strong measures to establish and enforce county and municipal level regulatory mechanisms.
Sacramento law enforcement mainly targets illegal grow operations, although after the approval of an ordinance allowing medical marijuana to be cultivated indoors, most enforcement targets illicit outdoor grow operations in rural areas. Nevertheless, the standing policy has shifted away from raids and arrests towards working with the community to inform people of the changing laws. Grow operations in violation of municipal regulations are usually given ten days to comply - typically by moving or disposing of plants - before enforcement action is taken.
The value of the Sacramento market is expected to grow from $113.7 million in 2016 to $337 million in 2020, a growth rate of 196% and a Compound Annual Growth Rate (CAGR) of 31.2%. This is lower expected growth than the Northern California region, which is forecast to grow 217% (CAGR 33.4%) from 2016 to 2020.
If current restrictions are eased (the city of Sacramento is the only municipality in Sacramento County to allow medical marijuana dispensaries and currently has only granted permits to 30 dispensaries) the Sacramento market is poised for solid growth given the signs of strong demand, including the operation of unlicensed dispensaries and illegal delivery services.
All product categories are forecasted to grow in sales, but over the forecast period the market share of flower is estimated to decline while edibles, concentrates, and “others” (pills/tinctures/topicals/etc.) will increase in market share, driving Sacramento’s growth.
The biggest stories impacting the Sacramento market are the passage of the MMRSA (which finally brings statewide regulations to the medical marijuana market) and the on-going drought in the state of California.
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. This would still allow city bans and restrictions on cultivation and sales but should greatly decrease federal government raids. It is expected pressure would be put on cities to loosen their restrictions or do away with their bans as the deadline for local jurisdictions to pass their own regulations approaches.
Statewide regulations would most likely increase city’s and county’s confidence in the regulatory system and enable them to take advantage of cannabis industry tax revenue. In addition, the possible passage of recreational legalization in November 2016 is also expected to pressure local jurisdictions to allow a regulated industry and benefit from tax revenue (especially in Northern California).
California has been dealing with a significant drought over the past several years and its impact on local waterways (creeks, streams, lakes) threatens the water supply used by outdoor grow operations. The cannabis plant requires a significant amount of water each day and as the state’s water supply is stretched thinner and thinner, outdoor growers are resorting to illegal water diversions in order to supply their cannabis crops with water. This practice has drained already stressed local waterways and drawn the attention of state fish and wildlife agencies. Such an increase in attention continues to raise the chances of law enforcement involvement.
The biggest challenge for cannabis businesses in Sacramento County is the prohibitions and restrictions on dispensaries and delivery services. Other than the city of Sacramento, which limits the number of dispensaries to 30 and prohibits delivery services, there is nowhere else in the county to legally dispense medical marijuana. The presence of unlicensed dispensaries and illegal delivery services highlights strong regional demand for marijuana that is not met by the area’s limited number of licensed dispensaries. This regulatory environment reduces what could be a significantly bigger legal market and has allowed those fortunate enough to be granted licenses to flourish. Likewise, this regulatory environment makes it fundamentally impossible to find legal entry points for new dispensaries or delivery services.
Outdoor cultivation is generally prohibited in virtually all parts of Sacramento County, although limited indoor cultivation is permitted in some areas. Residents of unincorporated Sacramento County are allowed to grow up to 9 marijuana plants per single-family residential dwelling for medical purposes. The city of Sacramento permits personal medical marijuana cultivation limited to no larger than 400 square feet and no more than 3800 watts of artificial light.
Although outdoor marijuana cultivation continues in Sacramento County despite the prohibition, the county has classified outdoor cultivation a waste of water. This means outdoor growers face the additional liability of being fined up to $500 per day for excess water use. For this reason, most dispensaries in the region are likely supplied by unregulated marijuana growers located in more rural areas of Central and Northern California.
Since California state law does not address marijuana processing, producers of medical marijuana edibles and concentrates in Sacramento do so in a legal gray area. Much of the region’s medical marijuana processing takes the form of independent dispensaries producing edibles and concentrates on-site.
A small number of brand name concentrate producers, such as Full Flava Extracts, operate in Sacramento. Heavenly Sweet, which produces a wide variety of infused edibles available in dispensaries across Northern California, is also based in Sacramento. Given Sacramento’s proximity to fertile growing operations in northern California, a shift in political attitudes could facilitate the growth of a larger processing industry in Sacramento in the near future.
There are currently 30 licensed medical dispensaries and 7 unlicensed delivery services operating in Sacramento County, although several dozen more unlicensed dispensaries are also active throughout the county. These relatively small numbers are due to restrictions on medical marijuana dispensaries in all areas of the county outside of Sacramento city proper. Medical marijuana dispensaries in the region also face competition from an active black market that is supplied by the multitude of farms operation in Northern California. Accordingly, the market for regulated dispensaries will likely see expansion now that recreational marijuana has been legalized.
Quality Assurance
Currently, the only operating marijuana testing facility in Sacramento County is Sequoia Analytical Labs. California state law will not mandate marijuana testing until January 2018, so currently only a small number of dispensaries and delivery services in the region carry lab-tested products. This is expected to change dramatically over the next year in anticipation of statewide testing regulations. Nevertheless, the market’s top-selling edibles are lab-tested brands such as Korova, Kiva, and Cheeba Chews, illustrating consumer demand for lab tested products in the local edibles market.
Nearly half of Sacramento´s population is white (compared to California´s 39%) and Sacramento only has slightly more than half the Hispanic population (22%) that the state has (39%). Sacramento also has a 4% higher African American population than the state as a whole.
Education levels are similar in the state and county, with approximately 60% of the population holding a high school degree or greater, and 28% holding a Bachelor´s degree or greater.
The composition of the state and county are also nearly identical in terms of age groups, with about 14% of their populations between ages 25 and 34, and approximately 13% ages 65 or older. It is important to note Sacramento County’s population is also rapidly aging. From 2003 to 2013, there was a 54% increase in the population ages 60‐69, and a 45% increase in those age 85 and older.
Finally, in contrast to most of the Southern and Central California regions studied, both the mean and median incomes in Sacramento County are substantially lower than in the state overall, with a $9,000 and $6,000 difference, respectively. Moreover, the median value of housing units over the period 2009-2013 was much lower in Sacramento County ($234,000) than it was in California ($366,400).
The vast baby boomer generation (which makes up the rapidly expanding 51-69 age group) may constitute as much as 50% of the potential medical marijuana customer base, according to Kris Hermes of Americans for Safe Access. As the “boomer” generation moves into retirement, is no longer restricted by employer policies, and simultaneously begins to experience the health concerns accompany aging, increased medical marijuana demand is sure to follow. In Sacramento County, where the elderly population is growing and increasingly made up of the relatively marijuana-friendly baby boomers, there is great potential for the medical marijuana industry to thrive.
With regards to race, according to the Pew Research Center (2015), the majority of white and black people say marijuana should be made legal while only 40% of Hispanics share that view. Therefore, based upon Sacramento County´s larger white and black populations, county residents are more likely to view marijuana favorably than are state residents in general.
In addition, national survey research shows those who live in low-income families are more than twice as likely to use marijuana moderately or heavily when compared to those in high-income families. Sacramento County´s low mean and median incomes may indicate a higher propensity for its residents to seek marijuana than residents in the wealthier regions south and west of the county.
Sacramento County historically tends to vote moderately liberal on both social and fiscal issues. As liberals tend to be more open to accepting and decriminalizing marijuana, one might expect the county to be lenient with respect to marijuana regulation given its consistent left-leaning political track record. However, much of the power over marijuana regulation is held among Sacramento´s non-partisan Board of Supervisors - its governing body which has a constituency that has urged it to tighten marijuana regulation. The five-member Board is empowered to adopt ordinances and levy taxes in Sacramento´s unincorporated areas.
In 2014, following a string of marijuana-related homicides in the county, as well as in response to the lodging of many residential complaints, the Board voted unanimously to limit the indoor growing of marijuana and ban outdoor growth altogether. While it stopped short of an all-out ban, it is clear this Board and its constituents have an interest in seeing the marijuana market and production firmly regulated.
Furthermore, many cities outside its unincorporated area but within Sacramento County, such as Sacramento and Citrus Heights, have banned most or all outdoor cultivation. Others, such as Elk Grove, have banned marijuana cultivation entirely. Thus, before entering or investing in the Sacramento County marijuana market, it is important to monitor the decisions and leanings of the County Board of Supervisors as they appear to reflect the sentiments of the county´s residents toward marijuana´s regulation and legality.
The Sacramento County dispensary scene is small yet viable, and demonstrates the potential for growth with the reduction of local regulations. Brick-and-mortar dispensaries are limited to Sacramento city proper, where the municipal government currently permits the operation of up to 30 dispensaries. Although the city is presently enforcing a moratorium on new dispensary licenses, a number of unlicensed operations are scattered throughout the city and demonstrate the strong regional demand for medical marijuana. In general, most dispensaries are small, independent operations with steady amounts of business, serving not only Sacramento but surrounding areas as well. As the hub of the Northern California medical marijuana market, the region is expected to see large growth now that more liberal cannabis regulations have passed.
Among Sacramento’s most notable dispensaries is Canna Care, a dispensary run by the Christian medical marijuana advocacy group Crusaders for Patient’s Rights. Canna Care is also involved with Americans for Safe Access, a Washington DC advocacy group that supports legalization at the federal level. In addition to medical marijuana, Canna Care is also a strong supporter of local charities.
Sacramento is also home to Abatin Wellness Center, a medical center that achieved national fame due to its brief association with syndicated talk show host Montel Williams. Williams, a medical marijuana patient, served as a consultant to the business during its establishment in 2011. Although Williams has since moved on to other projects, Abatin continues to be known as a premier, high-end source of medical marijuana products.
Brand name edibles account for approximately half of the Sacramento market, constituting a somewhat larger proportion than found in other California markets. Although out-of-state manufacturers Cheeba Chews and Edipure rank among the top 10 brands by market share, the majority of branded edibles are produced by in state manufacturers such as Korova and Kiva (the top two brands in the county). Other major brands that make the top ten include Bhang and Trikom Treats.
A wide variety of brand name concentrates are present in the Sacramento market, although no single brand has a significant market share. Currently, California manufacturer Dab Face controls approximately 3% of the market, followed by POP Naturals with approximately 2.77%. A variety of California-produced brands round out the top ten, but the large presence of non-branded products indicates a potential for investment in the development and distribution of branded concentrates products in the area.
The seventh-largest brand by market share in the county is Heavenly Sweet, a Sacramento-based edible manufacturer that specializes in a wide variety of edibles including pastries, ice cream, and pizza. It is likely local manufacturers will expand production now that the state has legalized recreational marijuana use.
Sacramento’s market is expected to grow 196% over the forecast period (CAGR 31.2%) from $113.7 million in 2016 to $337 million (roughly $110.5 million in the medical market and $226.5 million in the recreational market) in 2020.
Flower will remain a strong product category but is expected to lose market share throughout the forecast period (from 53% to 36% of the medical market). The dollar value of flower sales is expected to increase as the overall market increases from $60.3 million to $128 million between 2016 and 2020. The growth rate of flower sales is estimated at 112% with a CAGR of 20.7%.
Edibles and concentrates will be fast growing segments of the industry with the edibles market share increasing to 35.5% by 2020. The dollar value of edibles sales is expected to increase from $34 million in 2016 to $119.6 million in 2020, with total growth of 252% and an estimated CAGR of 37%.
The market share of concentrates is expected to increase to 24.2% by 2020 with the dollar value of sales estimated to increase from $17.7 million in 2016 to $81.5 million in 2020, with total growth of 360% and a CAGR of 46.5% over the forecast period.
The market share of topical products, THC pills, tinctures, etc. is expected to increase to over 2.4% by 2020 with the dollar value of sales estimated to increase from $1.2 million in 2016 to $8.15 million in 2020, with total growth of 384% and a CAGR of 48% over the forecast period.
Concentrates are a fast-growing product category and although there are a wide variety of brand name concentrates available in the Sacramento market, no single brand has a significant market share. Because concentrates are viewed as healthier and many are odorless or less pungent than smoking traditional flower, and because they enable the user to consume larger amounts of THC or CBDs while taking smaller doses, their popularity has been rising. The large presence of non-branded products indicates an opportunity for well-positioned new market entrants to capture market share with consistent, reliable, high-quality products.
Another opportunity in the Sacramento market is in the area of cannabis testing laboratories. At present, Sequoia Analytical Labs is the only marijuana testing facility operating in Sacramento County. Although California state law does not mandate marijuana testing, the market’s top selling edibles and concentrates are lab-tested brands (verifying consumer demand for lab-tested products). It can be assumed local dispensaries that opt to sell their own edibles and concentrates will look to have them lab-tested in order to better compete with the top selling brands. Additionally, dispensaries seeking to provide quality products to their patients will have incentive to lab test their products so patients can have more accurate information about their medication. Because competition in this part of the market is basically non-existent, new entrants will have the opportunity to build customer loyalty and capture market share.
The biggest threat to the legal Sacramento market is the local and regional black market. Northern California is the heart of cannabis cultivation in California and every year harvest time brings a surplus of product to the market. Black market prices, usually cheaper than dispensary prices, can lure patients away from dispensaries and create significant competition between the legal and illegal markets. Because brick and mortar dispensaries have built-in overhead and operating costs, many find harvest time to be a low sales season.
While the black market generally competes with the flower market it does not have a noticeable impact on the edibles and concentrates markets. This is primarily due to the fact the production of edibles and concentrates generally requires expensive equipment and/or can be time consuming. Therefore, patients looking for products in these product categories buy from dispensaries all year.
Regulatory Environment
There are indications opposition to medical marijuana is strengthening in the county. In mid-July 2015, Sacramento County Supervisors voted to declare marijuana cultivation a form of water waste, while last year the county prohibited all outdoor cultivation. In June 2015, the county also prohibited indoor cultivation of more than 9 plants and the city of Sacramento is currently enforcing a moratorium on new dispensary licenses. Prohibitions or strong restrictions are in place in all other areas of the county. However, the January 2018 deadline for local jurisdictions to establish regulations under the MMRSA could apply some pressure on municipalities to move towards legal regulated markets.
Supply
The supply of medical marijuana in Sacramento County is becoming more restricted. Outdoor cultivation is prohibited throughout the county and indoor cultivation is generally confined to no more than 9 plants. If dispensaries are not able to meet their demand locally they are likely to source their cannabis from farms in remote areas of Northern and Central California. Shortages of supply have not been an issue to date, but the statewide drought and tougher restrictions place added pressure on Sacramento’s supply.
Demand
Demand in Sacramento is strong as evidenced by the unlicensed dispensary and illegal delivery operations that exist in addition to the licensed dispensary operations. The quantity demanded in Sacramento is estimated to increase 21% over the forecast period, the largest increase in quantity demanded in any of the California metro markets analyzed. Sacramento’s market is made up of mostly occasional and heavy users.
Competition
As restrictions in the county tighten, increased competition from the black market can be expected as still limited legal access will drive consumers to illegal sources. There are an abundance of grow operations in the less populated areas of Northern and Central California and during harvest season they are very capable of undercutting dispensary prices, particularly on flower.
However, as California’s drought continues, outdoor grow operations are threatened by both weather conditions and increased scrutiny from state fish and wildlife services. This will strain supply and increase competition amongst cannabis businesses looking for product. Competition in the Sacramento market should remain strong and even increase in the short to medium term.