Portal - Metro - San Diego

San Diego

Regulatory Environment Overview

 

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, San Diego is expected to finalize its own set of regulations regarding medical marijuana cultivation, processing, and sale by sale by this deadline. Currently, the city of San Diego licenses and regulates marijuana dispensaries, with plans to issue a maximum of 36 dispensary licenses. As of August 2016, 15 licensed dispensaries were operating, with another 7 expected to open in 2017.

In February 2014, the San Diego City Council approved an ordinance regulating medical marijuana dispensaries operating within city limits. As per the terms of the ordinance, all dispensaries must be located in an industrial or commercial zone and at least 1,000 feet from schools, parks, nursing homes, or other dispensaries. A maximum of four dispensaries are permitted in each of the city’s 9 districts, for a total of 36 dispensaires. All must operate on a non-profit basis. A Green Alternative, located in southern San Diego near the Mexican border, was the first dispensary to open under the city’s licensing system.

The same zoning rules apply in unincorporated San Diego County, with the exception they are only allowed in industrial zoned properties at least 1,000 feet from residential zones. However, as of April 2016, county officials instituted a moratorium on new marijuana businesses in unincorporated parts of the county until at least March 2017, citing uncertainty regarding the outcome of the California initiative to legalize recreational marijuana.

After the passage of the MMRSA in October 2015, which granted local jurisdictions sovereignty regarding medical marijuana regulation, virtually all San Diego county municipalities moved to ban medical marijuana dispensaries. As of August 2016, the City of San Diego and unincorporated areas of San Diego County were the only jurisdictions that approved medical marijuana dispensaries. Only the City of San Diego was issuing licenses for new dispensaries.

All medical marijuana distributed in San Diego must be sealed in an airtight manner, and all packaging must contain labels with the following information:

  • Patient’s name
  • Dispensing date
  • Name and address of dispensing cooperative
  • Name of product
  • Product ingredients
  • “Product must be used as recommended”
  • “Product must be kept out of the reach of children”
  • “Product users must not operate heavy machinery while under the influence of marijuana”
  • “Sale or transfer of product to non-patients is prohibited”
  • “Product is intended for medical use only. Cal. Health & Safety Code § 11362.5”
  • Any additional use instructions and warnings that may be applicable

 

All edibles and concentrates must be labeled with the following:

  • The patient’s name
  • Dispensing date
  • Name and address of dispensing cooperative
  • A warning label that contains the cannabis patient advisory information
  • The source of the food production

 

Medical marijuana ID cards may be issued after an in-person application process at the San Diego Health and Human Services Agency 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.

 

Taxation

 

There is no additional excise tax on medical marijuana being levied in San Diego at this time. Sales on medical cannabis are subject only to the current California sales tax of 7.5%. City of San Diego residents are expected to vote in November on a proposed 8% tax on dispensary sales revenue.

 

Law Enforcement and Government Attitudes

 

Though legal since the 1990s, the City of San Diego only began issuing licenses for medical marijuana dispensaries this year, demonstrating a relatively strong reluctance to accept a legitimized cannabis industry. In February 2014, the City Council approved, by a vote of 8-1, an ordinance to regulate the city’s medical marijuana dispensaries. This suggests that municipal authorities are finally supportive of medical cannabis as long as the applicable regulations are strictly enforced.

Although law enforcement officials in California are generally sympathetic to those with a legitimate medical need for marijuana, there is a prevailing belief the current dispensary system is greatly taken advantage of by individuals who simply want to get high. As a result, police have aggressively opposed legalization measures and have openly spoken out against California’s medical marijuana program as a sham, an opinion that is woven into various officer training programs.

In October 2012, federal and state narcotics agents raided the home of Dennis and Deborah Little, which began a high-profile legal battle that lasted nearly two years. Deborah, 60, is a cancer patient who has been treated for AIDS for two decades. Her husband Dennis, 65, has peripheral neuropathy. Though both are registered patients in San Diego, their physician's recommendation for medical marijuana use, as required by state law, had recently expired. They were accused of marijuana possession for sale and illegal cultivation and faced up to six years in prison. They were eventually acquitted of the first charge by a Superior Court jury and the judge dismissed the second. The Littles recently filed a law suit against San Diego law enforcement, claiming that their rights as medical marijuana patients had been violated.

In the City of San Diego, the city attorney’s office has continued crackdowns against unlicensed dispensaries operating with city limits, going after owners with massive fines and criminal charges. In 2016, city narcotics agents carried out two raids against San Diego cannabis extraction company Med-West (a supplier for Bhang) seizing millions in assets. Grassroots, a cultivator and supplier for local dispensary A Green Alternative, was also the subject of raids by local law enforcement agencies in 2015. The raids, carried out in January and June, are part of a continuing statewide trend of asset forfeitures carried out by local narcotics enforcement agencies against marijuana businesses.

Old opinions of marijuana as “the evil weed” remain strong in San Diego, prompting the few cannabis business that operate there to go above and beyond what is required in terms of regulatory compliance.

MARKET DYNAMICS

 

Growth Rates

 

The value of the San Diego market is expected to grow from $131 million in 2016 to $489 million in 2020, a growth rate of 273% and a Compound Annual Growth Rate (CAGR) of 39%. This is slightly lower expected growth than the Southern California region, which is forecast to grow 286% (CAGR 40%) from 2016 to 2020. Such growth should not be surprising given the San Diego market is seeing the opening of the first permitted dispensaries so legal access should draw growing numbers of San Diego consumers.

All product categories are expected to show substantial growth but like many other metro areas, edibles, concentrates, and “others” (pills/tinctures/topicals/etc.) will drive San Diego’s growth as they all increase in market share. These products should be particularly appealing to the slightly older, more professional, and more affluent consumer base that probably prefer more discreet modes of consumption.

 

2016 Headlines 

 

The opening of the regulated market in San Diego continues to be the most significant story of 2016. Fifteen dispensaries have opened as of August 2016, in various city regions such as Pacific Beach, Downtown, Mission Valley, and Mira Mesa. As new dispensaries continue to be approved, city authorities are cracking down on unlicensed dispensaries. Owners to two illegal medical marijuana dispensaries in San Diego were ordered to pay $830,000 in civil fines, while owners of two others were criminally charged. These actions come in addition to raids against local processors and cultivators and demonstrate the environment for unlicensed businesses is expected to grow more hostile into the future.

 

Industry Challenges

 

For dispensaries currently operating without a permit, the most significant challenge is the increase in concerted efforts by local law enforcement to shut them down. Approximately a year ago there were an estimated 70 dispensaries operating in San Diego without a license, but as of August 2016, approximately 115 unlicensed dispensaries and 37 delivery services were operating throughout the county. Prosecution against unlicensed businesses is expected to continue.

As the city’s legal market gains momentum there are challenges for entrepreneurs wishing to enter the market, namely the newly regulated nature of the city’s market. While the city has taken strides to create a legal, regulated market, the current plan only allows for a total of 36 dispensaries. For this reason the legal San Diego market is difficult to enter as nearly half of the available licenses have already been granted.

SUPPLY CHAIN

 

Cultivation 

 

The scale of commercial marijuana cultivation in San Diego County is limited by ambiguity in California state law and ambivalence on the part of local law enforcement. Cultivation in areas of the county outside the city of San Diego fall under state regulations that limit growing to 6 mature plants or 12 immature plants per qualified patient. However, San Diego City Municipal Code allows qualified patients to cultivate up to 24 plants in a 64 square foot indoor space, or outdoors in a fully enclosed yard with a minimum six-foot fence, or a greenhouse that can be locked.

Primary caregivers, defined under state law as those who are responsible for the housing, health, or safety of qualified patients, may cultivate up to 24 marijuana plants for each qualified patient under their care, so long as the total amount of marijuana under cultivation does not exceed 99 plants. Consequently, most marijuana cultivation in San Diego takes the form of either illegal outdoor farming or indoor grow operations that may or may not meet regulation. It is therefore difficult to ascertain the extent of the county’s cultivation capability, since a significant amount of cultivation takes place outside the legal boundaries defined by law. It is likely much of local demand is met by imports from other regions such as Northern California or Mexico.

San Diego law enforcement is generally hostile to marijuana cultivation and has been aggressive in carrying out raids against local growers. For example, in May 2015, sheriff’s deputies and federal agents raided the growing facilities of the owner of A Green Alternative (San Diego’s first licensed medical dispensary) although no charges were filed. County law enforcement also works in conjunction with federal agencies to shut down outdoor cultivation taking place in rural parts of the county. Such proactive law enforcement activity suggests the county’s cultivation has not reached its full potential, and would likely expand significantly should local jurisdictions allow it following the passage of the MMRSA.

 

Processing

 

San Diego County law allows the cultivation and use of medical marijuana but is silent regarding marijuana processing. Restrictions on the scale of marijuana cultivation effectively circumvent the establishment of any legal large-scale processing facilities, and locally produced medical marijuana products are often processed on-site by individual dispensaries. Nevertheless, the county is home to at several processors such as The Chronic Catering Company, The Paradise Candy Company, and Med-West, all who distribute throughout Southern California.

 

Dispensary System

 

There are currently 115 medical dispensaries and 37 delivery services operating in San Diego County, but these numbers are expected to shrink as local authorities step up efforts to shut down unlicensed dispensaries following the city’s decision to adopt a formal licensing system. Although it remains unclear whether licensed dispensaries will be established fast enough to satisfy the demands of the local market, it is likely the new licensing system, combined with renewed efforts against unlicensed dispensaries, will keep supply in the medical marijuana market from meeting demand. The continued presence of outdoor grow operations, despite law enforcement raids and a relatively high demand for branded edibles and concentrates products produced in other parts of California, indicate there continues to be plenty of room for growth the San Diego County medical market.

 

Quality Assurance

 

There is no regulatory tracking or testing system in place and therefore no official record of the number of quality assurance Labs in operation. However, as of August 2016, there were two testing facilities operating in the San Diego region.

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.

DEMAND FACTORS

 

Demographics

 

San Diego has had a higher per capita income than the state as a whole for some time, and is generally considered to be quite an affluent area. The city of San Diego is ranked as the 5th richest city in the United States in 2015. Since the year 2010, San Diego county´s mean and median incomes have been between $3,000 and $7,000 higher per year than California´s. San Diego also has a slightly lower poverty level than the state (2009-2013).

Furthermore, nearly two-thirds of employees in San Diego County work in “white collar” jobs, highlighting the county residents´ above average wealth. The cost of living in San Diego is 4.9% greater than the California average, and a notable 39.9% greater than the national average.

In terms of the county’s population, in recent years San Diego has had a higher proportion of its population between the ages of 25 and 49 than California has had. A decreasing percentage of San Diego´s populace is under age 25. Otherwise, the state and county demographic profiles appear quite similar when looking at age.

 

Demographic Influences on Demand

 

California marijuana users tend to be young and the vast majority of them are under the age of 25. According to Gallup, statistically, the older voters are the less likely they are to support marijuana’s legalization - but 67% of Americans aged 18 to 29 do support it. This age group will promote the legalization of recreational cannabis and is more likely to purchase both medical and recreational marijuana products. Based upon this premise, the demographic shift toward a slightly older population in San Diego does not bode well for future demand for marijuana in the county.

Additionally, given different socio-economic factors, such as the high cost of living and increasing competition for professional or “white collar” positions in San Diego County, many young people cannot afford to make a living there. This is reflected in the slow departure of San Diego’s younger aged residents. This is a trend that can be expected to continue if the cost of living in the county remains elevated and could greatly impact the marijuana market (given that young people constitute an intrinsic part of the market).

San Diego’s wealth is also an important factor to consider in understanding the present and future of marijuana in the county, considering those who live in low-income (under $20,000) families are more than twice as likely to use marijuana moderately or heavily when compared to those with incomes above $75,000. Given San Diego’s current mean income of $88,933, the county’s residents may be less inclined to use medical marijuana than those in less prosperous counties elsewhere in California.

 

Political Influences

 

As of September 2012, of the 1.46 million registered voters in San Diego County, 510,792 were affiliated with the GOP and 510,692 were with the Democratic Party. Both parties were at 35%. The county is made up of moderate conservatives (who typically take a small lead at the polls) moderate liberals, and very few libertarian voters. Thus, it is difficult to predict local politics´ influence on the marijuana market when only considering general political ideology.

However, when specifically comparing attitudes toward marijuana throughout the state, San Diego County shows itself to be against the legalization of marijuana.

In a 2013 Field Survey conducted in California, 54% of registered voters who responded supported legalizing marijuana and subjecting it to the same sort of restrictions that exist for alcohol. Conversely, only 47% backed legalization in San Diego County.

Moreover, 17 of the 18 cities in the county have declined to allow medical marijuana dispensaries. The only exception is the city of San Diego, where as of 2015, only two marijuana dispensaries have been legally authorized to open and serve the county of over three million people. Other city leaders have even gone so far as to claim that San Diego is making a “huge mistake” by allowing legal dispensaries.

This resistance to marijuana´s legalization around the county may cause the recreational market to delay in gaining ground, and puts great barriers ahead of those interested in legally obtaining medical marijuana, thus limiting the growth of the market as well.

COMPETITIVE ENVIRONMENT

 

Major Players - Dispensaries

 

Due to a history of restriction against brick and mortar establishments, the majority of medical marijuana dispensaries in San Diego County have operated in a legal grey area. While medical marijuana use has been legal in the state of California since 1996, the county prohibited dispensary operations until 2014 when authorities allowed Outliers Collective (the county’s first approved medical dispensary) to open for business on unincorporated land just outside the city of El Cajon.

Since then, the city of San Diego has also begun to issue its own licenses to medical marijuana dispensaries. In March 2015, A Green Alternative (located in Otay Mesa) became the city’s first legally operating dispensary. As of August 2016, there were 15 licensed and operational dispensaries within the city of San Diego, with 7 more expected to open in 2017.

In total, the city plans to grant 36 licenses, although restrictive operating regulations and prohibitive license fees (totaling approximately $400,000 per license) suggest it may be some time before all 36 licenses are granted. Nevertheless, this suggests there is tremendous room for growth for medical dispensaries within the city of San Diego, not to mention the opportunities for recreational retail operations should the state legalize recreational marijuana in 2016.

Consequently, the vast majority of the county’s operating dispensaries are unlicensed and unregulated. This indicates ample room for the growth of licensed dispensaries, especially in “marijuana-friendly” neighborhoods such as Pacific Beach and Ocean Beach. Dispensary licensing in the city’s other municipalities would require reversals in local bans against marijuana businesses., suggesting the future of the dispensary market in these areas remains uncertain.

 

Major Players - Edibles and Concentrates

 

As with other major metropolitan markets, major California brands are commonly found at most San Diego dispensaries. Unbranded edibles and concentrates have given way to branded goods, mirroring trends in most other US markets. Lab-tested edibles in California offer the added benefit of being in a state where lab testing is not required, increasing their demand among users who prefer lab-tested products.

Edipure is a manufacturer of infused cannabis baked goods and gummies. Originating in Colorado, Edipure is one of the most widely distributed brands in the US, available in California, Colorado, Washington, and other states. One of its main selling points in California is its lab-tested certification. As of August 2016, Edipure was the leading edibles brand in San Diego, with 7.88% of the market.

Also 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 dominant) 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 second largest edibles brand in Southern California with over a 7.62% market share.

Korova is a native California edibles producer specializing in cookies, brownies, and popcorn.  The company was established in 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 August 2016, Korova’s market share in the region was just under 7.5%.

Although concentrates are quickly growing in popularity among San Diego’s medical marijuana patients, brand name concentrates continue to represent a little over 18% of the market. Among branded products, Jetty Extracts commands the largest market share at 4.5% while Moxie Seeds & Extracts commands the 2nd largest market share at nearly 3% followed by Nature’s Lab and HGH Extractions with close to 2% each. Considering the increasing demand for concentrate products and the current lack of brand name manufacturers, the county’s concentrates market presents ample opportunities for growth and investment, especially for products that are lab-tested.

 

Local Brands

 

The legal ambiguity of medical marijuana in the region has presented an obstacle to the development of local marijuana manufacturers. Nevertheless, San Diego is home to a significant number of processors, such as Med-West, which produces Bhang products. San Diego is also home to the Paradise Candy Company, a maker of infused hard candies and caramels.

GROWTH POTENTIAL

 

Outlook

 

San Diego’s market is expected to grow from $131 million in 2016 to $489 million in 2020, a growth rate of 273% and a Compound Annual Growth Rate (CAGR) of 39%.

Flower will remain a strong product category but is expected to lose significant market share throughout the forecast period (from 59% to 36.6% of the medical market). However, the dollar value of flower sales is expected to increase as the overall market increases from $77.6 million to $194 million between 2016 and 2020. The growth rate of flower sales is estimated a 150% with a CAGR of 25.75%.

Edibles and concentrates will be fast growing segments of the industry with the edibles market share increasing to 35% by 2020. The dollar value of edibles sales is expected to increase from $31 million in 2016 to $171 million in 2020, with total growth of 436% and an estimated CAGR of 52%.

The market share of concentrates is expected to increase to 22% by 2020 with the dollar value of sales estimated to increase from $19 million in 2016 to $110 million in 2020, with total growth of 464% (and a CAGR of 54% over the forecast period).

The market share of topical products, pills, tinctures, etc. is expected to increase to more than 3% by 2019 with the dollar value of sales estimated to increase from $2.23 million in 2016 to over $15 million in 2020, with total growth of 585% (and a CAGR of 62% over the forecast period).

As can be seen by the numbers, San Diego’s market growth is expected to be impressive, particularly in the edibles, concentrates, and “others” product categories where consumers can find healthier and more discreet alternatives to traditional flower consumption. For those trying to enter the market but not lucky enough to obtained one of the thirty-six dispensary permits, a competitive move would be to develop a lab-tested branded product to compete with the largely unbranded product offerings in edibles and concentrates.

 

Opportunities

 

The nascent but growing legal regulated market in San Diego provides the chance for new entrants to build a following from the significant number of patients looking for a legal channel to obtain high quality, lab-tested cannabis products. Producers of edibles, pills, tinctures, topicals and the like with the appropriate product positioning, lab-testing, branding and advertising will find a strong market for their products. The vast majority of these products currently in the San Diego market are unbranded and many of the dispensaries that offered them are now closed. There is a real opportunity for a company with high quality, reliable, and consistent branded products to capture market share and make it onto the shelves of all 36 dispensaries.

San Diego’s demographics (older, wealthier, more conservative) and its reputation for being particularly health conscious make it likely products viewed by consumers as healthier, more discreet, or more convenient will perform particularly well.

 

Threats

 

Currently, the biggest threat to legal access in San Diego is the structure and process of the legal regulated market. After two years of approval, less than half of the available licenses have been issued and activated. This extended time period required for dispensaries to open through legal channels only serves to limit legal access to qualified patients and drives them to the black market. Even when the legal regulated market is fully operational, there will only be 36 licensed dispensaries to meet the city’s growing demand.

Raids by local law enforcement agencies is also expected to be a continued threat against local processors and cultivators until more concrete regulations regarding the local marijuana industry are established.

 

Moving Forward

 

Regulatory Environment

There has been some talk of revisiting the city limit on dispensaries to four in each of the city’s nine districts (36 in total). The Planning Commission has formally requested a workshop to discuss possible changes to the city’s ordinance, including what to do about delivery services. However, as of August 2016, no date has been set for the workshop. Proposed changes would need to be approved by the City Council. This does provide some hope city officials might be amenable to increasing the number of approved and permitted dispensaries in San Diego to allow for more legal access and a more competitive market. The moratorium against new dispensaries in unincorporated portions of the county, as well as local bans against marijuana business in most other municipalities means legal market growth will be limited to the City of San Diego for the near future.

Supply

Beyond the ramifications of California’s ongoing drought, which could negatively impact cannabis harvests statewide, there are no expected changes to San Diego’s cannabis supply. Because of San Diego’s size, proximity to Mexico, and more lenient cultivation amounts for qualified patients, supply should not be an issue.

Demand

As the legal regulated market matures it is expected to draw consumers away from the black market. This is good news for market participants as more consumers will be looking to purchase cannabis through legal channels. The total quantity of cannabis demanded in San Diego is estimated to increase 19% over the forecast period.

Considering figures suggest San Diego’s market is made up of mostly occasional users who are more likely to purchase cannabis through legal markets, demand for legal cannabis is expected to be significant.

Competition

At present, competition in San Diego is decreasing slightly because of the new restrictions on dispensaries and law enforcement crackdowns against illegal dispensaries. However, the competitiveness of the market will depend to some degree on decisions city officials make regarding whether or not to increase the number of dispensary permits, and whether or not they will approve and regulate delivery services. If city officials opt for no changes to the current ordinance and begin cracking down on delivery services, competition will decrease. However, if delivery services are formally allowed and regulated by 2018 there would be an increase in competition.

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