Portal - State - Southern California

Southern 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 Southern California, many dispensaries are operating illegally and unabated despite recent attempts by authorities to begin regulating the medical marijuana industry. While some cities have sought to regulate, cap, or ban them outright, few local governments have been successful in reining in the hundreds of illegal dispensaries still operating in the region or stop the proliferation of new ones.

City of Los Angeles

The last few years have been turbulent for the Los Angeles cannabis industry, reaching a climax in 2012 when the city council passed a ban on all marijuana dispensaries. This was later rescinded. In 2013, voters passed Proposition D which allowed Los Angeles to begin cracking down on unlicensed medical marijuana dispensaries. The proposition allows only 135 such businesses to operate within city limits.

When the law passed, it was uncertain how many dispensaries existed, with estimates ranging from 700 to more than a 1,000. There was also no record of where many of them were located, further complicating the enforcement of Proposition D. Since the law took effect, the Los Angeles City Attorney's office has gone to great lengths to shut down illegal dispensaries and has claimed to shut down more than 500 between November 2013 and April 2015. However, new dispensaries are opening every day and some of those forced to close simply open up days later elsewhere. Los Angeles remains a difficult place for marijuana businesses: in June 2016, Los Angeles County upheld a ban on marijuana cultivation in unincorporated parts of the county, and as of March 2016, delivery services remained illegal.

Los Angeles County

In November 2016, Long Beach approved two measures that permit from 26 to 32 store fronts. They also permit non-retail cannabis businesses to operate in the city. 

Orange County

In 2016 several Orange County municipalities voted to lift restrictions on marijuana dispensaries with mixed results. Laguna Beach voted against permitting medical dispensaries as did Cost Mesa although Cost Mesa did approve a non-retail, medical cannabis business zone. In May, the Placentia City Council voted to allow cannabis dispensaries and commercial cultivation and processing, before reversing the decision in June. 

San Bernardino County

In August 2016, the San Bernardino County Board of Supervisors voted to uphold a ban on marijuana cultivation and sale in unincorporated parts of the county, to remain in effect even if recreational marijuana is decriminalized in November 2016.

San Diego County

In response to the MMRSA, most cities in San Diego County enacted bans on marijuana cultivation and sales in early 2016. Currently, the only places in San Diego County where marijuana businesses are allowed are in the city of San Diego and in unincorporated portions of the county. As of August 2016, 15 licensed dispensaries were operating in San Diego, with another 7 expected to open in 2017. A maximum of 36 licenses will be issued by the city of San Diego under the guidelines of a 2014 city ordinance.

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.  It 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 desire.  Dispensaries will pay taxes to the state government, and may also be required to pay 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 $871,199,839 $939,032,005 $996,420,230 $1,139,969,190
Sales Growth 7% 8% 6% 3.9%
Avg. Price/Ounce $360 $300 $300 $300
Total Recreational Marijuana Sales 0 0 0 $2,480,538,864
Sales Growth n/a
Avg. Price/Ounce 0 0 0 $370

 

2016 Growth Drivers

The medical market maintained consistent growth in 2016, estimated at just under 8%. Edibles and concentrates grew slowly in terms of market share but both categories experienced better than total market gains, with edibles increasing just under 35% to over $164 million and concentrates increasing by close to 19% to over $227 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 (1.2%) than any of the three primary cannabis categories (flower, edibles and concentrates) representing just over $11 million in sales.

Flower remained the single strongest product category both in terms of market share and dollar value of sales with $536 million, although this is a 2.3% decrease from the 2015 sales figure of $548 million.  Edibles and concentrates are expected to continue making steady gains in market share and both will continue their trend of outgrowing the market overall. However, flower is expected to continue as the leading product category in both market share and in sales.

2016 Headlines

The biggest story for the California marijuana market is approval of state-wide legalization of recreational use in November 2016. The Adult Use of Marijuana Act (AUMA), also known as Proposition 64, decriminalizes the possesion and recreational cultivation of marijuana statewide. The act establishes 17 different types of marijuana business licenses to mirror the medical licenses proposed in the MMRSA, and, in addition to local sales taxes, will levy a 15% excise tax on recreational sales. Taxes on commercial cultivation will also be levied: $9.25 per ounce of dried flowers, and $2.75 per ounce of dried leaves.

The AUMA will be one of the first legalization initiatives to lay out specific guidelines for advertisements, barring packaging and advertisements aimed at children but 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.

Implementation of the MMRSA is set to begin January 2018. This will bring much needed regulation to one of the largest medical marijuana markets in the country. The establishment of “robust regulations” like 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 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 regulations is expected to transform the industry throughout California.

The MMRSA stipulates 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.

A significant headline for the Southern California market has been continued crackdowns on marijuana businesses in Los Angeles and San Diego. The Los Angeles City Attorney’s office has continued its crackdown on marijuana delivery services, forcing popular delivery services SpeedWeed and Nestdrop to cease operations, claiming marijuana delivery was in violation of regulations laid out under Proposition D.

In 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 addition, city police have carried out two raids against San Diego cannabis extraction company Med-West, a supplier for Bhang, seizing millions in assets. The raids, carried out in January and June of 2016, are part of a continuing statewide trend of asset forfeitures carried out by local narcotics enforcement agencies against marijuana businesses.

Category Performance

Flower

Flower is the dominant product category in Southern California's market, comprising 57% of market share in 2016. However, this share is expected to decline through the forecast period (2016 to 2020) due to product innovation in the edibles and concentrates 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 $536 million to over $1.3 billion between 2016 and 2020, an increase of 150%. This equates to an estimated Compound Annual Growth Rate (CAGR) of 25.79% during the forecast period.

Edibles

Edibles are expected to perform very well with market share increasing to 30% by 2020. This is due to a variety of products within this product category that 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 $164 million in 2016 to over $905 million in 2020, a total growth of just over 450% (and an estimated CAGR of 53.2% over the forecast period).

Concentrates

Concentrates are expected to perform nearly as well as edibles with their market share forecasted to grow to 35.54% by 2020. In dollar value terms, concentrates will see strong growth from $227 million in 2016 to $1.29 billion by 2020, a total growth of 466% (and an estimated CAGR of 54.26% over the forecast period). Growth will be fueled by many factors, including concentrate products manufactured to contain only the more medicinally beneficial CBD compounds often preferred by users in the medical market, as well as the growing popularity of dabbing amongst younger patients. Potency, convenience, and the odorless vapor of many concentrates will also make 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 only 2.37% by 2020. However, in dollar value terms these products are expected to see tremendous growth and increase from just over $11 million in 2016 to close to $86 million by 2020, a total growth of 661% (and an estimated CAGR of 66.1% over the forecast period).

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 Southern California. As legal production increases, an abundance of demand mitigates price drops that would be normally anticipated from an increase in supply, thereby keeping prices relatively constant.

Tax policy influence on unit prices

The tax regime is currently a 7.5% state sales tax, $9.25 per ounce tax on commercially cultivated cannabis and a 15% excise tax with 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% 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 a 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. 

Demand Factors

Category (for Southern California) For Calendar Year 2016
Total Population                                                          28,551,890
Medical Patients (estimated)                                                                520,468

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 Southern California, the University of California system has established a Center for Medicinal Cannabis Research housed at UC San Diego and the University of California Los Angeles has a team of researchers dedicated to an in depth study of Medical Marijuana and its impacts on “neighborhood ecology”.

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

HIV and AIDS rates in California are very high at 362.7 and 229.6 per 100,000 people, respectively. As of 2014 Southern California’s Los Angeles, San Diego, Orange, San Bernardino, and Riverside counties constituted five of the top ten counties in the state that were hardest hit by both HIV and AIDS. Most of the other top ten counties, including San Francisco and Alameda, were in Central California. Furthermore, California ranked first among the 50 states in the number of HIV diagnoses in 2011.

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.

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.

Demand Factors

Category (for Southern California)

For Calendar Year 2016

Total Population

28,551,890

Medical Patients (estimated)

520,468

 

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 Southern California, the University of California system has established a Center for Medicinal Cannabis Research housed at UC San Diego and the University of California Los Angeles has a team of researchers dedicated to an in depth study of Medical Marijuana and its impacts on “neighborhood ecology”.

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

HIV and AIDS rates in California are very high at 362.7 and 229.6 per 100,000 people, respectively. As of 2014 Southern California’s Los Angeles, San Diego, Orange, San Bernardino, and Riverside counties constituted five of the top ten counties in the state that were hardest hit by both HIV and AIDS. Most of the other top ten counties, including San Francisco and Alameda, were in Central California. Furthermore, California ranked first among the 50 states in the number of HIV diagnoses in 2011.

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.

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

Southern California is populated by a large number of small, independent dispensaries and delivery services, most of which are either illegal or operate in a legal grey area. The lack of strong regulation and massive competition from the ubiquitous dispensaries in the region (most notably in the Los Angeles metro area) have prevented investment in more large-scale and professional establishments such as those seen in the Bay Area.

A crackdown on the hundreds of illicit dispensaries by local governments, as well as the streamlining of state-level regulations, will make many locations in Southern California attractive for investment by professional companies looking to build a brand leading up to the expected legalization of recreational cannabis following the November 2016 elections.

Some Native American tribes are looking to enter the medical marijuana space as well. This segment is gaining attention as tribes consider the implications of a Department of Justice ruling that would permit medical marijuana cultivation and distribution on reservations. Red Crow LLC has entered into a partnership with Sovereignty Medical Tribal Corporation to build an organic medical marijuana production and processing facility on the Torres Martinez Desert Cahuilla lands in Southern California.

Investment Flow into the Supply Chain

Cannabis venture capital firms have begun opening at a greater pace in California over the past two years as the countdown to the 2016 election and the legalization of recreational marijuana began. One of these, Casa Verde, was developed by Long Beach rapper Snoop Dogg to invest in cannabis industry start-ups and was one of the first investors in Eaze Transportation, a delivery app that has been dubbed the “Uber of marijuana”.

In late 2013, WeedMaps CEO Josh Hartfield launched Emerald Ocean Capital, another venture capital firm specializing in cannabis industry startups. However, as in much of the industry nationwide, most cannabis venture capital firms are looking for places to invest their money that serve the industry without actually touching the product (thus leaving them safe from federal prosecution).  WeedMaps has also been active in donating large amounts to advocacy organizations pushing for 2016 legalization.

One exception to this is Terra Tech, a publicly traded company based in Irvine. It specializes in supporting the cultivation of agricultural products through the development of hydroponic machinery, as well as the actual cultivation and sale of hydroponic products. Terra Tech is one of the few mainstream companies that have dared to invest in market segments directly involved in the cultivation and sale of cannabis.

Terra Tech started out cautiously with the acquisition of GrowOp, a business specializing in selling machinery used for indoor marijuana cultivation. It later applied for licensing in Nevada’s medical marijuana market. The company launched IVXX Elevate branded products earlier this year, which are available in both Southern and Central California. The line includes not only concentrates but also pre-rolled joints and even loose flower. This is an interesting move as flower is not typically sold as a branded product, though there are indications that the industry may be moving in this direction. The company also purchased Blüm Oakland, one of Oakland’s largest dispensaries, which boasts a fully integrated supply chain and 42,000 registered patients. As of August 2016, Terra Tech was projecting yearly revenue of $20 to $22 million dollars.

In August 2016, Vangst Talent Network, the nation’s leading cannabis staffing agency, opened its first satellite office in Los Angeles. The company has grown rapidly over the past two years as the rise of larger cannabis businesses accelerates demand for skilled cannabis workers. Vangst will be holding a career fair in Los Angeles in September.

Vertical Integration

As in most of California, vertical integration is the exception rather than the rule for most dispensaries. Given that most Southern California dispensaries are small independent establishments that are in constant danger of being shut down, dispensary owners are generally unwilling to invest the relatively high startup capital required to build their own grow facilities.  Most dispensaries obtain product from smaller grow operations either locally or from Northern California. For many, collective patient donations make up a significant portion of their business.

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

Most edibles in Southern California are branded and, due to the small independent nature of most dispensaries that leads them to source from branded manufacturers, house brands are not very common. Product selection is particularly limited among smaller dispensaries and delivery services. Also, brand loyalty is not very strong and the market is not exactly concentrated with the top ten brands making up only 17.8% of the market.

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

The Southern California edibles market includes five large brand-name manufacturers who control a significant part of the market: Cheeba Chews, Bhang Chocolates, Korova, and Kiva. Together these four brands make up more than 25% of the total edibles market in the region.

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 Southern California with over 10% of the market.

Bhang Chocolates is an established infused chocolatier that had been making high-end products for Whole Foods long before branching out into the marijuana edibles market. While its main product is bar chocolate made entirely from fair trade beans from Venezuela, it also makes Cannabis infused chewing gum. Last year, 60% of the company was purchased by Mentor Capital, an investment firm specializing in the legal marijuana industry. The deal has since gone sour and is currently tied up in a court battle. Bhang Chocolates are also sold in Arizona, Colorado, New Mexico, and Michigan, but their largest market is California. Bhang is the fourth largest edibles brand in Southern California with just over a 3.97% market share.

The Venice Cookie Company is an established California processor based out of Venice Beach, California.  The company produces a large variety of infused products, from chocolates to pastries, tinctures, concentrates, and even honey.  Its most well-known product lines are perhaps its 420 Bar line of gourmet chocolate bars, and its Cannabis Quencher line of infused drinks.   Several of its product lines are also distributed in other states such as Colorado and Washington.  The Venice Cookie Company is currently the seventh largest company in the market, with a 2.08% 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 6.04%of total edibles sales in the region.

Korova is a native California edibles producer that specializes 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 Korova products 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 5.67%.

Consumer Marketing

Producers and processors in Southern 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. Further advertising is done at the point of sale in some dispensaries in the region.

Growth Potential

Outlook

Southern California’s market is estimated to grow 286% over the forecast period (CAGR 40.13%) from $939 million in 2016 to just under $3.6 billion in 2020.

Flower will still be the dominant product category but is expected to decline through the forecast period from a market share of 57% in 2016 to 37.1% by 2020. The dollar value of flower sales is expected to increase from $536 million to $1.3 billion between 2016 and 2020, with total growth of 150% and an estimated CAGR of 25.79% from 2016 to 2020.

Edibles and concentrates are expected to be the fastest growing segments of the industry with edibles market share increasing to 25% by 2020. The dollar value of edibles sales is expected to increase from $164 million in 2016 to almost $906 million in 2020, with total growth of 450% and an estimated CAGR of 53.2%.

The market share of concentrates is expected to increase to 35.54% by 2020 with the dollar value of sales estimated to increase from $227 million in 2016 to $1.29 billion in 2020, with total growth of 466% (and a CAGR of 54.26% over the forecast period).

The market share of Topical products, pills, tinctures, etc. is expected to increase to 2.37% by 2020 with the dollar value of sales estimated to increase from just over $11 million in 2016 to nearly $86 million in 2020, with total growth of 661% (and a CAGR of 66.1% over the forecast period).

Southern California's most significant weakness is the lack of clarity, consistency, and enforcement regarding its regulations for medical marijuana, a weakness that will dissipate with the advent of MMRSA regulations in 2016.  Several of the state's largest cities have been actively shutting down dispensaries while also trying to implement a more regulated system. This is most apparent in Los Angeles and San Diego, where enforcement actions reduce what would otherwise be significantly larger markets.  Municipal enforcement actions will continue to be an issue even with the adoption of new regulations, however, as the MMRSA explicitly allows Los Angeles and other local municipalities to continue restrictions against marijuana businesses.

Regardless, the Southern California market does phenomenally well and is expected to make strong gains over the forecast period, though slightly behind the rest of California.

Opportunities

Weak regulations, the threat of prosecution, and intense competition means investors in Southern California must be highly strategic in order to be successful in this enormous market. Though the policy of the current administration is to not prosecute cannabis businesses who are in compliance with local regulations, those striving to operate in Southern California remain at risk as long as no regulatory mechanism exists at the state level.

However, the fragmented nature of Southern California leaves the door open for some dispensaries to build a following from the huge number of patients looking for a consistent, polished and enjoyable in-store experience when purchasing cannabis. Despite Los Angeles’ sophisticated reputation, most of the city’s dispensaries lack the professionalism found in more refined legal markets. A company that can bring Colorado standards to Southern California should be successful and gain traction if the recreational market opens up in 2018. The establishment of clear standards regarding licensing, quality assurance, and distribution will likely facilitate market consolidation, as business expansion that falls within regulatory boundaries will be much less likely to attract prosecution from local law enforcement.

Cannabis delivery services offer entrepreneurs market entry points without the excessive pressure of regulatory compliance as law enforcement generally targets brick and mortar shops. Such services are proliferating throughout Southern California (Brightfield analysts identified 120 as of August 2016) particularly in counties that have prohibited storefront dispensaries. The vast majority are small operations, many of which work with legally dubious grow operations open for only one harvest season. A strong business model providing professionalism and consistency to Southern California’s patients could easily penetrate the market. However, those looking to implement large-scale operations are recommended to focus their efforts outside of Los Angeles. Prop D specifically prohibits delivery services within the city limits and the city attorney’s office is actively pursuing cases against several delivery companies. Deliveries by licensed dispensaries to qualified patients will be allowed to continue under the MMRSA.

Producers of edibles and concentrates with the appropriate product positioning, branding and advertising could find a statewide market and continued growth (as each category is set to experience double digit growth over the forecast period). Products that are viewed by consumers as healthier, less conspicuous, or more convenient are expected to perform particularly well in Southern California – one of the most health conscious areas of the country.

The soaring popularity of branded concentrates offers the potential for nationwide expansion through multi-state licensing agreements. Furthermore, a handful of companies (such as Marley Naturals and Terra Tech’s IVXX) are starting to explore the prospects of branded flower, something that does not yet exist on a large scale in California. Flower is generally marketed by strain, though the same strain can be dramatically different from one dispensary to the next. As patients are looking for a consistent and reliable experience, the ability to trust a certain brand of flower regardless of where it was purchased will be highly appealing.

There are also opportunities for new quality assurance laboratories in Southern 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, especially given the region’s relatively large number of medical dispensaries.

Threats

The biggest threat for Southern California is the constant fear of being shut down and arrested by local or federal law enforcement, especially within the city of Los Angeles, where local law enforcement authorities are stepping up efforts to shut down unregulated dispensaries.  Even well established businesses can be raided at any time. The Werc Shop, one of the largest testing laboratories in Southern California, was raided in April 2015 and its president was arrested. Asset forfeitures are also a significant concern, as evidence by 2016 raids against Med-West in San Diego.

As localities become stricter with issuing permits, permit holders would have little incentive to price competitively or cut costs – thus possibly driving up prices for the patient and preventing competitors from entering the market. Under such a scenario the black market would most likely remain strong.

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. 

Evolution of the Industry

Regulatory Environment

Much of the Southern California region is heavily regulated with many localities outright banning medical marijuana dispensaries. There are some indications cities are beginning to move toward strict regulation as opposed to prohibition, but the movement has been slow and is expected to remain so, especially since new statewide regulations explicitly allow local governments to continue restrictions against marijuana businesses.   Recreational legalization could provide more pressure on localities with bans to allow dispensaries, but it is anticipated they will still be given the choice of whether or not to allow cultivation and sales within their jurisdictions.

Supply

There is no shortage of supply in the Southern California market. Recreational legalization could provide room for increased production, so those able to create brand (strain) loyalty or carter to niche markets should significantly improve their chances of remaining competitive. Likewise, if recreational legalization is passed in 2016, black market share is expected to decrease significantly in the region.

Demand

Based on Brightfield's analysis of the National Survey on Drug Use and Health (NSDUH) data 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 2016-2020. The legal markets will absorb roughly 55% with the black market meeting the remaining 45%. If local jurisdictions that now prohibit marijuana sales decide 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 now that recreational use will be legalized, cannabis tourism could have a significant impact on sales in the legal markets.  Effects from tourist demand are likely to be strongest in California, which attracts the bulk of visitors to the state.

Competition

Due to the size of the market, competition in Southern California is expected to intensify as the legal markets continue to expand. 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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