In this edition of "Rising High," The Fly conducted an exclusive interview with Jessica Lukas, senior vice president, commercial development of BDSA, a Colorado-based cannabinoid market intelligence and consumer research firm. Here are some highlights:
2021 SALES, 2022 FORECAST: The legal cannabis market boomed in the United States in 2021, with BDSA forecasting approximately $25B in sales in the year, up about 40% from 2020. The massive growth was driven by a number of factors including mature, new and emerging cannabis states, Lukas said. “It’s interesting to look at because your mature legal markets - Colorado, California, Oregon, Washington, Nevada - we’ve seen a lot of growth in those markets at an aggregate level,” she said. “It’s not just about net new markets coming online, it’s actually the mature markets growing as well.”
New legal cannabis states like Illinois, Massachusetts and Michigan are also developing at a rising rate, the SVP said, and emerging states like New York are expected to make massive contributions to BDSA’s forecasted market growth out to 2026. “We’re seeing a greater percent of the adult population consuming cannabis, quarter-over-quarter as well as year-over-year.” Penetration continues to grow even in mature cannabis markets, Lukas said, with states like Colorado, Oregon and Washington seeing about 50% of adults over 21 consuming cannabis, up from roughly 20%-25% in 2017. “We’re also seeing within the cannabis consumers segment, users consuming more frequently,” she said.
The SVP said BDSA has seen increases in the frequency of consumption across all form factors including edibles. “In California, we started seeing the frequency of edible consumption increase as COVID kicked off,” she said. “I’m not sure if that’s a correlation or not, but we definitely saw that start going up quite a bit in early 2020.” Legal cannabis market growth will also be driven by the development emerging and newer markets, Lukas said, as well as the opening of more retail locations increasing product availability. She added the emergence of medical markets in coming years and the shift of legalization in New York, New Jersey, Connecticut, Florida, Ohio and Pennsylvania will all be big growth drivers.
For 2022, BDSA forecast the U.S. legal cannabis market to reach nearly $30B, continuing to be a driving factor behind legal global cannabis sales over the next five years. "We expect both mature markets and new markets to contribute significantly to growth for 2022," Lukas said. "With about twice as much growth coming from new and emerging markets than mature markets."
CLASSIFICATION CHANGES: As the legal cannabis market matures, BDSA expects classifications for strains like indica, sativa and hybrid will fade away and more focus will be put on minors, cannabinoid ratios and terpene driven benefits. “Indica and sativa have been designations for consumers long before legalization happened,” the SVP said, noting consumers looked at classification to predict product experience. “As the market changes and growing technique, method and genetic composition has changed, it has been debunked that that is a good indicator of the experience that consumers are going to have scientifically.” She said BDSA expects minors, cannabinoid ratios, terpene profiles and beyond to replace indica/sativa labeling. “We have been tracking the percent of products and product sales counting the cannabinoid composition,” Lukas said. “Obviously THC and CBD being the first, but now CBN/CBG, THCa and THCv and this understanding of different cannabinoid ratios creating a designated experience.”
“We anticipate, especially within edibles, pretty much all brands going into that space of not just talking THC and CBD but introducing the cannabinoids that create functional benefits. And with inhalables, it’s really going to start being about the genetic composition of the plant and the terpene profile.” She added the shift will take some time and consumer education, but BDSA expects terpenes to become part of the vocabulary for cannabis consumers in 2022.
BRAND RECOGNITION: The research firm expects greater brand recognition and loyalty to emerge in 2022 as companies continue to drive consistent, expected experiences and cross borders. “There’s a couple of factors with the first again, the education and the growing sophistication of cannabis consumers,” Lukas said. “Also, brands are doing a lot more work as it pertains to in-store education of both the consumer and the budtenders.”
While consumers still do not name reputation of a brand as a top-10 influencer of their purchasing decision, BDSA’s Consumer Insights tracks about 20% of cannabis consumers saying brand reputation influences their product choice and the SVP noted top brands and multi-state operators are hiring shopping marketing teams. “They’re thinking about trade marketing, just like any major CPG company does,” she said. “That’s a factor here in terms of education and awareness of the brands within the store.” However, with the limitations on marketing and advertising, building brand loyalty will still be a challenge, Lukas said. “A lot that has to be through the common ground of the store,” she said. “Destigmatization means a lot more people are talking both online and in-person about the products and we know that consumers, even heavy consumers, are looking for a good experience.” Consumers are more likely to choose a product that is familiar, a brand they have used before, the SVP said, or one that has been recommended by a friend or family member. “Knowing as those brands become more available, consumers are talking to each other and they’re listening to budtenders, you’re going to start seeing consumers seeking out a specific brand versus seeking out a specific strain, classification or terpene profile.”
PRICING DIFFERENTIATION: As brands continue to expand their product portfolios, BDSA expects product pricing differentiation to appear in a bigger way, driven by product features, benefits, technology and quality. “Across categories it differs, but one factor is going to be cannabinoid content and minors,” the SVP said. “We definitely see within ingestable products, if a product has CBD, CBN or CBG touted on the label that can command a premium price. Consumers are willing to pay more because they believe that they will get the experience that they are seeking.” Gummies that also contain CBD are, on average, priced about 20% higher, according to BDSA, and their sales have increased roughly 40% between the second quarters of 2020 and 2021. “The other factors we’re looking at are things like grow methods, trend methods, THC content but then also extraction methods,” Lukas said. “Vape cartridges specifically, live resin vape cartridges in California command most of the premium price sales of vape cartridges in California.” Live Resin is broadly accepted as having a higher quality than other vape cartridge-extraction methods, however BDSA predicts the market will start seeing price differentiation even in that subsegment of the category. “I like to relate this to whiskey for beverage/alcohol,” the SVP said. “Whiskey is one category within spirits and you see drastically different price points based on that quality, the brand perception and how it is made. That’s what we’re expecting. We’ve generally seen price tiers, but we are expecting this year to start seeing price differentiation within a subsegment that is already premium.”
TRADITIONAL CPG TAKES A BACKSEAT: Many in the cannabis industry, including BDSA, predicted larger CPG companies would lead the global cannabis marketplace, but now the research firm expects mainstream CPG manufacturers and retailers to remain on the sidelines waiting for regulation. “In 2018, we were really predicting this is the year mainstream/CPG food and beverage companies are coming in, they’re going to be in hemp/CBD and they’re going to quickly move over to THC,” Lukas said. “We were wrong in that expectation and I think one of the factors driving that is the slowness of the FDA figuring out how they’re going to regulate hemp/CBD as a food additive in the mainstream retail channels.” Many of the big CPG players have decided to step back in making a move, she said, but it doesn’t mean they aren’t planning a move, investing in spaces or looking at M&A opportunities. “However, no one has really made a big leap,” the SVP said, noting the exceptions of Constellation Brands (STZ) and Canopy (CGC), Altria (MO) and Cronos (CRON) and Molson Coors (TAP) and HEXO (HEXO).
Meanwhile, leading cannabis brands are continuing on an exhaustive path of M&A, growing bigger and commanding higher valuations. “You’ve got players, large U.S. operators making moves and big moves globally,” Lukas said. “Canadian LPs are also making big moves globally and we just haven’t seen any of those mainstream CPG companies directly make those plays.”
FDA LIMITS CBD POTENTIAL: Following the Farm Bill, BDSA, along with others in the industry, predicted a relatively quick Food and Drug Administration ruling that would enable edible products containing hemp-derived CBD. However, while non-edible CBD products have performed well, edible products have remained off the table for major brands and retailers. “This is another one we’ve been wrong on,” the SVP said. “Every year we’re like this is the year and we’ve been saying that since 2018. At some point we have got to be right or this will just keep going on. We’re still predicting this year that they’re going to do it.” She added the FDA dragging of feet is interesting as prescription medication like epidiolex is available as a cannabinoid CBD product and the hemp/CBD marketplace is opening up. “Obviously where the FDA is hung up is how to regulate that as a food additive within ingestible products,” she said. “Then you have this other factor that is the increasing allowance of marijuana across states. That is an interesting angle here too, as this continues to go on without some sort of regulations, we get closer and closer to some sort of federal reform.”
BDSA continues to believe hemp/CBD is still going to continue to be regulated different than marijuana and without an FDA ruling, e-commerce is likely the only traditional retail channel to see much CBD sales growth in 2022.
THRIVING VAPE MARKET: After experiencing major disruptions amid public health crises in the cannabis industry, vape has resecured its place as a top cannabis product category and BDSA expects the segment to continue to thrive. “When all these crises hit in the fall of 2019, there were all these concerns of what does this mean for the cannabis vape market?,” the SVP said.
Key growth drivers included innovation, the growth of rosin and live resin vape cartridges and brands rolling out proprietary technology, she said. “I think there is still a lot of focus on making sure the products are safe and I think consumers kind of forget and they go back to what they were doing for a long time,” Lukas said. “There are clear benefits of vaping in terms of convenience, portability, vapor versus smoke, so we’re having a lot of conversations about what does this look like as the technology continues to evolve.” BDSA expects the vape technologies will adapt further to mitigate health risks and that vape products will continue to hold a 20+% share of sales in legal cannabis markets.
OTHER CANNABIS/PSYCHEDELIC STOCKS: Other publicly-traded companies in the space include Acreage (ACRHF), Akerna (KERN), Aleafia (ALEAF), Atai Life Sciences (ATAI), Awakn Life Sciences (AWKNF), Audacious (AUSAF), Aurora Cannabis (ACB), AYR Wellness (AYRWF), BC Craft (CRFTF), Body and Mind (BMMJ), CanaFarma (CNFHF), Canopy Growth (CGC), RIV Capital (CNPOF), Clever Leaves (CLVR), Columbia Care (CCHWF), Compass Pathways (CMPS), CordovaCann (LVRLF), Cresco Labs (CRLBF), Cronos Group (CRON), CV Sciences (CVSI), Curaleaf (CURLF), CURE Pharmaceutical (CURR), Delic Holdings (DELCF), Delta 9 (DLTNF), Emerald Health (EMHTF), Fire & Flower (FFLWF), Flora Growth (FLGC), FluroTech (FLURF), Gage Growth (GAEGF), General Cannabis (CANN), Goodness Growth (GDNSF), Greenlane (GNLN), Green Thumb (GTBIF), GrowGeneration (GRWG), Harborside (HBORF), Hemp (HEMP), HEXO (HEXO), High Tide (HITI), IM Cannabis (IMCC), India Globalization Capital (IGC), Indiva (NDVAF), Inner Spirit (INSHF), Innovative Industrial Properties (IIPR), InterCure (INCR), Ketamine One (KONEF), Khiron Life Sciences (KHRNF), Lowell Farms (LOWLF), Lotus Ventures (LTTSF), MediPharm Labs (MEDIF), MedMen Enterprises (MMNFF), MJardin Group (MJARF), Neptune Wellness (NEPT), Thermic Science (ENDO), Organigram (OGI), Planet 13 (PLNHF), Relmada Therapeutics (RLMD), RYAH Group (RYAHF), Skye Bioscience (SKYE), SLANG Worldwide (SLGWF), Sproutly (SRUTF), Stem Holdings (STMH), Small Pharma (DMTTF), Sundial Growers (SNDL), Sunniva (SNNVF), TerrAscend (TRSSF), Tetra Bio-Pharma (TBPMF), Tilray (TLRY), Trulieve (TCNNF), Valens (VLNCF), Village Farms (VFF), Entourage Health (ETRGF), Zynerba (ZYNE) and 4Front Ventures (FFNTF).
