New York cannabis regulators aim to level the playing field for operators
by Tom Adams, CEO, Global Go Analytics
The New York adult-use cannabis market could prove to be a once-in-a-lifetime opportunity for local start-ups. New York is the country’s fourth largest state by overall population, but the third largest in terms of adult cannabis consumers (see graph with our forecasts of by-state adult consumer counts in 2027).
Industry players are watching closely as regulators finalize cannabis regulations and rules for license applicants. One of the most restrictive and vertically integrated medical-only states in the country could become one of the fastest growing adult-use markets in the country as many of those restrictions are lifted.
But given what’s known about the coming regulations so far, New York will present many challenges for nationwide cannabis companies that have long eyed the outsized New York opportunity:
Retail: Each licensee will be limited to three stores and the state’s goal is to have half of them go to social equity applicants with very specific backgrounds: a felony conviction in the licensee’s family and two years of experience running a profitable, tax-paying business. In addition, retailers will not be allowed to have consumption lounges, which require separate licensing. Retailers may sell products strictly for off-site consumption, Consumption lounges strictly for on-site consumption, and ownership and investment into these two types of licenses is strictly separated.
White labeling: Distribution companies may not be allowed to grow or manufacture their products and packaging rules look like they will only allow labels to show “one brand logo and the brand name” and state-mandated language.
Cultivation: Licensed growers may be granted limited rights to process their crops and sell their products to retailers but will be barred from owning retail licenses or reselling the products of other growers or manufacturers.
Multi-State Operators (MSOs) in New York
Several giants of the national industry have been jockeying to be in position for an adult-use bonanza since New York allowed the first five vertically integrated licensees to open dispensaries in 2016. On the cusp of adult-use legalization Curaleaf, GTI, Cresco, Columbia Care, MedMen, iAnthus, Acreage, and Vireo Health - among the largest multi-state operators (MSOs) in the country - held eight of the ten vertically integrated licenses to cultivate, manufacture and retail medical cannabis products, and each have four existing medical dispensaries, the limit under medical-only rules. They are now going to have to adapt to a radically different regulatory regime in the adult-use era.
Regulators are pursing anti-trust goals set by the legislature and appear determined to make sure that neither the MSO’s, nor anybody else, can dominate the adult-use market. The existing medical licensees will be allowed to double their total store counts to eight (seemingly good news for Cresco, which announced in March plans to acquire Columbia Care). However, like all adult-use retail licensees, the incumbent medical players will be limited to just three adult-use stores. That’s three stores in a state of more than 19 million people, 8 million of whom are concentrated in the New York City area.
The MSOs can’t be blamed for feeling a bit seduced and abandoned. In the medical-only era they were required to be vertically integrated. Many of the MSOs, as an overall strategy, have focused on obtaining licenses in medical-only eastern states that require vertical integration and tightly restrict the number of licensees. This has brought them the benefits of operating with limited competition, as in New York’s medical market. It has also enabled them to operate in multiple sectors as a means of finding operational efficiencies and scale when there are few efficiencies available across state lines while federal prohibition remains in effect.
Several of the MSOs had recently cut eight-figure deals to build cultivation facilities with local jurisdictions around the state in anticipation of the huge explosion in biomass demand that typically occurs with adult-use legalization. They can continue with their preferred vertical integration model under adult-use rules, but only in providing product to their own eight stores. Beyond that necessarily tiny slice of the retail market they will be selling at wholesale - a position few of them have sought out elsewhere having watched grinding declines in biomass prices crush cultivation gross margins in many states.
New York Cannabis Cultivation Opportunities
Competition will be particularly fierce in New York on the grow side: On May 15, New York became the first state to allow local hemp growers to apply for adult-use cannabis cultivation licenses; five days later 200 had done so. While that seems like a healthy number of potential cultivators for a new market, New Yorkers have long been accustomed to paying premium prices for high-quality cannabis in the state’s healthy legacy market. As most of the hemp farmers have little experience growing high-THC commercial cannabis, it is not at all clear that outdoor hemp cultivators can deliver quality flower for smoking. However, some hemp growers will likely be very competitive on price in providing biomass for extraction of cannabinoids and terpenes for concentrates and edibles. Further, as we’ve seen in California, the legacy market will remain so long as they can beat the regulated market on price or quality.
The State’s current medical license holders therefore face an agility trial in New York, but so too do other large operators. Having established themselves in their home states, companies like Cookies, Wana, and Kiva have relied on the “asset-lite” model to expand elsewhere—simply licensing their brands names and product formulations to distributors in other states and taking a royalty on sales. But recently released Cannabis Product Retail Packaging Prohibitions from the Office of Cannabis Management feature a rat’s nest of provisions that may make that tougher—including potentially limiting the company/brand name appearing on packaging to that of the New York licensee itself.
Although New York is promising an unprecedented level of financial support to local licensees, the limitations it is placing on players who have been standing by to invest heavily in replacing the state’s robust legacy market will likely slow the legal market’s development. This is because the law and currently proposed regulations would not only affect the ability of MSO’s to use their wealth to dominate the market, but also preclude investors from investing in multiple companies which makes investing in any small start-ups a much riskier proposition.
New York Cannabis Market Opportunities & Forecast
Before much was known about the rules, we speculated that the New York cannabis market, growing at the same rates seen in prior conversions of limited medical markets to adult-use, could grow quickly to $4-$7 billion in spending (see “Giants Being Born” https://globalgo.consulting/content/germanynewyork ). Now we think it more likely that recently published forecasts from The Brightfield Group showing New York growing to $3.5 billion in 2027 are a more realistic expectation for corporate planners and investors.
That will still make it the third largest prize in US legal cannabis in 2027, behind only California and Pennsylvania by Brightfield’s forecasts. Hence, even with the limits the state is imposing on any one company’s ability to dominate, it should prove a lucrative proving ground for companies preparing for the competitive battle to come with federal legalization.
