Giants Being Born: Germany & New York Will Quickly Become Two of the World’s Largest Cannabis Markets with Adult-Use Legalization
By Tom Adams - CEO, Global Go Analytics
Adult-use legalization was signed into law in New York March 31, 2021 (the 15th state to do so) and is now on the horizon in Germany after the Bundestag election (on September 26, 2021) that appears likely to bring a pro-legalization coalition to power. That has whetted cannabis investor appetite for the growth likely to follow since New York is the 4th largest US state (20.2 million population) and Germany is the largest country in Europe (83 million).
It will likely take 18 months for New York to get its program in place and German non-medical sales are unlikely before 2024. Three years after they legalize, though, New York could be the second-largest state cannabis market in the US and Germany the second largest national cannabis market in the world. History, after all, offers some tantalizing precedents of medical-only markets exploding when all adults were allowed to buy legally, suggesting that New York’s and Germany’s current $200-$300-million markets could become multi-billion-dollar giants by 2025 and 2026, respectively.
That might sound fanciful, but it’s based on an analysis of the kind of growth that history says to expect: Compound annual growth rates (CAGRs) in the three years after legalization were phenomenal in Washington (88%), Colorado (58%) and Oregon (57%). Such explosive growth is not a given, of course: California saw legal spending contract by 17% in 2018, the first year of legalization there, and posted a first-three-year CAGR of just 21%.
What made the difference? Much depends on how liberally adult-use markets are regulated and how lightly taxed. California had large swathes of the state institute local bans and it has the highest legal-cannabis tax load in the world, accounting for its disappointing growth since legalization.
Analyzing Existing Medical Markets
But another key determinant of how much growth is seen in new adult-use markets is how limited an existing medical market is before full legalization. California’s medical market in 2017 was a $3-billion free-market colossus. Washington, Colorado and Oregon were, in comparison, strictly regulated. And the tighter the medical-era regulatory vice, the more expansion ensues upon adult-use legalization.
The medical markets in New York and Germany are about as tightly regulated and limited as can be imagined (although for very different reasons) suggesting growth rates could be in the Washington-Colorado-Oregon range, and dollar growth could be unprecedented, when adult-use rules take over.
Here’s how I would rate the German and New York medical regimes in terms of growth-curtailing regulations, current limitations that should enable superior market growth upon adult-use legalization:
· Retail Availability: Germany allows medical cannabis sales only in existing licensed pharmacies; there are more than 20,000 of them but many don’t offer cannabis and tight supplies limit access even at those who do. New York’s program originally licensed just five vertically integrated licensees to open four dispensaries each in this enormous state; that has since been expanded to 10 licensees, but even now just 38 stores struggle to serve the entire state. Let’s give Germany a C+ and New York a D- (reserving failing grades for markets with no legal medical access at all).
· Eligible Conditions: Germany allows its doctors to prescribe cannabis as they see fit, but German doctors are a conservative bunch and few do so. New York limits recommendations to those with “severe debilitating or life-threatening conditions (which) must also be accompanied by…cachexia or wasting syndrome, severe or chronic pain, severe nausea, seizures, or severe or persistent muscle spasms, PTSD or opioid use disorder.” Both markets serve less than 150,000 patients, about 0.3% and 0.8% of the population, respectively. Germany gets a B- for at least respecting doctors; New York, again a D-.
· Allowed Products: Germany has finally allowed domestic suppliers, but they will be required to produce only products in three tightly defined categories by their THC/CBD content; flower is sold, but tinctures and pills are the only ingestible product types. New York stores face strict restrictions on product types, stocking mostly pills, tinctures and topicals. A limited variety of vapes are available, but only ground flower. Let’s give them both a C.
· Pricing: Germany has relied on imported medical cannabis to date, keeping supplies tight and prices high. Prior to a March 2020 renegotiation of its insurance reimbursement scheme, pharmacists had a mandated 100% mark-up and prices were above $20/gram. For the domestic supply now starting to ship, a single domestic wholesaler will service all pharmacies. In New York, the state sets retail prices. New York is a D- again, but Germany has pulled its grade up to a B-.
California’s medical program had a tumultuous history since becoming the first legal medical market in 1996 but there’s no denying that, largely due to government neglect, it gets an A for medical-market conditions that were conducive to growth in 2017. Hence the estimated $3 billion in medical spending in approximately 3,000 dedicated cannabis dispensaries that year. Doctors were free to issue “recommendations” without government oversight, and nearly 1 million patients (2.3% of the population) had them. The state was a hotbed of branded product development, especially in hugely popular vapes. Even a more business-friendly adult-use program than California finally adopted in 2018 would have had a tough time making for a better growth environment.
Applying Comp-Market Analysis
How big can New York and Germany get under reasonably liberal adult-use regimes? Given their conservative approaches to medical-market regulations, it seems far more likely that their three-year CAGRs would be more in line with those seen in Washington, Colorado and Oregon than the modest 21% three-year CAGR seen in California. The Brightfield Group forecasts New York’s medical-only market will amount to $1 billion by next year. If adult use launches early in 2023, at Oregon’s 57% CAGR New York could be worth $4 billion in 2025; at Washington’s 88% CAGR it would reach $6.9 billion. That would be almost as big as Brightfiled’s $7.4 billion forecast for California in 2025.
Germany could quickly become the second biggest country-wide market in the world with adult-use legalization. Brightfield Group forecasts medical-only spending growing to $1.1 billion by 2023. Should the new government make adult use legal in 2024, at Oregon’s 57% CAGR, Germany could be worth $4.1 billion in 2026; at Washington’s 88% CAGR, it would hit $7 billion. That would be bigger than Canada, which Brightfield forecasts will see its market top out in the $5.6-billion range by then.
Of course, much will depend on what adult-use rules are adopted in these high-potential markets: local bans and onerous tax rates could make New York and Germany as disappointing as California has been. But comparing the existing medical regulatory regimes provides the needed context for estimating how much pent-up potential resides in each of the world’s current medical-only markets. Regulators hoping for a tax revenue windfall from adult-use legalization will need to be far more accommodating in their adult-use rules than they have been in the medical-only era.
Start your due-diligence here: The current regulatory status of markets in the US, Canada and around the world are comprehensively outlined in the “FTI Consulting/Global Go Annual Report on Cannabis Law & Markets”, a 400-plus page report just published by Global Go Analytics. Click here for more information.
Ready to get started on becoming a major player in New York, Germany, or other high-potential cannabis markets in the US and around the world? Click here to inquire about Global Go Analytics’ strategic planning consulting services.