BDSA Predicts 2024

As the year 2023 draws to a close, the attention of the cannabis industry naturally gravitates towards the prospects and unfolding trends that will shape the landscape in 2024. These trends hold the key to the well-being of individual markets, specific segments within those markets, and the overarching industry as a whole. Additionally, there exists a palpable anticipation of potential developments at the federal level, including the prospect of rescheduling, banking reform, or even more transformative, albeit less probable, changes such as full descheduling. Shedding an illuminating perspective on this subject matter, the esteemed market research firm BDSA has undertaken an insightful examination of the challenges and uncertainties that loom over the industry as it ushers in 2024.

Among the salient issues identified by BDSA are the repercussions stemming from the emergence and proliferation of intoxicating hemp products, which are poised to exert a profound impact on the legal cannabis market. This phenomenon brings with it both unprecedented opportunities and commensurate risks, marking a pivotal juncture in the industry’s evolution.

Furthermore, the constraints faced by the New York adult-use market remain a focal point of concern. Issues such as limited retail availability and the persistent challenge posed by illicit competition continue to impede the market’s growth potential, presenting a complex set of hurdles that demand strategic navigation.

Consumer preferences, notably a predilection for convenience, are anticipated to be a driving force in catalyzing shifts at the subcategory level within the industry. Innovative products such as disposable vapes are poised to gain popularity as a consequence of this prevailing consumer sentiment.

Moreover, a significant facet that warrants exploration is the role of in-house genetics and proprietary strains in enabling brands to differentiate themselves within the flower category. This strategic approach is envisioned as a means to not only distinguish brands but also to bolster brand share growth in mature markets that have experienced a degree of stagnation.

In addition to these considerations, a noteworthy development is the projected substantial gains in the shake/trim/lite (STL) category. This growth is anticipated to be driven by price-conscious consumers in emerging markets, underscoring the economic dynamics that continue to shape consumer choices within the cannabis sphere.

Insights from BDSA Analyst Brendan Mitchel-Chesebro on the Cannabis Industry’s Trajectory in 2024

Cannabis Business Executive recently conducted an illuminating interview with BDSA Analyst Brendan Mitchel-Chesebro to delve deeper into these prognostications. This insightful dialogue aimed to provide a comprehensive understanding of the industry’s trajectory, which, in 2023, exhibited consistent albeit irregular growth patterns, serving as a prelude to the unfolding dynamics that will define the industry in 2024 and beyond.

Mitchel-Chesbro from BDSA, in discussing the evaluation process, elaborated on the diversified approach they adopted. He explained, “We endeavored to explore multiple avenues in our analysis. We consistently aim to provide predictions that encompass industry-wide trends, extending beyond the conventional boundaries of the cannabis sector. This is exemplified by our first prediction regarding intoxicating hemp products. Simultaneously, we also strive to offer predictions that pertain to the entire market, which underscores the significance of our focus on New York, a market brimming with immense potential. The challenges that have arisen in New York both before and after the initiation of adult-use sales have generated noteworthy narratives.”

Mitchel-Chesbro further emphasized their commitment to granularity by delving into specific aspects such as product categories and emerging form factors, all while illuminating the nuances within these product categories. He elucidated, “Our intention is not to identify a singular trend or to suggest that all predictions converge in the same direction as indicative of a broader overarching trend. Rather, we meticulously cover what we perceive as some of the most influential trends across these various tiers of analysis.”

However, when asked to encapsulate his perspective into a single headline for 2024, he responded, “I would assert that, as has been the enduring theme, the cannabis industry continues to grapple with an array of challenges and remains ensconced in an aura of uncertainty.” He went on to expound, “The year 2023 bore witness to myriad uncertainties, encompassing elements featured in our predictions list and extending beyond its confines. It is worth noting that we did not delve into topics such as rescheduling or the potential enactment of SAFER banking legislation in 2024. These aspects represent uncertainties that have instilled a degree of apprehension in certain quarters.”

Nevertheless, Mitchel-Chesbro underscored the core message they sought to convey through their predictions. He emphasized, “The overarching message we sought to impart through these predictions is that the cannabis industry remains a realm replete with opportunities. Even in markets that some may have prematurely regarded as stagnant and inundated with an excess of brands and cultivators, there remains substantial potential for growth. This is particularly evident in mature Western markets. By scrutinizing the granular data at the subcategory or product level and adeptly navigating these shifts, one can discern avenues for continued expansion.”

When discussing the underlying factors driving these trends, Mitchel-Chesbro explained, “A significant portion of these trends is not primarily influenced by regulatory aspects but rather by a range of pressures affecting the industry.” I believe that a significant portion of the cannabis brands’ moves into the intoxicating hemp domain is motivated by factors such as price compression, challenges in achieving profitability with specific product formats distributed through legal dispensary channels, and the overarching opportunity presented by the intoxicating hemp industry, which holds considerable appeal. Consumers are beginning to embrace it, and it doesn’t entail many of the complications associated with the legal cannabis sector.”

In a similar vein, he continued by stating, “Furthermore, we have delved into the rise of the shake/trim/lite category, and its remarkable growth in specific markets has been rather unexpected.” The growth in Illinois and the potential it holds in Pennsylvania, for instance, indicate that categories like this have ample potential for expansion. Brands are well-positioned to leverage these opportunities due to the challenges faced in some markets. Many consumers are particularly price-sensitive, and macroeconomic difficulties have affected a broad spectrum of consumers. Hence, product formats that offer cost-effectiveness, or what I would describe as higher value, such as shake/trim/lite, are gaining appeal.”

Mitchel-Chesbro emphasized the significance of such product formats, especially in new or emerging markets where demand often outstrips supply. He explained, “In such markets, formats like shake/trim/lite serve as a stopgap solution for consumers who seek a legal alternative to illicit sources during product shortages, which have been observed in several states that initiated adult-use sales in recent years. This, I would say, constitutes a pervasive industry-wide pressure driving this upward trend. Prices have witnessed a considerable decline, but some consumers continue to seek value, and shake/trim/lite represents a product format that offers both value and decent quality. It’s important to note that being labeled as shake/trim/lite does not equate to inferior quality; it’s a misconception in some cases.”

Regarding the moderating inflation rates and its potential impact, Mitchel-Chesbro opined, “I believe that inflation will indeed have an effect. However, its impact is contingent on various factors. Inflation alone does not solely determine consumers’ economic outlook or their financial well-being, but it is likely to exert an influence. Moreover, it will also impact the industry itself. Many cannabis producers were already contending with thin profit margins, making it challenging to bear the tax and regulatory burdens inherent in the industry. Inflation compounds these difficulties, as it leads to increased expenses across the board. This includes higher costs for electricity, manufacturing materials, and various other facets of the industry. Therefore, it’s not just consumers feeling the strain; it’s an industry-wide challenge, particularly when we discuss systemic inflation.”

The Market Is the Key Factor

When individuals engage in discussions with me regarding the challenges within the cannabis industry, I often tend to direct their attention toward specific markets or circumstances based on my conversations with companies. These companies may have discovered their niche, optimized their operational efficiency, thrived in particularly favorable markets, or found success for various reasons. When BDSA asserts that numerous opportunities exist in the industry, does this optimism pertain to a specific group or sector within the industry?

In response to this query, Mitchel-Chesbro articulated, “I believe you’ve pinpointed a crucial aspect when you mentioned that it is fundamentally market-dependent.” He elaborated, “Certain markets inherently present substantial opportunities, regardless of how one assesses them. The determining factor for the feasibility of seizing these opportunities often hinges on how regulatory frameworks evolve. For instance, I would consider Florida to be a vast opportunity, and Ohio also holds significant potential, especially when it transitions to adult-use sales.”

Mitchel-Chesbro continued by highlighting opportunities in more mature markets where price compression and a profusion of brands and retailers are prevalent. He illustrated this with the example of the California market, stating, “In the case of California, I believe there is still ample room for growth. When you delve into the granular data, you’ll notice trends such as the ascension of premium inputs in the disposable vape segment. Over the past year, we’ve witnessed considerable innovation within the digital disposable vape subcategory. This includes not only products becoming more dependable and the introduction of new form factors but also the incorporation of premium inputs like rosin and live resin. These premium inputs can justify higher retail prices and attract consumers who make choices based on factors such as taste, flavor, or the presence of premium, solventless concentrates.”

He underscored the uniqueness of each situation, remarking, “I would assert that the outlook varies based on the specific market under consideration.” Furthermore, he pointed out that even in some well-established markets, substantial opportunities continue to manifest. To illustrate this point, he cited the case of Michigan, which has witnessed consistent growth despite experiencing over 50 percent price compression in the past two years when assessing equivalent average retail prices. Mitchel-Chesbro’s role is to discern the sources of this growth. He noted, “Michigan boasts a sizable and highly engaged consumer base, characterized by signs of brand loyalty. Moreover, Michigan is home to numerous homegrown brands that have exhibited robust performance.”

Location

Mitchel-Chesbro highlighted the significant influence of location in these dynamics. He pointed out, “In the Midwest, where several markets have stringent regulations and lack legal access, you have individuals crossing state borders from places like Ohio and neighboring states to purchase cannabis in Michigan. This influx of consumers has significantly boosted sales in the state. Looking ahead to other markets set to launch adult-use sales in the coming years, particularly Ohio, we anticipate similar dynamics driven by motivated consumers willing to travel across borders to access cannabis.”

He emphasized the proximity of Ohio to states like Indiana, which has maintained strict prohibition, making the proximity to legal and increasingly accessible cannabis in neighboring states a compelling factor for consumers.

Mitchel-Chesbro expanded on this theme, stating, “The opportunities we observe in mature markets like Michigan are not limited to those regions alone. I believe that some of the markets we predict to be the top contributors to growth by 2027 will experience similar dynamics that have fueled the strength of the Michigan market.”

When asked about similar dynamics in other parts of the country, Mitchel-Chesbro affirmed, “Certainly, we are witnessing similar dynamics in various regions. Allow me to provide a few examples. While we cannot attribute them solely to cross-border shopping, it does play a role. One such example is Pennsylvania, which experienced significant patient growth throughout 2022 and early 2023, partly due to price compression and, to some extent, cross-border shopping. Sales have, however, declined considerably, which can be attributed to the geographic distribution of the population in the eastern seaboard. Many residents, particularly those centered around Philadelphia, commute out of state for work. Thus, if they find it convenient to access legal cannabis in New Jersey, with a wider range of available form factors (as many edible products are restricted in the Pennsylvania medical market) and more purchase options, some consumers are willing to travel to neighboring markets, not just New Jersey, to purchase adult-use cannabis.”

Mitchel-Chesbro also mentioned the example of Washington DC, where cross-border shopping influenced consumer behavior. “In Washington DC, there is a medical cannabis program, but it effectively operates as quasi-adult-use because individuals can self-certify as medical patients and the program allows residents living outside of the district to purchase cannabis. When Maryland introduced adult-use sales, we observed an immediate decrease in out-of-district shoppers in DC. This suggests that many people were already traveling to DC for their cannabis, and once adult use became available in Maryland, local accessibility became more attractive. Additionally, some DC residents may have been curious to try Maryland brands or explore local offerings, leading to a reciprocal trend.”

He noted that these dynamics are not unique to a specific region and are observed in various parts of the country.

Regarding the dynamics related to price compression, product availability, and their impact on consumer behavior and the industry’s response, Mitchel-Chesbro referenced BDSA’s consumer insights data. He explained, “We have observed two factors that consistently rank as the top drivers influencing consumer location choices for shopping. These factors are low prices and the convenience of the retailer’s location, such as its proximity to the consumer’s home or workplace. Both of these factors significantly motivate consumers, and I believe that brands looking to succeed in expanding to adult-use markets or transitioning from a medical to adult-use market should adopt a highly localized approach.”

He emphasized the role of geography in driving decisions, stating, “For instance, in the case of Ohio, retailers and brands should consider their location strategically. If a store is located near the Michigan border, consumers may be more motivated by price savings when they realize they can obtain the product for half the price in Michigan. While I may be using some hyperbole here, as Ohio’s adult-use prices are yet to be determined, people are unlikely to prioritize a store that is only a few minutes closer if they can drive to Michigan and save $50. Therefore, strategic planning and understanding the local dynamics are crucial components of success in this regard.”

New York

Mitchel-Chesbro discussed the specific challenges and dynamics in various cannabis markets, providing insights into the complexities faced by different states and regions.

Regarding the market situation in New York, he acknowledged the initial difficulties the state experienced after legalizing cannabis. The legalization triggered a surge in illicit retailers across New York City, with both delivery and storefront operations becoming prevalent. Delays in the licensing process exacerbated the issue, resulting in a slow rollout of legal cannabis operations. Enforcement efforts against illicit retailers also faced challenges, given the large number of such establishments in the city.

Mitchel-Chesbro emphasized the need for a comprehensive approach to address the illicit market in New York, which includes increasing retail availability, the number of cultivators, and manufacturers. Reducing prices to competitive levels with illicit sellers is crucial to drive consumers toward legal options and fully realize the market’s potential.

Moving to the state of Maine, Mitchel-Chesbro highlighted reports of illegal cannabis cultivation allegedly operated by Chinese organized crime groups. He noted that this trend reflects a broader shift in illicit cannabis supply sources as prohibition is rolled back in various states. The geographical origins of illicit cannabis have become more diverse, with criminal enterprises seeking opportunities across different regions.

Regarding the phenomenon of larger Multi-State Operators (MSOs) leaving certain states for limited-license states, Mitchel-Chesbro explained that such decisions are driven by the evolving dynamics of the cannabis market. He emphasized that industry players are not simply reacting to broad trends like the popularity of specific product categories. Instead, they are making granular decisions and carefully considering pricing strategies to navigate challenges.

Mitchel-Chesbro noted that while smaller brands may have advantages in understanding local markets and adapting quickly, both smaller and larger companies face the common issue of dealing with shrinking profit margins in mature markets. Decisions to invest in mature markets or expand into newer, potentially less challenging markets depend on each company’s tolerance for these issues.

Regarding the regulatory environment in cannabis markets, Mitchel-Chesbro acknowledged that there are restrictions in place across all legal cannabis markets. He cited the example of California, which has a diverse market landscape but also faces challenges related to regulations, retail availability, and illicit competition. The challenges in California are shaped by the state’s history of quasi-legal, unregulated cannabis markets dating back to the passage of Prop 215. The illicit market remains significant in California despite the advent of legal cannabis.

He emphasized that states with less entrenched illicit markets, such as Maine and New York, may have opportunities to address issues like illicit competition more effectively as they roll out regulated cannabis programs. Once legal retail becomes widely available and prices align with illicit market rates, these states can expect to see a reduction in illicit cannabis activities at a faster pace compared to mature markets with long-standing illicit operations.

Growing Cannabis at Home

The inclusion of home cultivation as part of the cannabis landscape signifies a significant stride in destigmatizing the industry, not merely in normalizing cannabis usage but also in normalizing individuals’ connections with the plant and their understanding of it. According to Mitchel-Chesbro, BDSA has amassed data on home grow adoption, shedding light on this facet of the cannabis market. He shared, “In our most recent consumer and site survey, we inquired where consumers have obtained or purchased cannabis in the past six months. Approximately 9 percent indicated that their cannabis was homegrown, a statistic that has remained relatively consistent since fall 2019. The percentage of individuals claiming to source their cannabis from home grows has fluctuated within the range of nine to twelve percent.”

When queried about whether this percentage accounts for their home cultivation, Mitchel-Chesbro clarified, “That would indeed encompass their home cultivation. We strive to be precise in our questionnaire phrasing, and we also queried whether they obtained it from a friend or family member and whether that friend or family member resides within or outside their household. Therefore, if they acquired it from a family member who cultivates cannabis themselves, it would fall into this category.”

He further pondered on whether this percentage would persist as a reliable indicator of those who choose to embark on home cultivation, noting, “The fact that we have consistently observed a very similar percentage across eight waves suggests its reliability. We have seen minimal fluctuations, only a three-point change, over the past four years, which I would regard as a fairly accurate representation.”

While home cultivation resonates with a specific, dedicated segment of the market, it does not necessarily align with the broader consumer base, for whom convenience holds paramount importance. As Mitchel-Chesbro emphasized, this factor is pertinent to all consumers.

He remarked, “We have witnessed the emergence of various form factors across categories that cater to the pursuit of convenience, and convenience undoubtedly holds sway over many consumers. This extends beyond disposable vapes, encompassing products like rosin vapes and live resin vapes, which provide convenient options for experienced and discerning consumers. Moreover, we have witnessed a significant uptick in the sales of infused prerolls, along with a proliferation of different infused preroll products in the market.”

This trend extends across multiple product categories. Mitchel-Chesbro elaborated, “An indicator of the significance of convenience is the frequency of cannabis gummy consumption. While gummies and edibles may not rival categories like vapes and flowers in sheer size, our consumer insights data consistently reveals that when we inquire about the products consumers have used in the past six months, gummies consistently lead the way. While individuals may purchase more flowers or vapes, the frequency of gummy consumption stands out, driven by the convenience they offer.”

It becomes evident that brands and producers must consider this aspect if they haven’t already. Mitchel-Chesbro concurred, saying, “Convenience plays a pivotal role, but it’s essential to recognize that convenience is not solely the prerogative of one specific consumer segment. To some extent, many consumers prioritize convenience. Therefore, offering products with convenient form factors and consumption methods that appeal to various consumer segments is crucial. Your product must be convenient and attractive to both value-conscious shoppers and those seeking low prices.”

He added, “I appreciate convenient products, but I don’t want run-of-the-mill distillate vapes. I seek products with more flavor and a more premium form factor. Thus, your strategy should encompass more than just convenience; it should consider catering to consumers seeking affordability as well as those who appreciate quality and are willing to invest in it.”

Creating an Impact

I was particularly interested in understanding how retailers and brands should differentiate themselves, both generally and in specific markets. This aspect seems crucial in an industry where competitors are all selling cannabis.

“I’ve been contemplating this throughout the year,” said Mitchel-Chesbro. “When I visit retailers and examine their offerings, I often don’t find the classic strains I prefer, such as Durban Poison or Sour Diesel. Instead, I see popular strains like Cookies, Wedding Cake, and Runts, with multiple variations of each. This indicates a trend in the industry where brands follow the popularity of certain strains, driven by their prevalence in the illicit market, social media exposure, and pop culture influence.”

He continued, “While we don’t have comprehensive data to support this observation, it’s clear that brands often replicate what sells well in stores. However, I believe that developing proprietary genetics can help brands target consumers who appreciate specific flavors and unique experiences. It can also lead to value-added products. For instance, in California, we’ve noticed that single-brand strains command prices that are 34% higher than the average flower. So, while breeding and developing unique genetics may be challenging and costly, it offers substantial rewards. It allows brands to stand out without merely chasing trends and provides an opportunity to offer unique, premium products.”

Mitchel-Chesbro cited Fig Farms in California as an example of a brand that successfully employs proprietary genetics to differentiate itself. “They have truly unique genetics, which sets them apart from brands simply creating new crosses of popular strains like Cookies. This approach not only helps brands stand out but also enhances the overall value of their offerings.”

Regarding federal-level developments, Mitchel-Chesbro highlighted the potential impact of financial reforms in 2024. He emphasized that relief from IRS code 280E, which imposes significant financial burdens on cannabis businesses, would be a substantial catalyst for change in the industry. Additionally, he mentioned the growing market for intoxicating hemp products, which could further expand if such financial reforms were enacted. The removal of these barriers could significantly influence the direction of the industry.