The growing cannabis market in the USA

After decades of suppression at the federal and state levels in the United States, cannabis has blossomed into a major industry. Entrepreneurs and major corporations are taking advantage of this growth, and the market continues to witness active capital transactions, including acquisitions, capital raises and initial public offerings (IPOs).

Worldwide legal cannabis spending hit $14.9 billion in 2019, an increase of 45.7% from 2018. The global cannabis market forecast is set to hit $42.7 billion by 2024 (source: Arcview Group, BDS Analytics).

There has been a significant growth in this sector in the US since cannabis was legalized in some form, primarily led by adult-use markets in Canada, California and Massachusetts. In 1996, California became the first state to legalize medical marijuana. The market really started to take off in 2012 when Colorado and Washington both legalized recreational marijuana. 33 US states now have broad legislation in place that allows the use of marijuana, with as many as 11 additional states expected to join that number in 2020.

Each state sets its own regulations, so the US market is a patchwork of different rules and regulations. And despite the legalization at the state level, marijuana remains a Schedule 1 narcotic at the federal level, though federal agencies do not pursue companies and individuals operating according to state regulations. Consequently, cannabis companies operating legally at the state level continue to face challenges with regard to banking, insurance and access to institutional capital.

The US cannabis market size was valued at USD $11.3 billion in 2018 and is expected to grow at a CAGR of 14.5% by 2025.  Despite its quasi-legal status this sector has seen exponential growth, with companies striving to keep up with its growing demand in both ancillary services and of course cultivation, dispensaries and distributors.  The cannabis market is expected to generate more new jobs than manufacturing in 2020.   

The cannabis industry can largely be segmented into two major spheres, Plant-touching and Ancillary.  Plant-touching businesses handle the cannabis plant itself, either cultivating, distributing, processing or selling it. Ancillary business support the growth and sale of cannabis, but do not “touch” the plant. Examples include manufacturers and distributors of cultivation equipment and supplies, smoking accessories, testing laboratories, financial services, logistics and transportation, security, cash management, data platforms and tech companies.

Deloitte has estimated that the size of the ancillary cannabis industry will be over 2.5 times the size of the cultivation market.  Whilst still being subject to strict regulations, companies in the ancillary market are not subject to the most stringent rules and legislations as their cultivating counterparts are.

In addition to marijuana, which has a high concentration of tetrahydrocannabinol (THC), the psychoactive chemical in cannabis, the market has also benefitted from the legalization of hemp. Although hemp is the same plant as the one used for marijuana products, it has a low (less than 0.3%) concentration of THC. Hemp was legalized with the passage of the US Farm Bill in 2018. The two main products derived from hemp are cannabidiol (CBD) and industrial hemp, which is used for its fiber, and as a food product. 

CBD is a natural compound found in the cannabis plant which is sold in oils, sprays, creams and pills and has been linked to providing relief of depression, anxiety and even cancer. CBD products are growing in popularity and are widely available, creating many business opportunities in the medical and wellness sectors.  Unlike marijuana, which cannot be transported across state lines, hemp is federally legal so may be transported from one state to another.

ICFG member  in the USA, Westbury Group, located in Westport CT is now finding M&A business opportunities in this growing industry, in both the plant-touching space and ancillary markets.

Westbury Group is currently working with a fast-growing online retailer of cultivation equipment and supplies, serving growers in the cannabis and hemp industries.

They are also pitching for business across the full breadth of companies associated in both the plant-touching and ancillary spaces, including a leading integrated producer, an oil extractor and a financial services provider.

Westbury Group bankers recently attended the Marijuana Business Conference hosted at the Las Vegas Convention Center in December 2019, which had over 30,000 attendees. Westbury noted that the overwhelming majority of those attendees were serious business-people, not curiosity-seekers.

2020 will be a big year for cannabis conventions and trade shows, with multiple events scheduled to take place across the US over next 12 months. These range from finance-focused investor summits to compliance and agricultural symposia. Considering the explosive growth of the cannabis industry to date, these events are ideal spots for networking and attracting new clientele

Internationally, other promising markets for cannabis include Australia, Germany, Poland, Colombia, Mexico, Uruguay, and Israel. While current stringent rules and regulations in Europe governing cannabis sales and cultivation may limit the near-term growth in Europe, the recent call by the United Nations and the World Health Organization to decriminalize the possession of drugs for personal use may presage higher growth for the global market in the mid to long-term.

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