The Consumer Landscape with New Frontier Data

In the third episode of Cowen Insights The Growth Chamber, Cannabis, Beverages, & Tobacco Analyst Vivien Azer hosts New Frontier Data’s Chief Knowledge Officer, John Kagia, for a cannabis-focused discussion at SXSW’s Cannabis Industry Evolution Summit. New Frontier Data is a leading data and analytics company serving the global cannabis industry.

John shares his perspectives on the evolution of consumer behavior in the cannabis space and insights from their newly published multi-year TAM for the U.S. market. Press play to listen to the podcast.

Transcript

John Kagia:

It may too much to say that cannabis is recession proof, but it’s certainly recession resilient.

Vivien Azer:

Hi, this is Vivian Azer, Cowen’s beverages, tobacco and cannabis analyst. Delighted to be joined by John Kagia, who is the chief knowledge officer of New Frontier Data. Hey, John.

John Kagia:

Hey, Vivian. Delighted to be here.

Vivien Azer:

Oh my gosh, it’s been a great south by southwest. Thank you so much for doing the panel yesterday.

John Kagia:

No, my pleasure. Thank you for moderating.

Vivien Azer:

And so excited to be podcasting with you. I think New Frontier Data might be new to some institutional investors, but we love data. So talk to us about what New Frontier does.

John Kagia:

Thanks very much. So New Frontier Data is a market research, data analytics and intelligence company focused exclusively on the legal cannabis industry. So since 2015, we have been collecting data that spans the entire cannabis industry. We don’t focus on any singular aspect of the market, but rather we view ourselves as the umbrella under which the entirety of the industry’s data ecosystem can exist, which means that we’re collecting data from cannabis consumers. We do at least one annual US focused cannabis consumer survey with up to 7,000 respondents. We collect data through point of sale platforms, which gives us really good insights into the retail intelligence or the trends on the retail side.

John Kagia:

We collect data from every government that is publishing data at the federal and state level, every government agency that is collecting data at the federal and state level, which allows us to understand everything from tax rates to medical participation rates, to how law enforcement and prohibition enforcement are going to things like drunk driving levels and the states canvas DUID’s in the states that are tracking it. So it’s a really broad portfolio of data, and part of the benefit of this is that it allows us to understand the linkages of how, whether it’s policy outcomes, industry trends, retail developments, are impacting different aspects of industry. We squeeze the balloon on one side of the market and we’ll be able to see the impact that it has on the other.

Vivien Azer:

That is fascinating. I’ll tell you, personally, I love covering cannabis because it’s like my other coverage in beverages and tobacco. Highly regulated, highly taxed, which means from a public data source perspective, it is very, very robust in terms of the disclosure, which makes our job a little bit easier despite the dynamism in cannabis. I mean, it might be a little cavalier to say anything is easy in cannabis, but we take the same approach as you, right? We look at things top down and bottom up. And the top down perspective, I think, is the most challenging because you’re always trying to understand the evolution in regulatory reform. But I understand that you guys have just done some new top down work. Let’s talk about that.

John Kagia:

Yes. So in our newly released US trends report, we’ve been producing this report annually for the past seven years, and in it we’re looking at the state of the US industry. And central to that is trying to understand where the industry currently is, so what the size of the market is right now, and how large based on current growth trends we expect the markets to be. In this case, for the first time, we’re actually forecasting it out to 2030. So making quite a number of new types of assumptions than we used to previously make when we were only doing this as a five year projection, but we feel like we have accrued enough data that enables us to stretch a little more in terms of our thinking of where this market could grow.

John Kagia:

So in this new report, by our latest estimates, in 2021 the industry did roughly $27 billion worth of sales. We are expecting that to increase to a around $32 billion by 2022. That will increase to $52 billion by 2030, just in the states where it’s currently legal. But we are anticipating, based on the way the legislative environment is evolving, that we could potentially see an additional 18 states, nine medical, nine recreational, pass market activating laws in the intervening eight years. And if we picked up those potential states, by 2030 this could be a $72 billion industry.

Vivien Azer:

Got it. And do you assume any kind of federal legalization?

John Kagia:

We don’t assume federal legalization in that model. We have a separate model for federal legalization that we keep having to adjust because of the way the conversation around federal legalization is currently happening. And obviously, federal legalization is going to be catalytic to this market in some respects in ways that we can’t even begin to predict. But we understand that right now, most stakeholders in the market are really focused on the near term, real time realities on the ground, which are states continuing to activate these markets, states continuing to grow quite robustly in an increasingly competitive environment where consumers are enthusiastically embracing the offerings of the legal market.

Vivien Azer:

So going from $27 billion in 2021 to $32 billion in 2022, does assume pretty healthy double digit growth. Does the early commentary coming out of earning season from the cannabis companies give you any pause on that?

John Kagia:

It might be too much to say that cannabis is recession proof, but it’s certainly recession resilient. We have seen through the last couple of cycles where there’s been an economic squeeze that consumers, rather than ending their spending or stopping to spend on cannabis, will do one of two things. They’ll lead a shift to value products, or they’ll revert to the illicit unregulated markets where you can avoid taxes. Particularly for flour consumers where there’s a pretty comparable product available in the unregulated market. This economic cycle feels like it could potentially be different. The shocks coming out of both the developments in Europe, the potential supply chain disruptions now that China’s shutting down major cities like Shenzhen, we think could potentially bring together the worst two economic kind of disruptors that we’ve seen in a while, particularly given the broader inflation or environment. That said, what we are anticipating is, particularly for the new states that are activating, there’s going be time to adjust their pricing to reflect the realities of the ground by the time they’re coming online.

John Kagia:

So here we’re looking very closely at New York, New Jersey and Virginia as markets that we expect to see very strong growth out of. The consumer data we are seeing out of those states suggests the consumers are ready for it as soon as the market is ready. The challenge, I think, for the large operators in particular is, can they price their products appropriately? We have seen that the illicit market has become phenomenally adaptive to market conditions. In some respects, even more so the illicit market is more agile than the legal market. So our caution to the major primes in particular is, be prepared particularly to start serving this value segment and understand how the broader macro climate is going to affect consumer’s ability to spend. The willingness is there, but the ability to spend is going to be critical.

Vivien Azer:

Absolutely. And I mean, look, New York has such a well developed illicit marketplace, and that’s only, I think, going to exacerbate the problem when you have so much excess supply on the west coast. We’ve heard companies talking about disruption to their businesses in Maine because of the illicit marketplace. But I think it is a good call out that the companies should be cognizant of price gap management in terms of dislocating. Because I walk a around New York city and there’s these vans, fully branded, there’s now storefronts that are fully branded, and there’s no enforcement. So I don’t know what the incentive is to shut that down and hopefully redirect consumers into the legal channels, but I think the companies are going to have their work cut out for them to do that. So we’ve covered New York and New Jersey, which is great, as you’re thinking about next key state opportunities, which ones are front of mine for you?

John Kagia:

We think that the next three big states to pay close attention to are going to be Florida and Pennsylvania on the recreational side, and Texas on the medical side. Both Florida and Pennsylvania have been having this debate for a long time. The public support is absolutely there, but because of quirks in their respective policy and legislative environments, they haven’t been able to quite do it yet. We think they’re important just because of the sheer size of the markets. If those both flip, then those become catalytic to that additional $20 billion in revenue that we’re expecting through year and 2030. Texas is an interesting one. We think that, one, it’s a massive market. We think that the government data does under report the level of demand in the state. And Oklahoma, now that Oklahoma’s program is so expansive and is drawing so many Texas consumers into the state, that it’s driving that conversation with momentum in a way that we’re pretty bull that over the next couple of years we’d like to see the Texas legislator finally take this on.

Vivien Azer:

I tell you, yeah, it’s a very good call out on Oklahoma. I can’t believe that 12% of the population is registered as a medical cannabis patient. We’ve never seen anything like that. I mean, that’s multiples ahead of like a Florida at 4% and change, right? Or a Pennsylvania.

John Kagia:

Part of the reason why that Oklahoma number is so important is, to us it underscores in a way that we’ve never seen before the scale of pent up demand. So Oklahoma is the first state where you’ve had more medical patients register for a program than there are self-admitted cannabis consumers on the government study. So on the national survey on drug use and health, which is essentially the country’s gold standard for drug use, only 8% of Oklahoman’s admit consuming cannabis. So clearly they’re more-

Vivien Azer:

There’s a disconnect in the data.

John Kagia:

There’s massive disconnect in the data. And so we’ve tried kind of modeling to account for the fact that in these very prohibition aggressive markets, that there is this under reporting, under accounting, and Oklahoma, if it’s any indication, is a good illustration of just how large those numbers could be when you look across the south and across the Midwest. But yeah, very, very interesting market to watch.

Vivien Azer:

Absolutely. I mean, we rely so heavily on that NSDUH data. I mean, I can’t do annual survey that has an end of 70,000 people. But I always caveat when I talk to investors, I’m like, these are the people who are willing to admit to the federal government that they’re using a schedule one controlled substance. And yeah, you’re right, Oklahoma is a very interesting case study in terms of that disconnect. So let’s stick with the consumer then. So clearly there’s a lot of consumer demand, perhaps even more than the government data would suggest. Can we peel the onion back a little bit? Do you have any insights in terms of consumer demographics, age, income? What are you seeing in terms of the evolution of the cannabis consumer?

John Kagia:

So one of the things that all of this new data that we are now accruing has been able to show us is, one, really affirmative of this idea that cannabis use transcends American society. It is about as multi-spectral a representation of American society as you can find. Now obviously, there’s some things that are inherent to the market. It skews younger, it skews male, but even some of those differences are starting to erode. This used to be a, let’s say, 65/35 male female split. You’re seeing usage increase dramatically amongst women. Users skew very young, but some of the fastest growth and use is amongst older consumers. And so there’s this kind of normalization that’s happening. Yes, it will continue to be largely younger and perhaps slightly more male than female consumers, but broadly speaking, there’s a huge cross section of America that consumes cannabis, and we think therein lies the opportunity.

John Kagia:

The early stages of this market focus primarily on the young male heavy consumer. And what we’re finding is, as cannabis are using data to more effectively define the product offerings, identify their target audiences and build resonant products for loose groups, that there’s really rich opportunity through segmented, targeted customer acquisition, customer profiling. We’re also seeing really dramatic shifts both in consumption behaviors, the drivers of use and what products consumers are using to align with their product needs. So first we’ve seen the share of flower fall dramatically. Nationally across all the point of sale data we’re looking at across the country, flower is now below 50% of the product being sold with the value added products accounting for the balance.

John Kagia:

Two, we are seeing a shift away from even amongst the hardcore consumers who are flower purists, they’re now supplementing their use with value added products, adding edibles, adding topicals and tinctures. Which to us indicates two things, one, more conscious and more intentional use. And so the joint that you might have in a social setting or before doing yoga, will be different than a product that you might consume, say a pill or a tincture that you take before you go to bed. And so consumers are thinking a lot more intentionally around what they’re using and why, and that’s creating very significant opportunities for product supplementation.

Vivien Azer:

That insight really resonates with me because I think it just speaks to the evolution of the consumer more broadly, not necessarily the cannabis consumer, because we see the exact same thing in beverage alcohol and we see it in tobacco. Poly-use consumption that is occasion based is evident in all three categories. The gender call out is really interesting too. I remember, very early days in our cannabis work, I was speaking at beer conferences about cannabis and then speaking at cannabis conferences and making alcohol analogies. And one of the things I was very consistent in saying to the cannabis audience, please don’t make the mistake of beer. Do not create a category that alienates female consumers, because the reason beer has been losing so much market share is because the category alienated females and so they feel more comfortable in wine and spirits. But I do think, to your point, that the innovation that we’re seeing really reflects a consciousness of how wide the addressable market could and should be, for sure.

John Kagia:

We think that the opportunity to target female consumers is absolutely massive. And candidly, we think the industry has not yet capitalized in what we think is a phenomenal opportunity. And part of that is, and we’ve talked a little bit about this offline, this idea that we need to shift away from this idea of non-medical cannabis use being recreational. We have found in our consumer data that almost all cannabis use has a wellness bent to it. And from that framing, then it changes the way you think about who’s consuming and why. Recreational tends to suggest social, kind of quote unquote party context, which fits in very well with the alcohol narrative. But when you think that, the top reasons that are driving most cannabis use, even amongst non-medical patients, are relaxation, managing stress, reducing anxiety, improving sleep outcomes, managing pain, as being kind of the top five or six reasons for use, then it changes that orientation of, right, so how do you serve consumers who aren’t looking for a party drug, but are actually looking for something that will improve the health and wellness outcomes?

John Kagia:

And so, for example, just even the idea of the women we’ve been speaking to in our research around things like products that can help them deal with feminine health issues, menstrual cramps, products that can be used to improve intimacy outcomes. The opportunities are absolutely massive and the consumers who are starting to use some of these products in the market are raving about them, but they remain a minuscule category in the market. So there’s, we think, very, very significant outcomes, whether it is to support the so-called soccer mom who’s looking for an alternative to her glass of wine, to the older or the more mature female consumer who are never going to smoke a joint, their arthritis is going to prevent them from rolling a joint. I think there’s a great deal of opportunity to consider not only what outcomes that they’re seeking, but what product form aligns with them. Building brands that actually resonate, building community that allows them to share their experiences, that remains very fertile ground for the industry.

Vivien Azer:

Yeah, absolutely. I mean, the intersectionality, again, is really just so striking to me because in global tobacco, Philip Morris, British American Tobacco, Imperial Tobacco and Altria, all now are talking about cannabis. But they’re being very careful about, especially for the international, multinational operators where it is really a very narrow lane and it is entirely focused on health and wellness. Well, speaking of intersectionality, we’re at South by Southwest. There is a lot going on. It’s my first time. I’m finding the whole experience just so enriching. How’s your experience been?

John Kagia:

It’s been incredible. My first time as well. You know, somebody told me or described it to me as a burning man but in Austin without the dust. And it’s actually proving to be a lot of that. So far my experience has been about serendipity. Just the number of random conversations I’ve happened to have with people who are brilliant in their respective fields, not just in cannabis. I’ve met a couple of random technologists. Just had an incredible conversation with a political candidate. The energy here has been phenomenal. And I think particularly having been feeling like I’ve been in the Hinterlands for the past couple of years because of COVID, what a way to come back into the social world. Truly a wonderful experience.

Vivien Azer:

I’m so happy to hear it. Same here. This is Vivian Azer, Cowan’s beverages, tobacco and cannabis analyst. Thank you, John.

Speaker 3:

Thanks for joining us. Stay tuned for the next episode of Cowan Insights.

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