U.S. Cannabis Collective

THE TD COWEN INSIGHT

Herein we provide a state-by-state desk reference for U.S. cannabis industry using data-driven insights. We slightly revised our 2023 U.S. legal cannabis TAM to $28.9 bn and lowered our 2026 TAM estimate to $36.3 bn (previously $38.1 bn) amid a deflationary backdrop and regulatory delays. Price deflation remains a headwind in many markets, as sales will be driven by incremental growth from nascent adult-use markets.

TEMPERING STATE-BY-STATE CANNABIS MARKET ESTIMATES FOR 2023

We continue to believe federal legalization will not occur in 2023 and that a path for the SAFE Act to pass is not likely. Price deflation, tough COVID stimulus comps, and excess supply have been overhangs. With the industry having grown less than we expected in 2022 (+3.3%), we temper our estimates for most markets in 2023. This rings particularly true for delays in New York and, to a lesser extent Maryland, though positive adult use trends in Missouri drive upside to estimates. Delays in Virginia contribute incremental risk to our out-year estimates as well, such that we now look for $36.3 bn in retail sales in 2026.

ESTIMATING THE U.S. LEGAL TAM FOR CANNABIS

We derive our U.S. legal TAM using a bottom-up approach based primarily on retail sales data from state governments and Headset. Our TAM includes 1Q23 reported retail sales data for 15 states that collectively account for ~72% ($20.9 bn) of our 2023 TAM, of which ten were based on state-reported sales, with the remaining five informed by Headset data.

PRICE DEFLATION FOR CANNABIS VARIES BY STATE

As we have seen from pricing data at both the retail level and the wholesale level, price deflation intensified in the second half of the year, albeit to varying degrees.

In Michigan, December wholesale prices had declined ~50% YoY (though March was down ~19%). This, in turn, resulted in cross-category price deflation at the retail level.

In Massachusetts, wholesale prices are now down over 50% as price deflation accelerates. That said, we see some relief in more developed West Coast markets like California, where we believe price deflation prompted a shakeout in supply. As such, while wholesale prices in California were down as much as ~44% in July 2022, YoY declines have moderated to down ~12% more recently.

WHAT TO WATCH

We are watching a few things in 2023:

1. Reductions in capacity and supply as price deflation becomes unsustainable, given the high cost of capital for the industry
2. Incremental growth from nascent adult-use markets like Missouri, New York, Connecticut, and Rhode Island
3. Continued down-trading as we remain cautious on the lower-income consumer, which cohort over-indexes to cannabis consumption
4. Continued migration from the illicit market into legal channels (helped by legal market price deflation)