New York’s Adult-Use Cannabis Market Off to a Slow Start

INDUSTRY PLAYERS ARE watching closely as New York regulators finalize adult-use regulations and rules for license applicants. One of the most restrictive and vertically integrated medical-only states in the United States could become one of the country’s fastest-growing adult-use markets in the country as many of those restrictions are lifted.

New York adult-use legalization could prove to be a once-in-a-lifetime opportunity for local start-ups in what is the country’s fourth-largest state by overall population, but the third-largest in terms of adult cannabis consumers (see graph, opposite page, with our forecasts of by-state adult consumer counts in 2027).

Given what we know about the coming regulations so far, New York will present many challenges for nationwide cannabis companies that have long eyed the outsized New York opportunity with relish. Here are some potential roadblocks at various stages of the farm-to-market pipeline:

• CULTIVATION. Licensed growers may be granted limited rights to process their crops and sell their products to retailers but will be barred from owning retail licenses (except for the existing vertically integrated medical licensees) or reselling third-party products.
• DISTRIBUTION. Branded product companies may not be allowed to grow or manufacture their products; additionally, packaging rules look like they will only allow labels to show “one brand logo and the brand name” and state-mandated language.
• RETAIL. Each licensee will be limited to three adult-use stores and the state’s plan is to have the first 100 go to social equity applicants with very specific backgrounds: a felony conviction in the licensee’s family and two years of experience running a profitable, tax-paying business.

Before the Green Rush

Several giants of the national industry have been jockeying to be in position for an adult-use bonanza since New York allowed the first five vertically integrated licensees to open dispensaries in 2016. On the cusp of adult-use legalization, some of the largest multi-state operators (MSOs) in the country held eight of the 10 vertically integrated licenses to cultivate, manufacture and retail medical cannabis products in New York.

These eight MSOs—Curaleaf, GTI, Cresco Labs, Columbia Care, MedMen, iAnthus, Acreage, and Vireo Health—each have four existing medical dispensaries, the limit under medical-only rules. They are now going to have to adapt to a radically different regulatory regime in the adult-use era.

Regulators are pursuing goals set by the state legislature and appear determined to make sure that neither the MSOs nor anybody else can dominate the adult-use market. The existing medical licensees will be allowed to double their total store counts to eight (seemingly good news for Cresco, especially—the Chicago, IL-headquartered company acquired NYC-based Columbia Care, pre-doubling its medical marijuana footprint in the state before it gets to double down again). But like all other adult-use retail licensees, the incumbent medical players will be limited to just three adult-use stores. That’s three stores in a state of more than 19 million people, 8 million of whom are concentrated in New York City.

Jilted at the Altar?

The MSOs can’t be blamed for feeling a bit seduced and abandoned. In the medical-only era, they were required by the state to be vertically integrated. Many of the MSOs, as an overall strategy, have focused on obtaining licenses in medical-only eastern states that require vertical integration and tightly restrict the number of licensees.

This has brought them the benefits of operating with limited competition, as in New York’s medical market. It has also enabled them to operate in multiple sectors as a means of finding operational efficiencies and scale when there are few efficiencies available across state lines while federal prohibition remains in effect for the forseeable future.

Several of the MSOs had recently cut eight-figure deals to build or expand cultivation facilities around New York state in anticipation of the huge explosion in biomass demand that typically occurs with adult-use legalization. They can continue with their preferred vertical integration model under adult-use rules, but only in providing product to their own eight stores.

But beyond that necessarily tiny slice of the retail market, the MSOs will be selling at wholesale, a position few of them have sought out in other non-vertically integrated states. No wonder—grinding declines in biomass prices have crushed cultivation gross margins in many states.

Supply Side Jockeying

Competition will be particularly fierce in New York on the grow side. On May 15, New York became the first state to allow local hemp growers to apply for adult-use cannabis cultivation licenses—five days later, 200 had done so. New Yorkers have long been accustomed to paying premium prices for high-quality cannabis in the legacy market, and it is not at all clear that outdoor hemp cultivators can deliver quality flower for smoking. But some hemp growers will likely be very competitive on price in providing biomass for extraction of cannabinoids and terpenes for concentrates and edibles.

The MSOs then face an agility trial in New York. That’s a test several have passed in other vertically integrated medical states that moved to adult-use, including Arizona, Illinois and Michigan.

“We expect a lot of the dynamics will be similar,” Curaleaf’s new CEO Matt Darin told me in July, noting the company has developed robust wholesale sales operations in many states. “Our thinking is that being vertically integrated is the best model, featuring your products in your own stores, but also in third-party stores. It actually gives you a diversity of revenue sources, which is a good thing.”

New York is promising an unprecedented level of support to social-equity licensees in hopes that this helps them get open quickly. But the limitations it is placing on national players who have been standing by to invest heavily in replacing the state’s robust legacy market will likely slow the legal market’s development.

Before much was known about the rules, we speculated that adult-use spending in the New York market would explode after legalization. Last year, we noted that if New York’s adult-use market were to grow at the same rates seen in prior conversions of limited medical markets to adult-use, it could expand very quickly to $4-$7 billion in spending by 2025 (see “Giants Being Born” at Globalgo.consulting/content/germanynewyork). Now we think it more likely that recently published forecasts from The Brightfield Group showing New York growing to just $3.5 billion by 2027 are a more realistic expectation for corporate planners and investors.
That will still make it the third largest prize in U.S. legal cannabis in 2027, behind only California and Pennsylvania by Brightfield’s forecasts. Hence, even with the limits the state is imposing on the ability of any one company—or group of companies—to dominate, it will likely provide a useful proving ground for companies preparing for the competitive battles to come with federal legalization.