Legal US pot sales soar to $5.4B in 2015

Legal U.S. pot sales soared to $5.4 billion for 2015, up 17.4 percent from $4.6 billion in 2014, according to data released Monday by the ArcView Group, which tracks the cannabis markets.

The figures include medical and adult consumer sales. However, the annual gain was largely fueled by the explosive growth in consumer sales, as some states have approved adult recreational marijuana use. Adult use sales grew to $998 million from $351 million in 2014, according to the research. And voters in more states, including California, are likely to take up the issue in 2016.

By many measures, 2015 was a bellwether year for marijuana, as states like Colorado and Washington paved the way for new business models and growth. Entrepreneurs have opened spa-like retail shops for adult users and medical cannabis sales. The social experiment to abolish cannabis prohibition in some instances is melding with a for-profit corporate culture.

The growing cannabis market features a variety of innovative consumer-facing products such as vaporizers, edibles and capsules. As an example, Colorado adult use sales surpassed $100 million last year for the first time.

Washington state also saw strong monthly sales gains in 2015 — growing some three fold — with $75.3 million in sales for December from $18.8 million in January 2015. Sales of edibles and extracts in Washington already number in the hundreds of thousands of units in a single month.

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And 2016 is also shaping up to be an equally robust year with strong demand. ArcView estimates the legal market could grow to $6.7 billion in sales.

"You won't find another industry growing at that kind of clip," said Troy Dayton, chief executive of the ArcView Group.

In addition to publishing cannabis sector research, ArcView's investor network members have invested more than $64 million in about 104 marijuana companies. The report was published in partnership with New Frontier, which focuses on cannabis data analysis.

Across the country, 23 states and the District of Columbia allow medical marijuana use. Four states and D.C. allow for adult use of marijuana.

All told, about 86 percent of Americans live in states that allow some degree of legal cannabis use, according to the report.

This year, seven states could decide on whether to allow adult use: California, Nevada, Arizona, Massachusetts, Maine, Rhode Island and Vermont. Vermont may become the first to legalize cannabis through legislative action, rather than voter approval.

Beyond actual marijuana production and sales, more ancillary businesses are emerging, including security, insurance and e-commerce companies that support the entire supply chain.

Despite the growth in the market, there are potential risks including a key one related to taxes.

Under federal law, cannabis is a controlled substance and illegal. So the IRS does not allow businesses to deduct the cost of cannabis as they would for other goods sold. This inability to deduct a key cost of goods sold had made it more challenging for cannabis businesses to remain financially viable, as competition increases and prices fall over time, according to the report.

On the flip side of taxes, the cannabis market can be lucrative for state coffers. Colorado collected $13.2 million in taxes and fees in August — the single highest month of tax revenues since adult use sales began in January 2014, according to the report, citing the Colorado Marijuana Enforcement Division.

Beyond tax hurdles, rising competition is another key potential risk.

New growers have entered the market, hoping to strike it rich in a new frontier of legal weed sales. Wholesale and retail market prices have increased "significantly." Price pressures are forecast to continue into 2016.

And there's the possibility that nervous producers, hoping to reduce excess supply, could offload inventory through fire-sale prices.

"There is also a robust illicit market competing for the same business," according to the report. While the research did not estimate the size of the illicit market, ArcView's Dayton said the underground market is shrinking — not growing — as more legal sales come on board.

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Like in any boom industry, growing sales and investors are forcing the cannabis industry to adapt and grow in sophistication.

"There are more well capitalized, sophisticated players getting into the space and buying up smaller players," Dayton said. "We're also seeing small palyers grow into bigger players and increase the talent pool of their executive teams."

For now, a cannabis company must obtain individual state licenses to operate and sell in different states. This makes the emergence of medium-sized companies and ultimately national brands — a precursor to a public listing or initial public offering, down the line — trickier.

But the growth among existing players is expanding, with a handful of pot companies now pocketing anywhere from $30 million or $40 million in annual revenue, Troy said.

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