Alaska’s newest industry, retail cannabis, will almost surely reach market saturation at some point. But we may not realize until months after the fact.
Market saturation — it occurs when there is no new demand for a product — could take multiple forms and will likely have multiple drivers.
Saturation is normally brought on by decreases in demand, increases in competition, or a combination of both.
Because of summer sales to tourists, there could be seasonal saturation. Saturation could hit specifics products, such as flower or concentrates, or simply result from a glut of businesses.
It’s almost inevitable that sales will plateau and maybe decline.
Neal Fried, an economist with the state of Alaska, said it’s too early to tell if the market has become saturated. “Eventually you may know. My guess is it’s probably way too early,” he said.
How will we know?
A few metrics can shine light on the current market and preview the near future.
One is a list of all marijuana business licenses applied for in the state of Alaska. Another is examining sales through tax revenue.
An online database from the Alaska Department of Commerce, Community and Economic Development includes a list of all licenses applied for in the state, which includes retail, cultivation, concentration and testing.
Since Alaska voters legalized recreational cannabis in 2014, more than 250 licenses of all types have been approved. Additionally, 40 licenses are active pending inspection, while more than 130 licenses are in various stages of approval.
It can take months or even years for a license to work through the entire approval process, possibly delaying potential effects on market saturation.
A second easily watched metric is taxes.
Because cannabis is taxed $50 per ounce at the cultivation level, officials can track with reasonable accuracy the amount of raw product grown and sold.
In October 2016, the first month of tax collections, Alaska received only $10,400. By June 2017, that number increased to $512,500, and by Dec. 2018, tax revenue reached $1.5 million.
Alaska’s tax revenue has consistently risen month-over-month. A large jump occurs every October, likely due to Alaska Permanent Fund dividend distributions.
The $50 per ounce tax has other market implications, either intended or unintended.
Because the flat rate is assessed at cultivation, it puts a strict floor on the cost of production, which is largely believed to benefit large-scale growers, thanks to economy of scale.
As markets mature, retail costs typically decline. But with the current tax structure, that may not happen unless growers can find new efficiencies.
Additionally, Fried explained that lower prices can be erroneously attributed to market saturation.
“As price falls, consumption could increase, so demand could increase. he said.
Cheaply and efficiently growing pot in Alaska can be challenging — in large part because of geography and climate — and is another factor influencing Alaska’s market.
Growing cannabis large scale requires intensive capital, creating barriers to entering the market.
Alaska has notorious shipping costs and expensive utilities. There are costly industry requirements such as licenses and testing. Finding appropriate real estate can be challenging as well.
Additionally, large outdoor grows, like those that have contributed to a big glut of marijuana in Oregon, aren’t as feasible or well developed in Alaska.
But even in Alaska, retailers have noted large upswings in available product at the end of the summer growing season.
Another indicator of market saturation, though not entirely reliable, is if businesses start going under. Such a scenario could be the result of saturation, other market factors or simply the result of a poorly run business.
As described by Evan Levinton, co-owner of Anchorage-based retail shop Enlighten Alaska, “People are going to wash themselves out because they didn’t really know what they were getting into.”
Be it saturation or someone’s inability to run a business, Levinton thinks the next two years will begin to define the market.
“If they (regulators) don’t cap the licenses, a lot of people are going to weed themselves out, no pun intended. Cultivations will start hurting and go under first, retail locations will follow,” Levinton speculates.
Enlighten Alaska was one of the first retail shops in Anchorage, and Levinton recounted the early days of operations.
“Prices were extremely high in the beginning,” he said, adding that he would constantly call cultivators to find product to sell.
Then more growers came online.
“About a year after we began is really when we stopped having to worry about trying to reach out a whole bunch. ... As of right now, two years in, we are very picky who we work with,” he said.
The crystal ball
Because it will become harder for retailers to distinguish themselves from one another, Levinton thinks the future success of retail stores will depend on convenience as much as anything.
“If you’re not growing yourself and bringing something unique to the market, all the retailers will even out,” he said.
Fairbanks-based grower Karl Hough operates Subsistence Products, a limited cultivation facility. Limited cultivation facilities must be less than 500 square feet. Hough only has one employee.
Hough thinks small-scale growers are already being pushed out of the market, either from saturation or other market factors.
When the industry was still in its infancy, Hough was selling to retailers and fetching $3,000 to $4,000 per pound. “The first year there weren’t enough growers. They (retailers) were coming to us all the time and they bought everything we had.”
But that soon changed. “As soon as a few big greenhouse and warehouse growers came in that fall, the market just fell off,” he said.
Brandon Emmett, co-owner of a Fairbanks concentrate company and former member of Alaska’s Marijuana Control Board, agrees with Hough.
“I think that due to the tax floor, with the excise tax being what it is, and the price of marijuana not being able to fall, that there is becoming saturation at the retail level for flower,” Emmett said.
Now, more than two years in, Hough said he’s lucky to get $1,000 per pound after taxes, which doesn’t even cover his costs.
He expects in the next two or three years will see concentration.
“It’s going to look like there’s about half a dozen big major warehouses supplying 90 percent of the pot. The ones that will make it are the ones with big dreams and big pockets,” he said.
Hough is critical of Alaska’s tax structure and regulations that contribute to high cost of entry, saying they disproportionately affect small growers.
He supported marijuana legalization as a avenue for Alaska’s many growers to support a cottage industry, “A self-sustaining state industry that can float a whole bunch of ships,” he said.
Unless prices rebound, Hough said it’s unlikely he’ll renew his cultivation license.
Part of the reason he expects to leave the industry is what he refers to as “another boogeyman” — the possibility that cannabis will be deregulated at a federal level.
If that happens, Hough is even less optimistic about Alaska’s market share. “We wouldn’t be able to compete any more than we could compete with coconuts or bananas,” he said.
Contact staff writer Robin Wood at rwood@AlaskaCannabist.com.