Recreational cannabis is now legal or decriminalised in over 30 countries worldwide, with Canada making headlines in October 2018 as the first G7 country to pass comprehensive legislation. With mounting political pressure for a similar review of the UK’s cannabis laws – and 42.5% of people supporting legalisation – it now seems inevitable that some form of regulated UK cannabis market will emerge within the next ten to fifteen years.
A lucrative market
Based on consumer spend data, GlobalData Retail estimates that the value of the UK unregulated cannabis market is £2.5bn in 2019. To put this in perspective, the figure is marginally less than the UK will spend on skincare this year.
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Survey data suggests that only 10.4% of the populace have used cannabis recreationally over the last 12 months. However this figure rises to 19.3% for 18 to 34 year olds, demonstrating a clear demand amid younger consumers for the product, and thus presenting an opportunity for a regulated retail market.
This £2.5bn cannot be considered the amount that retail would benefit from post-legalisation. Under regulation price per gram would significantly drop, with open competition, economies of scale and legitimate distribution networks all contributing to an estimated 60% fall in price compared to the black market (falling from circa £10 per gram to £4*). However, assuming a 30% duty levy (on top of VAT), the regulated UK market would be worth £1.6bn in 2019, and would generate almost £490.4m for the UK government.
While there is copious literature both for and against changes in legislation, from a UK retailer’s perspective there are two pertinent questions: how would it be regulated, and who would stand to benefit?
The regulatory framework
With respect to regulation, cannabis would most likely sit somewhere between tobacco and alcohol. Age restrictions would apply, as would location restrictions (i.e. no smoking indoors). However, cannabis would also have to the additional complication of a THC (the principal psychoactive agent) threshold, with different bands attracting different taxation – akin to alcohol being taxed by ABV. However, any levy on cannabis would have to be lower than other ‘sin taxes’. Previous studies have shown that the unregulated cannabis market is more dynamic than other black markets, and any levy significantly higher than 30% (in addition to VAT) would risk accelerating untaxable sales.
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By GlobalDataEstimating the potential channels of distribution (and who stands to gain) in the UK is a harder task, mostly due to the possible variation in regulations. However, parallels can be drawn from activity in the North American market.
Canada’s largest food retailer, Loblaw, intends to sell cannabis products from behind the counter in its existing tobacco shops, independent of its central grocery store outlets. Meanwhile John Mackey, CEO of Whole Foods Market, stated (speaking about Texas specifically) that “chances are good that grocery stores will be selling it (cannabis)” if decriminalisation continues. He added that Whole Foods would open cannabis dispensaries rather than sell it from the main store.
So, despite the differences between US and British regulations, it seems likely that the major supermarkets would enter the cannabis market in some form.
Independent vs corporate vendors
Outside of traditional supermarkets (or any of their possible cannabis-focused fascias), legalisation would likely result in an eruption of small, independent stores and chains – provided that licences to vend were not too hard to come by. As such the market would initially be fragmented between the larger players trialling the proposition, specialist independents/small chains, and direct from manufacturers.
Interesting preliminary data from Canada also suggests that non-physical demand would be high, with an estimated 35% of Canada’s legal cannabis sales currently purchased through websites or mobile apps. While it is expected that a number of specialist cannabis retailers would arise, it is intuitive that legalisation would also see an increase in online pureplays, and add c£560m to the overall online market.
Given the high growth potential of the market, existing American and/or Canadian cannabis specialists (e.g. Canopy Growth, Aurora or Aphria) would likely look to expand to the UK should legislation change. Furthermore, traditional tobacco players may also look to capitalise as demand for non-electronic tobacco products continues to decline rapidly. This is a sector with significant financial authority, as demonstrated by the recent $200bn merger talks between tobacco titans Philip Morris and Altria.
Expanding a viable proposition across continents is not an easy task for any retailer, and difficulties would be exacerbated by the novelty of the market and the unpredictability in response from the general public. If a green-thumbed entrepreneur can establish a retail network that properly connects with its customers, there is room to gain a substantial share of an unexploited market.
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