How to Successfully Operate in Arizona’s Legal Cannabis Market

by | Feb 25, 2021

Now that Arizona voters overwhelmingly have approved Proposition 207, businesses are eager to tap into the $2 billion market projected for the state’s combined adult-use and medical-cannabis programs.

But, what many eager new businesses might not readily realize is, at least in the beginning, the state’s existing medical-cannabis operators will have several advantages over companies wanting to grow and sell on the recreational side.

The contrasts between Arizona’s adult-use and medical markets are important for any cannabis businesses in the state to understand, but they truly present unique implications for cultivators and producers who want to position themselves in the newly legalized recreational market.

The differences also highlight the need for all companies, including distributors and retailers, to have a reliable, scalable wholesale platform if they want to succeed quickly in The Grand Canyon State this year and beyond.

Let’s look at some of the important differences between Arizona’s two cannabis programs.

First to Market Medical Cannabis Dispensaries

When Arizona became the thirteenth state to legalize adult-use cannabis in November 2021, it set into place a program that gives the state’s existing medical-cannabis dispensaries the advantage of being the first ones to sell to recreational consumers. From January 19 until March 9, the state’s current nonprofit medical operations can apply for “dual licensees,” which means they will be allowed to sell to both medical-cannabis cardholders and recreational consumers. 

Some of the state’s current medical cannabis dispensaries began selling to adult-use consumers at the end of January. Starting in April, additional medical cannabis dispensaries will be allowed to sell recreationally in the market regardless of whether they have dual licenses.

The most important thing for cultivators and producers to note in planning for getting their products on retail shelves — is under Proposition 207, only existing vertically integrated medical cannabis companies in the state, and 26 new social-equity businesses, will be part of Arizona’s adult-use program. Over time, and as the state’s population inevitably grows, more permits will be issued. As the new adult-use market launches, though, only currently established cultivators, ones already tied to the state’s medical program, will be able to take part.

Cannabis Taxes and Fees in Arizona

Medical cannabis dispensaries having a head start on retail sales might not be a completely overwhelming obstacle for businesses wanting to take part in the newly legalized adult-use space, but, the state’s existing medical cannabis companies have other notable advantages.

Taxes on cannabis under the state’s existing medical program are a 6.6% state sales tax and an optional 2-3% tax applied by different municipalities. Compare this with the provisions of Prop 207 that set a 16% excise tax on adult-use cannabis purchases that, combined with other state surcharges, can add up to as much as 24.6% on dispensary purchases.

Clearly, medical-cannabis patients in Arizona will pay much less in taxes and fees on their cannabis purchases. Even though medical patients will have to pay for medical cards every couple of years, as well as doctor recommendations, it’s the sticker shock at the point of sale for individual adult-use purchases that could make consumers prefer the state’s medical program over its new adult-use program. Cultivators, producers, and ancillary businesses will need to acknowledge this if they want to sell the right products effectively in the right marketplace. 

Dosing Differences in THC for Medical and Recreational Cannabis

In addition to existing medical cannabis companies having less-taxed retail products on their dispensary shelves, they’ll also be allowed to legally sell more potent, and, therefore, more-effective and more-popular, cannabis products.

Cannabis edibles have been hugely popular in practically all adult-use states where they are sold. In 2020, BDSA Consumer Insights data showed gummies as the most widely consumed and most-popular ingestible products sought by consumers in the adult-use markets in both the U.S. and Canada. Edibles’ current popularity in Arizona’s medical program, and their potential consumer popularity in the state’s adult-use program, can’t be overlooked or discounted.

But here, too, are evident differences between what can be sold on Arizona’s adult-use market and its medical one. Under the mandates of Prop 207, edibles sold on the adult-use market can only contain as much as 10mg of THC per serving and a total of 100mg per package. Compare that with the unlimited amount of THC per serving that can be found in edibles, including gummies, sold on the state’s medical cannabis market. Edibles in the medical cannabis market can contain as much as 50mg of THC or even a whopping 100mg of THC per piece.

To a casual observer, the dosing differences might not seem drastically prohibitive. But for consumers already accustomed to the higher doses of THC in medical products, it’s difficult to think they will readily gravitate to the new adult-use market for lower-dose products, especially if those products are more costly because of the higher taxes and fees being levied. Cultivators and producers will not only have to address these differences in the products and services they provide for retailers, but it will be crucial that they understand just how these differences can affect production costs and retail pricing dynamics between the two markets.

Cannabis Home-Grow Allowance

The advantages of the medical market aren’t the only competitive forces that recreational retailers will have to confront. Arizona’s new adult-use market also allows for limited home-grow. Adults can grow as many as six plants at home or double that with two adults in the household.

This means that cultivators and retailers will have to be acutely aware of how to best differentiate their flower products if they want to compete with the kinds of flower strains Arizonans will grow on their own. This aspect alone might be the only one to equally affect retail and cultivation decisions in both the medical and recreational cannabis markets.

Cannabis Supply Chain Problems and Solutions

Another issue Arizona’s two legal cannabis markets will face are geographical and population factors that will affect the number of adult-use dispensaries allowed in the state. An additional issue is on the consumer side, medical-cannabis cardholders will have certain job protections that are not extended to recreational users.

But, most important for cultivators and producers wanting to engage in Arizona’s new adult-use market is the continued need to master the inefficiencies and challenges populating the supply chain. These factors will be multiplied in Arizona’s cannabis space, which is, for all practical purposes, two distinct marketplaces that favor medical cannabis companies for now.

Both markets are characterized by a lack of defined and consistent operational practices and data management processes. Cannabis and hemp supply chains run the continual risk of being fragmented and disjointed, making ordering and fulfillment a nightmare for both wholesalers and the dispensaries they serve.

Simplifying Wholesale Cannabis Operations

Leaf Trade’s software simplifies compliance and supply-chain operations for the wholesale cannabis industry. Some major cultivators, like Aeriz and Copper State Farms, already use Leaf Trade in Arizona to manage, track, and sell their wholesale inventory to qualified buyers (over 165 (and counting) dispensaries in Arizona use Leaf Trade for their wholesale buying). We save time and money for our customers so they can create better products for their patients and consumers, and this couldn’t be more important as the recreational market launches in Arizona.

Leaf Trade offers wholesalers, processors, retailers, and dispensaries a smarter way to manage, market, and cultivate the growth of their cannabis and hemp businesses.

Buyers in Arizona (and everywhere) can sign up for free here!

If you are a licensed cultivator and would like to learn more about selling your wholesale inventory on Leaf Trade, schedule a free demo.