One of the biggest changes in cannabis as it has transitioned from the semi-regulated medical industry to the highly regulated and competitive recreational sector is the availability of — and need for — big data analytics.
As producers and retailers get increasingly sophisticated, the ability to track and forecast sales trends and manage inventory with a high level of efficiency have become crucial for success.
Founded by the same team that created Leafly, Headset is one of the companies that has stepped in to fill the industry’s need for data and analytics. Headset has a variety of analytics products designed to help businesses stay competitive in markets all across North America.
Headset CEO and co-founder Cy Scott spoke with Marijuana Venture about all things data-related, including the latest trends in California.
Marijuana Venture: As you’re gathering and analyzing more and more data, do you see unique trends within each state or do you find that cannabis retail is essentially the same from one market to the next?
Cy Scott: We’ve processed more than $4 billion worth of transactions at this point, so we’ve got a pretty significant lens into what’s going on, especially in those markets that we offer the market intelligence services. The answer is yes, they are different. A lot of it has to do with legislation and rules, so certain markets allow certain products, while others don’t.
Edibles range between 10% and 15% of any given market. In a market like Nevada, it’s about 10% of all sales, where a market like Colorado, edibles account for 15%. There are those differences. What we’ve noticed in California is that the vapor pens segment is about 32%, where in a market like Washington, it’s about 14% of the market. I think a lot of that nuance has to do with California in July changing its regulations on dosages and packaging. Basically, the full regs went into effect for processors, where before they could sell “medical” products.
It really depends on the legislation and the players that make products in any given market.
MV: Have you noticed any particularly surprising trends, either from the industry overall or from a specific market?
CS: I think the decline of flower sales is pretty interesting. Over time, we’ve noticed that in most markets, a significant majority — upwards of 90% — of sales go to flower on day one. Often this is a byproduct of not having the brands and the processing ability on day one, but then over time, flower loses market share.
We saw that trend pretty significantly in Washington. On day one in 2014, sales were mostly flower. Now, flower in the Washington market is under 50% of the market, and that has continued to decline. It’s not going to go to zero anytime soon, but it definitely has dropped significantly. Now you don’t see any market with more than 50% of sales going to flower. It just shows how diverse the product is getting.
When a lot of people think about cannabis, they think about flower products, but it’s much more nuanced than that.
MV: What are the main categories that are replacing flower?
CS: The largest percentages go to edibles, concentrates, vapor pens and pre-rolls.
Pre-rolls are over 10% in the markets that we measure right now. Vapor pens are 20-30%. Concentrates range from 5-15%, depending on the market.
After that, it falls off. Beverages are roughly 1.5-2% of any given market. Then you have capsules, tinctures and topicals. Those are all about 1% or less, but they have high growth rates. It’s kind of interesting to see the growth in the new segments.
Another interesting thing we noticed with the Washington market is that the No. 1 selling product by revenue is actually a topical: the Flow CBD Gel from Fairwinds, which is pretty incredible. It shows the maturity of the market. You’re not just getting the cannabis connoisseur who wants to dab all the time. You’re getting a broader audience that is looking at topicals and other products.
MV: Is that partially because with flower each strain and package size are technically different products, while the Flow CBD only comes in a single size and formula?
CS: That’s true. We treat every product, every SKU, as a separate line item. So something like flower that comes in a variety of package sizes, we treat those as distinct products. A gram is separate from an ounce, and so on. The flower, concentrates and pre-rolls that are strain-specific inflate the SKU count, so to speak, and impact their ranking.
MV: Over the past few years, are retailers increasingly recognizing the need for this kind of data and the ability to analyze their own sales information?
CS: Yeah, absolutely. We try to make it as easy as possible to really highlight what’s going on, but we have noticed a level of maturity coming to market over the years.
The difference in the sophistication levels for a lot of these retailers from 2010 to today is pretty extreme. You have larger operators — chains like Green Thumb Industries, MedMen, groups that have a number of locations across a number of markets — that are often capital-backed and they have more resources to invest in personnel who are looking at numbers, people that are really studying the data. That audience needs the tools to be able to explore and optimize their businesses. Not only do they have more sophisticated personnel, but there are also more products and brands coming to market and a finite amount of shelf space.
Retailers can’t just sell everything that comes through their door. There is a risk of cannibalizing existing products. There are warehousing costs and inventory costs. Retailers need to be making smart decisions and they recognize that they need analytics to be able to do that in the best manner.
MV: Do you still see a lot of retailers operating based on personal favorites or gut-feelings?
CS: There’s definitely a spectrum of different retail types.
You have the smaller, mom-and-pop stores that don’t have analysts on staff to really do deep dives. For that audience, we have a number of dashboards that are more simplified and push the insights to the forefront. So, for that kind of audience, we can send a daily email that identifies over-stocked inventory. They really appreciate that. They’re not building those reports themselves. They might not prioritize that type of research, and in that case, we deliver an email that lands on their desk and they can go take action on it, instead of having to purposefully find over-stocked products, as an example.
MV: What trends have you seen with California’s adult-use marketing coming online in the past year?
CS: California rolled out a legacy program that allowed existing medical products to be sold for the first six months, as long as they were packaged in child-resistant packaging at the point of sale. But then, once the full regs went into effect in July, a lot of people weren’t ready.
In June, the number of distinct products we saw sold was close to 6,000. That number dropped to just under 3,500 in July. More than 2,000 products just disappeared overnight from the market, which is crazy. That’s about a 40% decrease. It really impacted things like concentrates, beverages, edibles, tinctures and sublinguals. It’s a harder product cycle on the development side to create, compared to something like flower.
And at the same time, there was a decline in revenue. The sales were pretty much through the roof for June compared to July. In June, we saw about $125 million in sales. In July, with one extra day, it dropped to $88 million, a 42% drop in sales.
A lot of retailers were doing close-out sales. A lot of products had to be sold in June or it was going to be destroyed, so a lot of people dropped prices and that drove sales. Then in July, we saw this huge drop in revenue. Part of that can be chalked up to people not being prepared, not having enough products on the shelves that could meet the regs, but also people might have stocked up so much in June that they wouldn’t need to come back in July. They bought all their flower they needed.
MV: How is the California market shaping up overall?
CS: Everyone anticipates California to be a $5-6 billion market, but it’s definitely not there yet. We’ve tracked it at $1.06 billion (as of interview). It’s going to be a larger market than Washington and Colorado for sure, but it’s not going to be six times the size yet.
Another interesting thing is that 32% of the product sales went to the top five brands. So you’re seeing a lot of consolidation, with just a handful of brands capitalizing on the market. That has to do with the processors that have a broader reach. The brands that have broad distribution across the state seem to do really well, but it’s a surprisingly small number of brands, considering the amount of revenue they’re taking.
That will grow over time. You’ll see more and more brands taking more and more market share, but it’s been a rough year for California, and they’ll have new testing regulations that will impact them again. Every new market has gone through it and it will take a while to shake out and normalize.
MV: A lot of states have had similar issues in the rollout of their adult-use programs. Some people act like these complications were unavoidable, but those who were paying attention to other markets knew things would play out this way.
CS: And I anticipate the same thing happening in Canada. It’s going to be a rocky start. It will have its own nuances, but obviously a lot of overlap as well.
Canada is five to six times the population of states like Washington or Colorado. You’re seeing estimates that it’s going to be a $6 billion market, but given the legislation they have and the limitations on packaging, you’re going to see headlines like you’re seeing in California right now that the black market is thriving and there are issues for license holders.
MV: What are the most common questions people ask you?
CS: When I’m talking to clients, it’s really about the competitive landscape and where opportunities might exist. When we’re talking to the press or media, it’s around trends or why certain things might happen. For example, recently I’ve gotten a lot of inquiries around CBD data. That seems to be a very hot topic. You obviously saw the headlines recently about Coca-Cola rumored to be looking at a CBD-based beverage.
A lot of people want to know: What does the CBD market look like? What are people purchasing? What kind of product mix is out there? What kind of price point? What are the leading brands?
Retailers often want to know what reports they need to be looking at and how to optimize their business. They are also interested in benchmarking and making sure their product assortment is in line and they’re carrying the right mix and right ratios and the right brands to stay competitive. They like to know if their pricing is in line with market averages, which we’re able to provide as well.
MV: Washington and Oregon are two states in particular that have problems with tremendous oversupply, and California will probably eventually fall into this category as well. How has that played out in the data you’re looking at?
CS: You’re seeing lower price points in markets like Oregon, especially. But not at the rate you’d expect, given the headlines. Retailers seem to be holding the line on the price and just getting their product for much less, so their margins are getting better.
We’re also seeing growth slowing down. We’re still seeing growth, but when you look at a state like Washington’s year-to-date sales versus a year ago, it’s still up by 5%, but it’s not at the percentage growth that it was. We were seeing 50% to 100% year-over-year growth in the early years, but retail stores aren’t being opened at the pace they were in the beginning.
This interview has been edited for length and clarity. [/themify_col]