In November 2020, Arizona voters approved Proposition 207, a state ballot initiative legalizing the adult use of cannabis, by a 60% to 40% margin.
Prop 207 “grandfathered in” the vertically integrated, limited license structure of Arizona’s medical cannabis program. When Arizona’s medical cannabis law was implemented in 2011, the state imposed a limit of 130 licenses statewide. These licenses were vertically integrated, giving operators the ability to cultivate, manufacture, distribute and sell cannabis.
Each license provided the operator the ability to open a single retail dispensary. There has thus historically been a strict cap of 130 dispensaries in Arizona, and operators looking to open multiple dispensaries have had to acquire an additional license for each dispensary they intended to open.
Prop 207 “grandfathered in” these 130 medical licensees, providing these operators with a dominant foothold in Arizona’s new adult use market. Adult use sales began in Arizona in January 2021, just 10 weeks after the passage of Prop 207, marking the fastest implementation of an adult use cannabis law in the country’s history.
In addition to allowing its existing medical licensees to convert their operations to adult use, Prop 207 also called for the issuance of 39 additional cannabis licenses, for a total of 169 licenses across the state. 26 of these licenses were allocated towards “social equity applicants” that were negatively impacted by The War on Drugs. These licenses were finally issued in Summer 2022, and these social equity businesses will open in 2023 and 2024. The other 13 licenses were allocated towards rural, “underserved regions” of the state that lacked cannabis access. These new businesses will also open in 2023 and 2024.
Because Arizona requires operators to be vertically integrated and is a limited license state, the barriers to entry in the state’s cannabis market are very high. As a result, the cannabis supply chain in Arizona is highly condensed, with a handful of large multi-state operators (MSOs) accounting for more than half of the market share in the state. This stands in stark contrast to many other “unlimited license” states, such as California, where no operator holds more than 5% market share in any vertical.
Arizona is known for having one of the more favorable cannabis tax regimes of any state in the country. While Arizona imposes a 16% state excise tax on cannabis sales, qualified medical patients are exempt from this tax entirely. In addition, Arizona caps its municipal excise tax on cannabis at 2%, unlike states such as California, which has no cap on local cannabis excise taxes. Arizona also has a considerably lower general sales tax than other states, and does not impose a cannabis cultivation tax. Finally, the Arizona state tax code does not impose a penalty similar to IRS Code Section 280E, meaning that cannabis businesses in the state can claim ordinary state tax deductions.
In 2021, the legal cannabis market in Arizona generated $1.4 billion in total sales. In 2022, the market is expected to grow slightly and generate $1.7 billion in legal sales. As the 39 new cannabis licenses open for business in 2023 and 2024, total statewide cannabis sales in Arizona should grow.
May 2022 | Item 9 Labs announces acquisition of Wild Card Cannabis for $12.8MM
February 2022 | Trulieve acquired 64,000 sqft cultivation facility in Phoenix for $50MM
December 2021 | Curaleaf announces acquisition of Bloom Dispensaries in a deal valued at more than $230MM
November 2021 | Curaleaf enters into definitive agreement to acquire Tryke Companies in a cash and stock transaction valued at ~$286MM
October 2021 | Trulieve completes acquisition of Harvest Health in a $2.1B deal creating the largest and most profitable U.S. cannabis operator
September 2021 | The Green Halo is acquired by Roop Investments for $30MM
August 2021 | 4Front Ventures received $15MM from Navy Capital Green Management
August 2021 | Jupiter Research received $10MM from Alternative Finance Network in non-convertible debt
March 2021 | AYR completes acquisition of Oasis for $75MM
March 2021 | Verano announces acquisition of three retail and a cultivation and processing facility
November 2020 | Verano announces acquisition of Alt Med
March 2019 | Harvest acquires Arizona Natural Selections
Because of the state’s vertically integrated, limited license structure, the most common way to enter the market is through M&A. Leading MSOs such as AYR, Curaleaf, Trulieve and Verano have all entered the Arizona market over the past two years using this strategy. Operators who are able to acquire one or multiple of Arizona’s 169 cannabis licenses can have assurance that they will be in a market with high barriers to entry.
However, M&A can be very capital intensive. Because of this, other operators have resorted to more creative measures to gain a foothold in Arizona’s market. Increasingly, many of the leading MSOs are “subleasing” part of their cultivation and manufacturing licenses to other cannabis operators that are looking to develop brands in the state. This practice, which does not have a comparable analogue in other states, has been tolerated by state regulators as a way to broaden participation in the legal cannabis market.
The delivery business in Arizona is also poised for growth in 2023 and beyond. While Prop 207 placed a temporary moratorium on the delivery of recreational cannabis, that provision is set to expire in 2023. When it does, Arizona is poised to implement an adult use cannabis delivery program. Given the large geographic size of the state and its limited number of storefront dispensaries, delivery is the part of the cannabis value chain that is likely to see significant growth in the coming years.
Regulatory and industry insights provided by Ananda Strategy