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Cannabis may be retail's brightest spot in 2019

Immune from current trade wars, less constrained by federal regulation, and thriving despite zero access to tax deductions that bolster balance sheets for the rest of corporate America, cannabis may be this year’s brightest spot in retail.

The larger U.S. retail sector suffered a punishing year in 2018, during which companies cut nearly 99,000 retail jobs, 30% more than in the previous year. That momentum continued in January, according to research firm Challenger, Gray & Christmas, with retail leading all sectors in job cuts for the month, increasing 45% year over year.

The data, coupled with recent bankruptcy filings by iconic retailers like Sears, Toys R Us, and Payless, has understandably heightened doubts over the sustainability of traditional brick-and-mortar. And while some major retailers like Walmart (WMT) and Best Buy (BBY) have embraced hybrid “click-and-mortar” models and posted better than expected Q4 sales, overall investor confidence in the sector remains a mixed bag.

A growing number of ‘bud tenders’

Meanwhile, cannabis retailers appear unblemished.

In 2018, total cannabis spending at U.S. dispensaries including medical and retail purchases reached $10.5 billion, according to cannabis research firm BDS Analytics. That’s up from $8.6 billion in 2017 and $6.6 billion in 2016. The past year is also the first time U.S. recreational cannabis sales outperformed medical sales.

This year, the direct industry is responsible for the employment of 121,000 full-time U.S. workers and 50,000 indirect full-time workers, up from 89,500 direct full-time workers in 2016. That number is expected to reach 291,500 direct full-time jobs by 2021, for a total employment impact of around 414,000.

Worldwide spending is now forecast to grow 39.1% to $17 Billion in 2019.

"Bud tender" Ryan Huntington stocks up a display case with products as The Cannabis Corner, the first city-owned recreational marijuana store in the country, makes preparations for their grand opening in North Bonneville, Washington March 6, 2015. REUTERS/Jason Redmond (UNITED STATES - Tags: BUSINESS POLITICS DRUGS SOCIETY)

“Typically, bud tenders, the people working the front line at the dispensaries, are making about $12 to $15 an hour, which is fairly in line with retail, maybe a little bit better,” Greg Shoenfeld, BDS’s Vice President of Operations, told Yahoo Finance. “On the cultivation side you get a lot of lower level employees that are making in that $12 to $15, and maybe up to $20 an hour range. Head growers for large outfits can make about $100,000 to $120,000 a year.”

That outpaces average wages paid to U.S. retail workers. According to the Bureau of Labor Statistics, median hourly wages for retail salespersons totaled $11.16 as of May of 2017.

“Having come from mainstream retail world, it was always a little sad to see clients of many years closing their doors and then all of a sudden we got into cannabis, and you could go buy a dispensary on a weekday morning and see a line out the door, people waiting to get in,” Shoenfeld said.

Even so, demand is heavily dependent on government regulation.

Ten U.S. states — Washington, Oregon, Nevada, California, Colorado, Alaska, Vermont, Maine, Massachusetts, and Michigan — and Washington DC have legalized recreational marijuana. Medical marijuana is legal in 33 states, and in Washington DC, Guamm and Puerto Rico. Marijuana remains an illegal controlled substance, federally, though Justice Department officials have not pursued prosecution in states that have voted to legalize.

As of February, Colorado had 550 active retail marijuana licenses. California currently has 625 licensed retail locations, and Oregon has 606. Together, the three states alone rival the 1,981 U.S. Home Depot stores open for business as of Q3 2018.

Colorado “flirting” with over-saturation

Colorado, the first state to legalize recreational marijuana, which is considered a mature market, experienced a 2% total growth rate in 2018. That’s a huge swing from prior years that showed steeper growth spikes of 15% in 2017 and 31% in 2016. In 2014, the first year of adult use, sales grew 110%.

“Colorado, it's flirting with being over-saturated in the number of dispensaries,” Shoenfeld said. “In Oregon, it's been much more of a free-for-all of issuing new dispensary licenses. We've seen tremendous growth, and there's probably hundreds of applicants that are likely to receive licenses in 2019.”

That state is not the only one that could see an explosion in weed retailers. “We’ll see the same cycle of inception and then hyper growth and maturity and most states, if not all states,” BDS CEO Roy Bingham said. “It’s only a question whether regulation somehow would distort it significantly from that norm.”

BDS Analytics Phases of Cannabis State Market Expansion

For so-called plant-touching cannabis retailers, regulation is a double-edged sword.

“The general retail market has been redefined by e-commerce,” Shoenfeld said. “That, by and large, doesn't exist in the cannabis industry.”

Shoenfeld said while exceptions exist in certain markets where consumers can order products online to be delivered, those sales are a small part of the current cannabis market.

It’s one of the reasons, Bingham says, cannabis retailers are protected from some of the challenges facing traditional retailers.

“I think it’s fundamentally to do with the growth of the industry combined with the fact that in most states, you have to go to a bricks and mortar dispensary in order to purchase, “ Bingham said.

In this Thursday, Feb. 7, 2019 photo a bud tender shows a top cannabis strain at Serra a dispensary in Portland, Ore. A U.S. senator from Oregon has proposed legislation that would give states a free hand to allow legal marijuana markets without the threat of federal criminal intervention. (AP Photo/Richard Vogel)

Room for growth

Despite steadying sales in mature markets there’s still room for new growth.

The 2018 Farm Bill that legalized industrial hemp is fueling an upsurge of new CBD and CBD-infused products.

Already about 6% of dispensary sales are for high CBD or CBD-oriented products, Bingham said.

“What we've seen is the CBD growing at more than 50% a year,” he said.

It’s also worth keeping in mind that plant-touching cannabis retailers are operating without the benefit of certain tax deductions that could bolster their bottom lines.

“[T]hey cannot deduct their non cost of goods expenses, so that would include people, for example, who are serving, and therefore it's a bigger problem for someone within retail where a lot of your expense is in your bud tenders,” Bingham said.

While sophisticated companies may successfully allocate as much as possible to cost of goods, a big chunk of expenses remain non-deductible.

“And so while they may be nicely profitable, after paying a big tax bill — that might be double what it would have been if they didn't have this to add problem — they have very little cash left over to fuel their expansion,” Bingham said.

“It will become, ultimately I guess a windfall for those who could survive when eventually it does go away, which most people think it eventually has to go away.”

Alexis Keenan is a New York-based reporter for Yahoo Finance. She previously produced live news for CNN and is a former litigation attorney. Follow her on Twitter at @alexiskweed

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