Licensed Producers

By John Aguilar, The Denver Post

Cities and towns in Colorado have devised all sorts of ways to decide how many pot shops can open and where, but two communities using a points-based system to evaluate and select prospective recreational marijuana businesses — Aurora and Thornton — are running into legal hot water.

Aurora is facing a lawsuit alleging that it didn’t follow its own rules for ranking pot shop applicants for the two dozen licenses it issued. Thornton, which has four available licenses for recreational marijuana retailers, could get hit with a similar challenge in the coming weeks.

The two cities use a points-based system as part of their marijuana regulations. Other communities use random lottery drawings (Adams County), establish hard numerical caps on a first-come-first-served basis (Wheat Ridge) or put in place buffer zones (Louisville) to manage the number and location of shops.

The points-based ranking systems like those in Aurora and Thornton allows a city to more thoroughly vet business owners and limit licenses to entrepreneurs with solid business plans, adequate financing and clean criminal backgrounds, but inconsistencies in applying those formulas can subject community leaders to accusations of subjectivity, favoritism and fraud.

“The problem with a points system is that it’s going to have winners and losers and that opens everything up to scrutiny and litigation,” said Sam Kamin, a University of Denver law professor who is an expert in marijuana law.

That is exactly what Stan Zislis, co-owner of Silver Stem Fine Cannabis, alleges in a lawsuit he filed against Aurora after it denied him a license to open a shop near East Colfax Avenue and Tower Road. The city established a scoring and ranking system in 2014 after it decided to allow recreational marijuana sales, awarding points to applicants in different categories of business expertise and preparedness. It limited the number of licenses citywide to 24 — four stores in each of the city’s six wards.

The case, which goes before a judge in Adams County on Thursday, alleges a number of things Aurora did or didn’t do in evaluating Silver Stem for a license. But the most egregious violation came down to what Zislis contends was a mathematical error that the city refused to fix.

Specifically, he claims that the Aurora Marijuana Enforcement Division (AMED) erroneously rounded up a score in evaluating a competing applicant’s operating plan rather than properly rounding it down, resulting in an overall score that knocked Silver Stem out of contention. A correct rounding of numbers would have resulted in Silver Stem and the competing applicant getting the same score, but the suit alleges the city “manipulated scores in order to avoid a tiebreaker scenario.”

The suit claims that Jason Batchelor, who was Aurora’s finance director in 2014 when Silver Stem’s application was denied, “acknowledged that AMED committed a clear mathematical error” but concluded that Silver Stem “was entitled to no relief.”

Aurora officials declined to comment on the suit, citing the ongoing litigation.

Zislis, whose company has five locations in Colorado and one in Oregon, said there’s nothing inherently wrong with a points-based system as long as it is utilized fairly.

“It’s not the scoring system we’re challenging — it’s the fact that they meddled with the scores to avoid a tiebreaker,” he said.

Since Silver Stem’s suit was filed against Aurora, Zislis has cited a number of other problems with the city’s marijuana licensing system. Those include using a city employee to review applications, which Zislis says doesn’t qualify as an independent arbiter, and the fact that a license-holder has gone beyond the city’s two-year window to start operations.

Boulder marijuana attorney Jeff Gard said his client had a similar experience in Thornton, which last year legalized the sale of recreational pot and decided to use a point system like Aurora’s. Gard claims a competitor’s application for one of the city’s four licenses included incorrect criminal background information, but despite bringing the issue to Thornton’s attention, Gard said the city “didn’t act on it.”

“They’re not following their own point system,” he said. “When they created the rules, they’re binding on both parties.”

Gard said his client, which didn’t get a license, will likely sue Thornton over the issue.

Thornton’s assistant city manager, Rob Kolstad, said the city disagrees with Gard’s accusation. Kolstad said Thornton chose to use a ranking system because “the evaluation process would provide the city with the best applicants, the best businesses and good neighbors.”

Licensing disputes are not exclusive to Aurora and Thornton. Last year, the Pig N’ Whistle dispensary became the first pot business to beat back a decision by Denver to deny it a license after two judges ruled in the store’s favor. And in 2015, a pot entrepreneur locked horns with Wheat Ridge after the city set a cap of five stores in response to neighborhood complaints about his plans to open a store in a residential area. His store would have been the city’s sixth.

This story was first published on DenverPost.com

By Alex Pasquariello and Alicia Wallace, The Cannabist

America’s legal marijuana market topped $6.5 billion in 2016 and is projected to grow to $24 billion by 2025, yet data-driven insights into consumers have remained elusive.

Two new studies are shining a light on the cannabis consumer, providing insight into actual purchase behavior as the industry prepares for four new state recreational markets, including California, and six new medical markets expected to come online in the next eight months.

As the legal recreational and medical cannabis industry matures, consumers are increasingly open to experimenting with new products and delivery methods, including concentrates and infused edibles, according to a report released Wednesday by cannabis analytics firm New Frontier Data.

Meanwhile, sales of traditional dried marijuana, a.k.a. flower, are on the decline.

In 2016 alone, recreational demand for flower fell from 85 percent of sales in January to 64 percent in December. The decrease was mirrored in medical markets, where flower’s share fell from 87 percent of sales to 65 percent.

During that period, medical markets saw demand for concentrates grow from 10 percent of sales to 27 percent, according to the report. On the recreational side, concentrates grew from 10 percent of sales to 21 percent, while demand for pre-rolled joints grew from 1 percent of sales to 8 percent.

The shift away from flower toward higher price-point concentrates, edibles and pre-roll joints reflects a legal industry commercializing and scaling “in the light of day,” said John Kagia, New Frontier Data’s vice president of industry analytics.

“Concentrate-filled vape pens and sophisticated, dosed edibles simply weren’t available in the illicit market,” Kagia said in an interview with The Cannabist. “Pre-rolled products have gone from an afterthought filled with leftover cannabis to a premium product made with high-end strains and sold in elegant, easy transport packages.”

Other factors that could be influencing consumer behavior is the desire for discretion and a general negative perception of smoking, Kagia said.

“You can smell a joint from a mile away, but vaping offers a discreet way to consume,” he said. “Our society has also undergone a radical transformation in our views towards smoking tobacco, so the perceived benefits of vaping rather than smoking may also be one factor for the market shift.”

The trend toward infused products such as edibles is particularly acute in Colorado’s recreational market, where retailers moved more than three times as many infused products as medical dispensaries did in the first half of 2016, according to the report.

Medical marijuana consumers spend more

While recreational legalization was expected to cannibalize Colorado’s medical market, the report found that strong demand for pricey concentrates and edibles buoyed sales figures in the face of declining patient participation. While the number of patients enrolled on the state medical marijuana registry ebbs and flows, the report noted a decline from 107,534 in December 2015 to 94,577 in December 2016. However, tax revenues from medical sales remained steady throughout 2016 at about $1 million per month.

To gather the data, Washington, D.C.-based New Frontier Data partnered with Baker Technologies, a Colorado-based retail and marketing platform used by more than 300 retail marijuana shops and medical dispensaries in 10 states, to track consumer behavior in key markets including California, Oregon, Colorado, New Mexico and Washington.

New Frontier and Baker found that medical patients spend three times more on cannabis than recreational users.

In 2016, U.S. medical consumers on average shopped once every 10 days and spent $136 per transaction. In contrast, recreational consumers shopped once every 14 days and spent $49 per transaction.

Medical patients are purchasing larger quantities of the same product, Kagia said. Meanwhile, recreational consumers are purchasing smaller quantities more frequently so they can sample the myriad strains on the market.

Interest in cannabis consumer demographics extends beyond marijuana industry

Mining granular consumer data is also a sweet spot for Boulder’s BDS Analytics, a market research firm that tracks point-of-sale data at marijuana stores.

Last year, BDS launched a consumer research survey to get a better sense of the various types of cannabis consumer. In recent weeks, the firm has started to show the fruits of that labor by quietly releasing some data from its first comprehensive survey of adults in Colorado and California.

“We’re seeing some real differences between men and women, age groups, generations, attitudes and preferred methods of consumption,” said Linda Gilbert, a 30-year market research veteran who is heading BDS’ efforts on this front.

The survey will be updated every six months, but the initial results have been telling regarding aspects such as lifestyle and demographics, said Gilbert, who has conducted similar research for industries such as natural foods, pharmaceuticals and alcohol.

And companies within those industries — among others — are calling Gilbert to learn more about the cannabis consumer.

“If I’m not in the cannabis space and even if I have no intention of going into the cannabis space, I have to, as a marketing person, start to look at this as a new consumer cohort that I should try to communicate with,” she said.

For example, survey participants who have consumed cannabis in the past six months are more likely to be engaged in physical activity on a once-a-week or greater basis than people who don’t use cannabis, she said. The survey showed that 56 percent of consumers partook in outdoor recreation, compared with 34 percent of non-consumers; 53 percent of consumers hit the gym, versus 33 percent of non-consumers; and 42 percent of consumers engaged in yoga or Pilates, versus 21 percent of non-consumers.

“That’s one of the things that’s been really fascinating to me is how much it becomes part of a routine and lifestyle,” she said. “But it’s not a couch-potato lifestyle, it’s a healthy lifestyle.”

From focus-group interviews, BDS found that men are using cannabis to relax and to enjoy recreationally with friends, she said, adding that women said they consume to address anxiety, stress and pain such as menstrual cramps.

Gilbert’s BDS team also gleaned that women make up the majority of new consumers.

That knowledge could be incredibly powerful for companies within and outside of the cannabis industry, she said, reflecting on the launch of women-targeted products like Virginia Slims or energy bars.

“For the people who are not in the industry, more of this sort of mile-high view is important,” she said. “And for them, they all need the consumer data. I think there is a consensus that they’re going to be impacted.”