Understanding the recent sales declines in legacy cannabis markets

Introduction

In a recent report exploring declines in total market cannabis sales in the US, we found that these sales declines were likely a large-scale market correction to a pre-pandemic ‘normal’. In this report, we dive further into the topic in order to examine the underlying causes contributing to this overarching trend and answer the following questions:

• Which is a greater contributor to overall sales declines: transaction volume or transaction size?
• Which product categories are faring best and worst during this correction?
• Which customers are now buying less cannabis than they were during the peak of the pandemic sales rush?

If you’re interested in the specific causes to this overall market retraction, read on!

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Executive summary

When we dig into the underlying causes of the overall cannabis sales declines in the US, we find some notable patterns contributing to the market retraction. For example, when we examine legacy markets in the US such as California, Colorado, Oregon, and Washington, we find that both transaction volume and basket size have been decreasing since July 2021. When we compare these metrics however, we find that the relative decrease in transaction volume was greater than the relative decrease in basket size in all markets.

Product categories have also seen shifts in recent years, but the Flower category has seen the greatest fluctuation in growth. Flower performed exceptionally well early in the pandemic, but year over year growth dropped by -24% in July 2022. Beverages and Vapor Pens in contrast, have been performing consistently well since the pandemic and have experienced positive year over year growth rates in California and Washington every year since 2020.

The most valuable segment of consumers, the top 10%, increased their spending significantly in 2020 and 2021. This same group of customers is now returning their spending habits to pre-pandemic amounts in 2022, which is contributing to the sales declines that we are seeing today.

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Methodology

Data for this report comes from real-time sales reporting by participating cannabis retailers via their point-of-sale systems, which are linked with Headset’s business intelligence software. Headset’s data is very reliable, as it comes digitally direct from our partner retailers. However, the potential does exist for misreporting in the instance of duplicates, incorrectly classified products, inaccurate entry of products into point-of-sale systems, or even simple human error at the point of purchase. Thus, there is a slight margin of error to consider.

In this report we examine sales from the following Headset Insights markets, including CA, CO, WA, NV, and OR.

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Decreases in cannabis transactions

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In this first graph, we look at the monthly transaction volume of the median store in four US legacy cannabis markets: California, Colorado, Oregon, and Washington. Previously, we identified mid-summer 2021 (July-August) as the turning point where sales began to stagnate and decline. That point is marked by the gray dotted line on the graph. Since that point, transaction volume has been declining fairly steadily. For example, the median store in Oregon processed 3,501 transactions in July 2021, but dropped to 2,943 in July 2022. In California, median store transaction volume dropped from 7,309 to 6,106 over the same time frame.

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Shrinking baskets

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Here we are again looking at the median store in each of the same four legacy US cannabis markets, but this time analyzing the trend in average transaction*, or basket size, over time. Similar to the previous graph, we see a steady decline across all markets, which means that customers are overall spending less per trip to the store. The average basket size at the median Colorado store was $59.73 in July 2021, but decreased by more than four dollars in July 2022 ($55.21). In Washington, average basket size dropped by more than three dollars, from $34.14 to $31.41, over the same time period.

*Note: Basket sizes are reported in pre-consumer paid tax dollars. In states where taxes are higher (like WA, for example), total cash paid for purchases is much higher than reported baskets above. Consumer paid taxes in WA are 37%-47% and are 13%-25% in CA.  Non-consumer paid taxes (ex. cultivation and excise tax (15%) in CA), are implicitly included in the prices and transactions above.

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Transaction volume vs transaction size

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We now know that both decreasing transaction volume and shrinking baskets have been contributing to overall sales declines in US cannabis markets from the previous graphs. But which of the two metrics is causing the greatest impact on sales? This chart compares the relative declines in median store transaction volume and average basket size by state from July 2021 to July 2022.

We can see that in every market, the relative decrease in transaction volume is greater than the relative decrease in basket size. This indicates that declining numbers of transactions are having a greater effect on topline sales than shrinking baskets. This varies by market however. In Colorado for example, the retraction in overall transaction volume (-14%) is nearly double the decline in basket size (-8%). In Washington on the other hand, the two values are nearly the same at -9% and -8%, respectively.

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Category performance in California

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As most operators within the cannabis industry know well, sales trends among different product categories are never static. Let’s take a look at category performance to better understand which product categories are contributing the most, and least, to the recent downturns in topline sales.

This column chart shows the year over year sales growth of several product categories in the California market and compares them to the total market’s growth over the same time periods. We can see that the Flower category performed exceptionally well early in the pandemic. From July 2019 to July 2020, the Flower category’s year over year growth rate was nearly double that of the overall California market. Beverages and Vapor Pens are also among the only few categories that have maintained positive year over year growth every July over the past three years. Tinctures and Topicals, on the other hand, have consistently seen minor retractions each year. The change in  Flower category growth from 2020 (+127% growth) to 2022 (-24%), indicates that this shift in consumer preference could be a big part of the top line sales trend we are witnessing today.

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Category performance in Washington

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Now let’s look at category performance in the Washington market. We can see that most of the category-level trends that we saw for California are pretty similar in Washington. For example, Flower had the largest sales surge early in the pandemic and is now experiencing a significant correction. Additionally, Beverages and Vapor Pens are the most consistent categories showing positive growth over the long haul. As we also saw in California, Tinctures have been in a multi-year decline. Unlike in California however, the Topical category saw some positive growth in 2021.

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Trends among top cannabis spenders

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The top cannabis customers are obviously the most valuable to any cannabis business. They spend much more than the average customer and contribute a disproportionately large percentage of revenue to the industry. Because of this, let’s take a look at their spending trends over the past four years.

This graph shows the median total spend of the top 10% of customers over a three-month time period (May - July) during each of the past four years. These are the customers that have the greatest relative influence on topline sales in the cannabis industry. For example in California, this group of customers accounted for nearly 30% of all Headset tracked sales so far this year.

The top 10% of customers were on average, spending approximately $100 more across May - July in 2020 and 2021 than they were in 2019 or in 2022. That equates to about $30, or roughly an entire additional trip to a dispensary, per month. The symmetrical aspect of this trend also shows that the biggest fans of cannabis were greatly increasing their individual spends during the pandemic, and now appear to be reducing those spends as things return to ‘normal’.

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Cannabis customers compared

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Now let’s compare the top 10% of customers with the rest. Here we can see the year over year growth in that three-month (May - July) median customer total spend, broken out by state and by customer group: the top 10% of customers compared to the bottom 90%.

In 2020, we see that customer spends increased compared to the prior year across all groups. Interestingly, the bottom 90% of customers in California increased their spend just as much as the top 10% of customers while the lower spenders in Washington had a smaller uptick than the top spenders.

In 2021, all groups had effectively flat year over year growth in spending, which matches what we saw in topline sales during this period (the flattening of the curve before the decline). Then as consumer spending decreased in 2022, we can see some large differences between customer types. In both Washington and California, the summer spends of the median customer in the top 10% group decreased significantly more than that of the median customer in the bottom 90% group. This implies that the biggest cannabis spenders are tightening their budgets more than the ‘typical’ cannabis customers and therefore are causing a disproportionate amount of the topline market retractions we are observing this year.

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Intra-consumer spend by age group

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Next, let’s turn our attention to the different behaviors across customer age groups. This is a similar analysis to the previous two graphs in that we are evaluating median customer total spends during May through July of each year since 2019. But this time, we are including the top 10% of customers from each age group and pulling the median from that subset over time.

We can see here that all age groups follow a similar pattern to the overall trend we saw before: a sharp increase in spending in 2020 followed by a decrease in 2022. Generation X customers had the highest individual spends across all time periods indicating that, at an individual customer level, they are the most valuable to any cannabis business. However, as a group, Millennials still contribute the largest total chunk of total revenue in any cannabis market.

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Comparing spending across age groups

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In this final graph, let’s look at the year over year growth in median customer spend during that May - June time period across age groups. This is again the top 10% of customers (by total spend) within each age group during that time period. We can see some interesting differences between customer groups.

In 2020 during the peak of COVID cannabis sales surges, increases in overall cannabis spend is highly correlated with customer age group. The younger the customer, the more likely they were to buy more cannabis. There could be several explanations for this. Younger customers were more likely to benefit from pandemic-related economic policies such as student loan payment pauses, additional unemployment benefits, and later, stimulus checks. They also may have been less apprehensive to visit cannabis retailers in person than older customers before the widespread availability of vaccines.

Median customer spend held relatively flat in 2021 across all age groups. So far in 2022, most age groups have seen similar decreases in customer spending with the median Gen Z customer having the largest decrease in total spending at -11%. This is evidence that the youngest customers may have fueled more of the sales boost early in the pandemic, while the current retraction is fairly universal across all customer age groups.

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Conclusion

It is crucial to understand the underlying drivers of market trends in order to be able to better develop strategies in this industry. While sales are declining in legacy markets like Washington and Oregon, emerging markets like Massachusetts and Illinois have seen positive growth rates in recent months. Headset tools equip you with the knowledge you need to assess opportunities to succeed in the market. Keep track of category performance with sales dashboards, understand the consumer landscape with demographic insights, and target the right customers with marketing tools. Sign up for a demo to learn how you can keep an eye on opportunities in the cannabis industry.

Key takeaways:

• The overall decline in cannabis sales is being caused by measurable decreases in both transaction volume and basket size. However, in all markets analyzed for this report, the decrease in transaction volume is having a greater influence on topline sales.
• Of all product categories, Flower has seen the largest yo-yo with massive sales increases early in the pandemic and significant corrections in recent months. Beverages and Vapor Pens have been the most consistent performers, posting positive year over year sales growth in California and Washington every year since 2020.
• The top 10% of customers increased their individual total spends in 2020 and decreased their spends in 2022 more so than the bottom 90% of customers. This indicates that the heaviest cannabis purchasers had an outsized effect on the sales surge of 2020 and on the correction we are experiencing now.
• Younger customers increased their individual cannabis spends in 2020 relatively more than older customers. Customers across all age groups are reducing their spend this year at fairly equivalent rates.

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