Cannabis: Legal Market versus Black Market

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The cannabis industry has been growing exponentially for the past few years. As legalization gains momentum around the world, the potential cannabis market keeps growing. Currently, more than 35 countries around the world have legalized medical marijuana.

However, the continuous growth in the market paired with slow regulatory processes also gives way to the black market. As the cannabis industry keeps growing, the black market is growing too.

Cannabis market size

Cannabis legalization is growing around the world. In addition to legalization, the list of qualifying illnesses for the use of medical marijuana is fueling the growth of the market. Right now, the global cannabis market, including the black market, is said to be worth around $150 billion. As per Barclays’ European Consumer Report, this market value could rise to $272 billion by 2028.

As per Grand View Research, the global legal cannabis market was worth $13.8 billion in 2018. The market is further expected to grow at a compound annual growth rate of 23.9% until 2025. Medical marijuana accounts for the majority of the marijuana market. The difference in the sizes of the global market and the global legal market gives a pretty good indication of the massive black market in the industry.

Legal market versus black market for cannabis

As per Statistics Canada, just 28% of cannabis users purchase their products from licensed providers only. A total of 42% of users purchase their products from illegal sources. In addition, 39% of users get cannabis from friends or family. Though the numbers have been improving over the years, the current situation isn’t great for cannabis companies in Canada. The country has been rolling out retail licenses very slowly over the last year, which has resulted in very few retail stores operating in the provinces. As buying from legal stores is inconvenient, users turn to the black market because it’s easily accessible.

The cannabis market in Canada is arguably the most progressive in the world. Though it opened the door for innovative products, these products had a hard time reaching users due to continuous supply shortages. This disconnect allowed the black market to bridge the gap between rising demand and supply shortages. As product prices in the black market don’t include taxes, it’s also a much cheaper source than legal stores. Some analysts predict that black market prices are almost half those of legal stores.

Black market growth

As per New Frontier Data, illegal cannabis sales in the US are valued at $70 billion. This data implies that legal sales constitute only a fraction of the country’s overall cannabis sales. In addition to cutting into the profits of the legal market, the black market extends to the 17 states that haven’t yet legalized marijuana. Further, the sale of recreational products in the black market might be even higher given that only 12 states have legalized recreational use. In Canada, the black market is expected to account for 71% of cannabis sales in 2019, according to Forbes.

California is one of the states that have been affected the worst by the black market for cannabis. Almost 80% of cannabis sales in California happen through the black market, which makes a big dent in the state’s tax revenue. It’s also reduced its tax estimation from cannabis for 2019 and 2020. California is losing a considerable share of cannabis revenue to the black market. To offset the decline, the state has announced a plan to increase its tax on cannabis products. The move may be counterproductive for the already declining legal market, as the black market already holds a massive market share.

Legal market players

The legal cannabis market is plummeting, with giant companies reporting disappointing financial results recently. Canadian companies such as Canopy Growth (CGC) (WEED), Aurora Cannabis (ACB) (ACB.TO), and Tilray (TLRY) are facing lawsuits, revenue declines, and increasing losses. Even though the cannabis market is growing continuously, the performances of the market leaders aren’t reflecting that growth.

Not long ago, the market was facing a supply shortage. However, companies are now reporting that their products are piling up. The legal market may have lost its customers to the black market.

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