Two recent reports estimating the size of the underground cannabis industry have drawn widespread doubt among cannabis advocates, many of whom believe the studies set their numbers too low.
“I truly believe the illicit market is actually bigger,” said Robin Schneider, executive director of the Michigan Cannabis Industry Association. “That’s the general consensus that I’m hearing.”
One study, released two weeks ago by Anderson Economic Group (AEG) and commissioned by the Michigan Cannabis Manufacturer’s Association, creates a single year snapshot of 2020 and asserts that Michigan’s illicit market and adult-use cultivation combined was about 39% of a total market of $3.2 billion that year. A second study, conducted by New Frontier Data, which focuses on the national market, estimates the national illicit market share was actually 76% in 2020, declining over time, for a total national market size of $86.2 billion.
New Frontier’s larger illicit market estimate seems to make most sense to Tyrone Muhammed, an Illinois activist for minority businesses, and executive director of Ex-Cons for Community and Social Change.
“From my observation, I think you have 75% illegal, because they haven’t been able to tap into that market,” said Muhammed. “You still have people who continue to buy from their weed man; it’s cooler. But when you buy from dispensaries, it’s a privilege to pay 30% more. The only explanation I have is for white privilege: ‘Because I can.’ That’s why you can’t overcome the underground market.”
According to New Frontier Data and AEG, both studies are derived from the same data, The National Survey on Drug Use and Health, an annual, since 1981, federal government-conducted study of 70,000 people on tobacco, alcohol, and drug use, mental health and other health-related issues. The survey provides monthly and annual estimates of drug use, what types, frequency, and amounts by state. Using that data as a starting point, New Frontier and AEG make estimates of the total, legal and illicit, market size in each state.
“We’re not just talking about how much was sold to retailers, we’re talking about how much was consumed in the entire year. How do people get their cannabis from retailers from outside of the retail setting?” said Brian Peterson, director of public policy and economic analysis at AEG.
A common criticism of the national drug survey is that respondents tend to underreport whether they are a drug user, and how much they tend to consume, just as many patients play down how many alcoholic drinks they have a week when talking to their doctor at their annual physical.
Peterson said, “We’re being conservative,” when it comes to consumption estimates in Michigan. “Other studies show 20 to 50 percent for what is undercounted.”
“There’s been multiple studies of undercounting. We also reviewed empirical data to adjust our numbers. Ours are a bit larger from [the survey]. We estimated between 10 to 20 percent of underreporting,” said Peterson.
New Frontier Data, which has been conducting cannabis market size studies since 2016, says they use proprietary research to complement the national drug use survey information.
John Kagia, Chief Knowledge Officer at New Frontier Data, agrees there’s lots of evidence the national survey undercounts.
“In Oklahoma the total statewide monthly consumption rate was around eight percent in [the 2020] survey. In Oklahoma, since they activated medical cannabis, over nine percent of the adult population has signed up for the program. So, there are more regular cannabis patients than there are reported in the survey,” said Kagia.
“As a baseline reference [the national survey] has been a great platform to build from. We have also been adding consumer research we’ve been collecting that shows what these consumption patterns are like, how people are consuming their cannabis,”
But while New Frontier Data estimates suggest a larger illicit market than AEG’s estimates, New Frontier believes that as the legal market grows, the illicit market will shrink over time.
“As you get consumption lounges, more mainstream use, we think this will accelerate use [overall],” said Kagia. “Similarly the medicalization and pharmaceuticalization of cannabis: This model is about smokable flower and infused cannabis products. It does not include the race to make pharmaceutical-grade products out of cannabis. Once that class of product becomes available it will be a hugely consequential market.”
Tyrone Muhammed, who has been running a campaign #supportyourlocalweeddealer, endorsing neighborhood illicit dealers, says Kagia’s logic misses some key factors.
“You’re charging 30% or so for taxes, on something you can get on the street for 30% less. Many people are not necessarily smoking because of the brand or health factors, they could care less, they just want to get high,” said Muhammed. “A lot of people still want to remain anonymous [when they buy], because they aren’t professionals. Everytime you scan my ID [in a dispensary] that is invasive to them. When I can just roll up, or call up my local weed man, it’s real.”
Pam Althoff, executive director of the Cannabis Business Association of Illinois, believes how you interact with the market depends a lot on your personal history.
“We’re taxing it at a high rate. For people that are engaged in the underground market, if they trust their dealer, and have an amenity of delivery, and they like the product, there’s no incentive to switch to a legal market. For people that have never tried it, there’s a pathway to a legal market. That’s what we’re seeing,” said Althoff.
Phil Greenwood, a professor of entrepreneurship at the University of Wisconsin School of Business sees a lot of similarities between the growth of specialty coffee stores like Starbucks in the 1990’s, and the growth of the legal cannabis market. Where legal dispensaries are like Starbucks, and yesterday’s diner coffee is like today’s corner weed dealer.
“When you get in the beginning stages of literally launching a new market, they had to position themselves as something that convinces people who paid 25-cents a cup [at diners]. Why would [consumers] pay two or three dollars? And how do you differentiate Starbucks that has a national brand and economy of scale? Trying to estimate growth, it was hard. You had to try to break the existing coffee drinkers into segments,” said Greenwood, who says legal dispensaries have to not only draw existing cannabis users, but also reach beyond that group.
“You have all the non-coffee drinkers you have to convert over. And to convince people to come into a cafe: They convinced them to sit down and relax with coffee like they did in Europe. You have to position yourself as coffee, but as something beyond that.”