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Arizona’s cannabis market, once hailed as a rising star in the industry, is now grappling with significant challenges. Despite the continued strength in asset valuations, the state has seen a marked decline in both medical marijuana and adult-use cannabis sales. Between August 2022 and July 2024, the market's peak was in March 2023, with sales reaching approximately $127.29 million. As reported the Green Market Report, by July 2024, sales had dropped to around $90.32 million, representing a year-over-year decline of 14.5%, according to cannabis data firm Headset.
The drop in sales is evident in both the adult-use and medical marijuana sectors. Adult-use cannabis sales, which hit $87 million in February and March of this year, fell to $71 million by June. Medical marijuana sales, which reached $23 million at the beginning of the year, slipped to just $18 million in June.
A contributing factor to the sales decline is the growing number of dispensaries in the state. Arizona, which once prided itself in capping dispensary licenses, has seen an increase of 13.5% in operating dispensaries from June 2023 to June 2024. The state now has 168 dispensaries, up from 148, intensifying competition in an already challenging market.
This increased competition has coincided with a drop in cannabis prices. Headset reports that the average item price in Arizona decreased from $20.72 in July 2023 to $18.83 in July 2024, indicating possible market saturation or a shift in consumer behavior. The oversupply of cultivators and flower products has further exacerbated the pricing issue, particularly in the wholesale market.
Vext Science Inc. (OTC:VEXTF), a cannabis operator in Arizona, underscored this problem in its recent quarterly earnings report. The company noted a steep decline in the average dispensary's net sales, which fell from $814,968 in May 2023 to $557,094 in May 2024 – a decrease of 31.6%.
"The market continues to have an oversupply of cultivators and flower products, which has been impacting wholesale flower pricing," Vext stated. The company also pointed out that many dispensary operations in Arizona are vertically integrated, meaning they primarily sell their own products to maximize margins. However, the proliferation of non-license holding cultivators, who rely solely on the wholesale market, has put additional downward pressure on prices, leaving these operators particularly vulnerable.
Despite these challenges, the valuation of cannabis properties and assets in Arizona remains strong. Vext noted that acquisition multiples for dispensaries are still relatively high, even as some all-cash deals have seen a slight easing in price multiples. Drew Mathews, CEO of Green Life Business Group, confirmed this, emphasizing Arizona's unique market conditions.
"Arizona is by far one of the best markets still, and it holds its value because of the limited licenses," Mathews said. He added that a paper retail license in the state still sells for around $8 million, despite not being built out. "The values in Arizona are definitely very unique in that sense, considering how long the market's been around," Mathews noted. He pointed out that some sellers are still seeking valuations of 10 times EBITDA, which he described as "crazy."
Verano Holdings Corp. (Cboe CA: VRNO) (OTCQX:VRNOF) recently announced its purchase of three Arizona subsidiaries from The Cannabist Company Holdings Inc. (Cboe CA: CBST) (OTCQX:CBSTF), 203 Organix LLC and Salubrious Wellness Center, for $15 million in cash. This acquisition underscores the continued interest in Arizona's cannabis market despite its current challenges.
Arizona's cannabis market has evolved significantly since the legalization of medical marijuana in 2010 and adult-use cannabis in 2020. However, the market’s best month for adult-use sales, recorded in April 2023 at $108 million, now feels like a distant memory. Sales have averaged in the $80 million range since and have only recently dipped into the $70 million range, signaling a period of adjustment and uncertainty for the industry.
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