Background: The Tiers
Marijuana cultivation licenses (pdf) in Massachusetts are divided into eleven tiers depending on the square footage of canopy space that will contain mature plants at any point in time. According to a response from the Cannabis Control Commission,
The canopy refers to active and growing mature plants. Mature plants are defined as plants 8 inches or taller.
The maximum canopy for a single facility is capped at 100,000 square feet, a limitation that frustrated many established west coast companies that had planned to enter the Massachusetts market with facilities from hundreds of thousands to millions of square feet.
| Tier | Canopy | Tier | Canopy | |
|---|---|---|---|---|
| 1 | up to 5,000 sq ft | 7 | 50,001 to 60,000 sq ft | |
| 2 | 5,001 to 10,000 sq ft | 8 | 60,001 to 70,000 sq ft | |
| 3 | 10,001 to 20,000 sq ft | 9 | 70,001 to 80,000 sq ft | |
| 4 | 20,001 to 30,000 sq ft | 10 | 80,001 to 90,000 sq ft | |
| 5 | 30,001 to 40,000 sq ft | 11 | 90,001 to 100,000 sq ft | |
| 6 | 40,001 to 50,000 sq ft |
Sizing up MA
At the time of this writing, there are 54 cultivators with either a Provisional or Final license. Of these licenses, all but two are for indoor cultivation. Most of the data reflects Registered Marijuana Dispensaries (RMD) that are converting their operations over to adult-use (n=40) with a handful of general applicants (n=14) that have managed to acquire their final license.
I typically break out RMDs separately for a few reasons, all centered around the slightly different business conditions they face versus the general applicants. First, RMDs are required by law to be vertically integrated, operating both a dispensary and a cultivation operation to supply that dispensary. Second, many of these RMD applicants came online prior to the legalization of adult use and so faced different market pressures than today’s general applicants. For example, there are significantly more applicants in the pipeline today, so cultivators are facing increased competition and thus a different ROI on the dollars spent on starting a costly cultivation operation. This may have the effect of pushing general applicants towards the lower tiers.
Cultivator Size Distribution
The chart above shows a clear bias towards the lower of the tiers, with both RMD and general applicants peaking in tier 2 with four and eight cultivators respectively. Overall, 67% of cultivators fall in tier 4 or lower. Splitting the data, 70% of RMDs converting to adult-use and 57% of general applicants are in tiers 1 - 4.
Why the Lower Tiers?
One of the strongest factors likely driving the concentration of cultivators at the lower end of the tiers is the sheer cost of starting up a cultivation operation. Of the three licenses we generally discuss here, cultivation, product manufacturing and retail, cultivation has by far the highest capital requirement to get started.
According to the Marijuana Business Factbook 2017, the average cost of starting an indoor marijuana grow was $75 per square foot in 2017. However, many in the industry I have spoken with dispute this number and suggest it is actually significantly higher. They point to the need to control all aspects of the growing environment from lighting to temperature and humidity control systems as major drivers of increased costs for indoor startups.
This is in contrast to both retailers and product manufacturers, who do not require as much leased space or expensive support systems for their operations.
The Perfect Size?
Why the concentration of cultivators at Tier 2 with 5,001 - 10,000 sq ft of canopy? Back of the envelope math suggests that this may be the perfect size to supply a single dispensary with a little bit of wiggle room.
Let’s look at a hypothetical Tier 2 grower, using the maximum allowed canopy of 10,000 square feet. How much marijuana could this facility produce? According to the report Estimating Adequate Licensed Square Footage for Production developed by BOTEC Analysis for the Washington State Liquor and Cannabis Board, indoor and outdoor marijuana grows yielded on average 40 grams per square foot per harvest (n=16), though the authors of this study note that there is a considerable range behind this average, depending on grow media, lighting and other design elements. For an additional data point, MJardin co-founder John Fritzel said in a 2016 interview with Marijuana Business Magazine that their “operations average 45-50 grams per square foot.”
Conservatively assuming that our hypothetical grower yields 40 grams per square foot, that’s 400,000 grams per harvest or 1,600,000 grams per year on a 90 day grow cycle with four harvests per year. In freedom-units, that’s 3,527 pounds of bud per year.
I haven’t been able to find any published data regarding an average throughput of cannabis flower through a dispensary on an annual basis, but I have spoken to a few colleagues from the industry. One in particular that has the experience of operating dispensaries in multiple states said they expected their forthcoming adult-use dispensary in a high traffic location in the Boston area to sell 3,500 - 4,000 pounds of flower per year.
Taken together, it would seem that our hypothetical grower, yielding 3,527 pounds of flower per year, would be just the right size to supply a single dispensary in a high traffic area. Taken further, licensees in tier 3 and tier 4 could plan to open multiple dispensaries. It would be interesting to take a look at the vertical integration of cultivators to see if this idea is borne out by the data.
License holders in tier 5 and above would yield so much marijuana flower on an annual basis that they likely plan to be larger participants in the wholesale market as more retailers come online. This would require deep pockets, not only for the steep startup costs, but also to weather the time & operating costs before there are enough retail outlets to sell that product to.