Reciprocity Opens up a Canvas for the New Vegas

Vegas

By far one of the most interesting trial balloons the cannabis industry will ever see is about to get floated in the form of medical marijuana in Nevada, and specifically in the den of iniquity itself, Las Vegas.

As part of a first-of-its-scope full reciprocity system, people can soon travel to Las Vegas with a medical marijuana card from any state in the country (or rather, from one of the 23 states where you can actually get one) and buy cannabis for up to one month, provided you stick with a single dispensary.

Even though medical marijuana was approved statewide way back in 2000, it has taken this long just for the regulations to be enacted and the applications vetted. However, we are now (knock on wood) within a few weeks of seeing the first cannabis dispensaries in Las Vegas. There were a scant 10 dispensary licenses allowed by the unincorporated area of Clark County that is essentially owned by the Vegas Strip’s casino conglomerates.

 

Strict Entry Guidelines

Unincorporated Clark County (and the billions in annual revenue they are implicitly charged to protect and grow for the Vegas Strip) set up a very stringent application process, requiring potential dispensary owners, for example, to have $250,000 in liquid net assets and pay upwards of $35,000 in application/registration fees. Investments by, and ties to, local business leaders also seem to be an implicit prerequisite for receiving one of the very few golden tickets.

But in exchange for all the concessions and requirements, the dispensaries get to run as for-profit enterprises, not as a collective or co-op the way California and most other states require. This is, quite bluntly, the single greatest testing ground for the future of cannabis retail we have ever seen.

Obvious boilerplate potential:

  • Approximately 42% of visitors to Vegas last year arrived by airplane. Out of 41 million total visitors last year, that’s over 17 million people flying in each year for pleasure or business, and sometimes a mixture of both.
  • There are an estimated 550,000+ card-carrying medical marijuana members in  Nevada’s neighbor California alone, and upwards of 1 million nationwide. This map shows the geographic concentration of medical cannabis users, and just a cursory glance reveals that Las Vegas is well-positioned to benefit from reciprocity.
  • It’s Vegas, Baby – this is the place that famously sells itself as escapism. If there was a Family Feud survey of 100 people on the question, “What’s the best place to go when you want to cut loose and try new things?”, it’s likely that over 90 would say “Las Vegas.” The city itself, as a brand, has been cultivated over decades to be perfectly suited to newcomers trying cannabis. What better place than America’s playground?
  • Lower gas prices – most big investment firms now see gas prices as remaining at their newfound lows for the foreseeable future, as there are major structural issues pushing down the price of crude oil. As consumers start to get comfortable with the idea of reset gas prices, they could be more likely to take that long drive this summer.

While the state needs to pass recreational use before the union of cannabis and Vegas can truly be consummated, investors and analysts will start smelling the trail when anecdotal data starts coming from the Strip. A smooth, successful and black-eye-free rollout will gain national attention and advance the nation’s discussion on full legalization.

 

Profit Motives Will Lead to Massive Investments

The Vegas dispensaries, at least the smart subset of them that decide to fork out the cash, will be building up their businesses like we’ve never seen on the retail side. And why not, when there are real profits to be made by business owners? They won’t be able to erect huge neon signs to advertise their businesses or stay open at night, part of a number of requirements put on by Clark County to ameliorate the concerns of the casinos citizens.

The Strip, and to a lesser extent Las Vegas as a whole, is undergoing a major transformation, some of it forced and some organic. For example, while total tourist visits were up slightly in 2014 and hit a record high, gaming revenues have been falling for several years since the Great Recession back in 2008-09.

Gaming revenues in Las Vegas were down 16% last December alone, compared with the prior year, a decline that shocked even veteran industry analysts that were predicting recent losses to stem.

So people are coming, but less and less are coming to gamble. They come to experience the sights, shows, food, pampering, shopping—whatever “their Vegas” means to them. It is a trend the casinos have embraced (somewhat begrudgingly, perhaps) over the past decade as they provide more non-gambling entertainment options to guests.

 

Dotting i’s and Crossing t’s Takes Time

It remains to be seen whether the casinos will embrace cannabis tourists, and whether the first cannabis business owners in town will “play nice” with the casino elders.

Steven DeAngleo wrote an interesting white paper a while back talking about how cannabis and Vegas couldn’t mix unless it was as a totally immersive cannabis-themed resort, just for the stoners. He believed that the casinos would never allow people to be strolling through casino floors or down the Strip puffing psychotropic substances into the overstuffed walkways.

This will be a very real issue. Will casinos let you light up a joint in a casino, with so many people around to get a contact high? No, they just can’t. So form factor will be key. We may find out that dispensaries closest to the Vegas Strip are coerced by local politicians to carry only edibles or drinks or special vaping devices, so that nothing is seeping out into the air with the excessiveness of a lit joint.

But we shouldn’t let the potential red tape diminish the amazing watershed this represents. There is also every reason to think that Clark County proper and Nevada as a whole will try to make this medical rollout work, with an eye towards a recreational law passage in 2016 (the petition to get it on the ballot is already oversubscribed.) A looming threat, however, is the potential for Las Vegas Sands (NYSE: LVS) CEO Sheldon Adelson, a noted adversary of legalization efforts, to mount an expensive campaign to kill a ballot measure.

The tourism industry supports more than 45% of the total employed workforce in Clark County, a simply astonishing number. No local politician (that wants to continue being a politician) will come out against an obvious job growing and revenue-enhancing catalyst like for-profit, well-heeled dispensaries in Las Vegas.

Ryan has spent nearly 20 years analyzing financial markets and investment opportunities for institutional and high-net worth investors. He specializes in determining the size and scope of new markets, changing industry trends and the market potential of new companies, products and services. Ryan has also published hundreds of articles on investment topics, market commentary and macroeconomic analysis.

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