WSLCB - Board Caucus
(August 20, 2024)

Here are some observations from the Tuesday August 20th Washington State Liquor and Cannabis Board (WSLCB) Board Caucus.

My top 3 takeaways:

• Board members were briefed by Research Manager Sarah Okey about a Whitney Economics report analyzing the Washington state cannabis market.
  • SB 5080, passed in May 2023, required future legislative approval in order for WSLCB to “increase the number of cannabis retailer and cannabis producer licenses” every three years until July 1, 2032. The agency contracted with Whitney Economics to study the cannabis market and assess the need for additional cannabis social equity program licenses.
    • A July 9th presentation on the SB 5080 implementation rulemaking project at WSLCB included the first public mention of the Whitney Economics contract. Following internal circulation of the firm’s report—completed in May—board and staff discussed interest in learning more about the findings on July 31st.
    • Additionally, SB 5080 authorized: “between January 1, 2024, and July 1, 2032, LCB may issue up to 52 cannabis retailer licenses under the Program,” plus “up to 100 cannabis processor licenses immediately,” and “up to ten cannabis producer licenses, which must be issued in conjunction with a cannabis processor license” starting in 2025.
  • Okey started off by explaining the role SB 5080 rulemaking played in staff seeking “to better understand the economic forecast of cannabis retail, producer, and processor licenses through 2032” in hopes of “establishing a threshold of the number of licenses that could be located in each county.” She said staff “spent a lot of time thinking about ways to calculate the number of retail producer and processor licenses by county, but all of our options that we were bringing to the table seemed to not fully capture the complexities of the cannabis landscape, and we really wanted to appreciate those complexities…and this is where we found Beau Whitney from Whitney Economics.” The firm advertised “building data driven economic models for the cannabis industry with a mission of using sound analytic principles and valid data to provide insights and recommendations,” she said. And importantly, “he was able to conduct the analyses we asked of him within our specified rulemaking timeline, so we worked with him for about five months, starting in January and ending in late May, as he developed an independent report.” The full report was 75 pages long, but Okey primarily reviewed a shorter takeaways document prepared by her team with “methodology and main findings” for cannabis licensure. Moreover, she emphasized that the report “does not reflect an official statement from LCB,” just information by the contracted firm (audio - 4m, video - TVW).
  • Retailers (audio - 3m, video - TVW)
    • In projecting retail opportunities in Washington state, Okey outlined how Whitney “considered various factors such as the amount of estimated legal participation, total revenue, and demand.” As an economics consultant, she said, “many of these estimates he used were those commonly used in a company,” such as in determining a “future sales forecast, he estimated the total addressable market, which is a combination of the number of consumers based on a population…and a potential per capita consumption amount.”
    • Whitney’s estimates included the “minimum amount of revenue a retailer needs in order to cover all of its expenses and taxes in a given year,” which Okey commented was, “on average, $2.5 million to remain healthy and viable.” Okey said the report worked to define what viability meant in this context, stressing, “this does not mean to imply that if a business generates revenue below this threshold, they will immediately go out of business. However, the farther below this level of revenue, the greater the propensity for business failure, diversion, and products of other illicit activities.”
    • Based on Whitney’s estimates, the report stated “by 2032, 634 retail licenses may be economically viable across Washington.” Okey described how this “estimate is 160+ more than currently allocated, [but] Whitney additionally ran a more stringent model using a lower economic threshold of viability.” Assuming retail viability “using $1.6 million as a threshold, because some smaller operators or those in rural parts may require less labor,” she indicated, “if you look at the higher estimate, then 1095 retail licenses across the state may be viable in 2032.” Okey was clear this number wasn’t an official recommendation “unless looking at more rural places, but it is provided across the state and for each county.” She added that her remarks would focus on the overall state market rather than specific counties.
  • Producers (audio - 2m, video - TVW)
    • Okey observed that the forecast for producer licenses “considered various factors such as total capacity of existing producers and cultivated output needed to meet [demand].” Unlike the retail and processor licenses, there wasn’t a recommended number of additional licenses, she remarked, “because producers have a lot of variability in their output capacity” like growing indoor year round, or outdoor seasonally. As a result, she said Whitney “provided the estimated demand across time and compared that to the total output capacity of current producers.”
    • Okey relayed that existing producer licenses could adequately meet an increased demand since contemporary “supply capacity in pounds is estimated at 2.6 million, and estimated demand in pounds for 2032 is 890,000.” The analysis did presume all producers would be operating at 100% capacity, she said, even while “data suggests that producers, on average, use about 50% utilization, and producers have the ability to modulate their supply to market conditions.” Okey was additionally skeptical about whole state estimates since “producers are not public facing, products are easily transported, and that makes estimating producers by counties difficult and not as reliable.”
  • Processors (audio - 2m, video - TVW)
    • For processors, “this analysis used estimates based on prior research conducted by Whitney Economics [on the] amount of raw material needed in order for a processor to generate a profitable and viable business,” Okey remarked. Whitney estimated between 250 and 500 pounds “of biomass is needed per year,” and the estimation for processor licenses “was considered more simple for a number of reasons” given factors like the amount of input to make products, plus they tended to have “more stable prices and predictable revenues and are not as dependent on scale.”
    • Okey conveyed that the report found processors to have the greatest level of viability for new licenses, and Whitney estimated “between 1,780 and 3,340 processor licenses that may be viable in 2032. As a comparison, there is currently less than 1,100 license[s] today.” She cautioned that, similar to producers, the operations weren’t public-facing, “and products are easily transported, and they are transported easily across county lines.”
  • Okey read through five limitations to the report’s conclusions described in the agency takeaways document (audio - 4m, video - TVW)
    • 1. These are estimates only. No calculation will be able to precisely determine the number of licenses that will be able to operate successfully across time. The success of any retail, producer, or processor license is complex and nuanced.
    • 2. There is extensive variability across licenses and counties. For example, retail licenses in different locations with different number of employees will have different annual expenses, and these differences may alter the extent to which a business can operate successfully. Additionally, local jurisdictions with bans and moratoriums may impact legal cannabis market participation and the ability for licensees to find locations that would allow them to be successful.
    • 3. This analysis examined producers and processors separately. However, most of these licenses have both production and processing privileges. These combined license types may have unique factors that determine their overall success not accounted for in these findings.
    • 4. Data sources vary. Data on certain topics, such as percent legal cannabis market participation in Washington, are subject to differ based on which metrics were used. The data in this analysis were from commonly used sources for those in economics. However, those in other areas (e.g., public health) may use different metrics to estimate similar concepts, which would lead to different results.
      • Included in a public records request for Whitney Economics records was a 2022 Leafly Opt-Out Report which viewed local governments banning cannabis business stores as propping up unlicensed cannabis markets. The report argued stores-per-capita was one indicator of legal market success, and that Washington had captured 70% of the legal market with 6 stores per 100,000 residents. 
    • 5. The cannabis industry is constantly evolving. The possible rescheduling of cannabis at the federal level, its impacts on the application of IRS Code 280E, changes in interstate commerce, and other unprecedented changes could create shifts in the estimates provided. 
  • Okey reiterated that the Whitney Economics report should be viewed as “one of many tools that can help provide informed decision making” (audio - 1m, video - TVW).
  • Board Member Ollie Garrett was complimentary of the report and analysis by Okey’s staff: “it's eye opening, because it really is showing us a different picture than we thought” (audio - <1m, video - TVW).
  • Board Member Jim Vollendroff also praised the work, feeling as though it might suggest “a whole different conversation about maybe having an economist on board” (audio - <1m, video - TVW).
  • Vollendroff wanted to know how the calculated minimum revenue for a healthy retailer varied based on geography. Okey stressed that $2.5 million was an average and she would follow up with him with more details (audio - 1m, video - TVW).
  • Vollendroff also asked about the extent of limitations in gauging the "evolving nature of the business itself." Okey expressed uncertainty about how much that had been explored, but felt the estimated number of new processors correlated with opportunities for innovation in more manufactured products (audio - 1m, video - TVW).
  • Board Chair David Postman noted a point in the report that “as the industry has evolved over the past 10 years, it's now important for the regulatory structure to evolve as well.” Setting up new markets wasn’t easy, he said, and he appreciated the “part that says they think the LCB has done a pretty good job.” He summed up the report as a “rare independent look…at what we do and the health of the industry.” Postman also saw recommendations for better “guardrails related to the expansion of licenses” in the cannabis sector, and appreciated “these guys dug into it in a way that we haven't seen an economic analysis like this” (audio - 1m, video - TVW).
  • Postman was also curious "how do we get this to the legislature," asserting the thresholds set out in SB 5080 “says we can have…up to 52 retail, 100 processor, and 10 producers” licenses. While the intent of the report had been to “help us with this question of concentration… but they really look at the overall capacity, which I'm not sure is in our authority today” (audio - 3m, video - TVW).
    • Director of Policy and External Affairs Justin Nordhorn felt WSLCB was vested with broad rulemaking authority, and that thresholds for retail stores shouldn’t be understood to mean “caps” on the minimum number of outlets. He speculated that staff could talk about the findings with legislators during “the assembly days coming up” before the 2025 legislative session. Nordhorn also stressed Okey’s point that WSLCB wasn’t promising any specific cannabis business would be viable.

• Okey then reviewed the Research Program progress on setting standard operating procedures (SOPs, audio - 2m, video - TVW).
  • Okey was hired to manage the Research Unit which was established in the Spring of 2023 after the initial Manager, Kathy Hoffman, transitioned to work at the Washington State Department of Labor and Industries in October of that year.
  • Okey referred to the newly refreshed WSLCB research project page, remarking that their goal was to be “a transparent resource focused on public health and safety.” She shared three SOPs for Research Program briefs, reports, and surveys, indicating “this isn't to say that these are the only deliverables that the research program provides. However, within the first year of this program, these were the main internal requests that we have received.”
  • Each SOP outlined general information and terms, Okey stated, plus answers to questions around “what typically is and is not included in each deliverable, why each deliverable is important and why it is crucial for the research program to have independent findings, the typical step by step process, from internal request to board presentation, and…the range of time each deliverable might take to complete, and then what the research program does with each deliverable.” She suggested the board should expect Research Program materials to be “evidence-based and data driven information…that either may or may not align with current practices, policies or rules that LCB has, but we will never be providing any action statements that require mandate or imply that LCB will make changes.”
  • Additionally, her team would function collaboratively within the agency, seeking “feedback from different divisions and different subject matter experts, but it is really important that we have independent findings without undue influence.”

• Research Specialist Tyler Watson gave an overview of two cannabis briefs written by the Research Program related to flavored vapor products and packaging and labeling (PAL) appeal to youth before board members weighed in with questions and comments.
  • Watson presented results from the 2023 Healthy Youth Survey (HYS) to board members on July 9th.
  • Flavored Vapor Products (audio - 4m, video - TVW)
    • Watson described how different flavoring agents carried different risks, “naturally derived flavoring agents, terpenes, for example, that can come from the cannabis plant or even other plant sources. And then there's…synthetic and other natural flavors so that that can be added in as well.” Furthermore, “we know that these flavored products appeal differently to different demographics,” he said, and that among those who use cannabis vapor products, “half or more are choosing flavored products.”
    • Speaking to the “varied regulations” of vapor products, Watson suggested the items had “expanded and maybe become even more available.” Some states limited the amount of cannabinoids or were “limiting certain types of flavors,” he said, highlighting candy-like flavors popular with youth. Vaping was “the most popular way of consuming cannabis among adolescents” as well as young adults. He emphasized the need for more research on the subject.
      • Adding artificial flavors to cannabis vapor products was made illegal in Washington state with passage of HB 2826 in 2020.
  • PAL Youth Appeal (audio - 4m, video - TVW)
    • Moving over from talking about the youth appeal of vapor products, Watson mentioned he’d “spent a good amount of time" looking at PAL and what imagery appealed to minors and young adults. He said because previous marketing efforts had shown “that packaging and labeling elements can appeal to youth,” in particular, “like candy, for example, other snacks…colorful designs and logos, images of fruit or candy. There's lots of things we know are attractive to youth.” Watson believed cannabis products were already having a similar effect.
    • One practice that had already been studied with regard to youth appeal was the style, content, and placement of warning labels. Ensuring “statements stand out, they're separate from other information, making them specific, even specific to adolescent risk” were all PAL aspects which could influence youth appeal and use of cannabis products. Watson noted “evidence shows that when you do some of these things for the health warning labels, they're more likely to be read, they're more likely to…have the desired impact on, on populations reading them.”
      • At time of publication, WAC 314-55-105(1)(c) prohibited cannabis packaging "Especially appealing to persons under the age of 21" defined as:
        • (i) The use of cartoons;
        • (ii) Bubble-type or other cartoon-like font;
        • (iii) A design, brand, or name that resembles a noncannabis consumer product that is marketed to persons under the age of 21;
        • (iv) Symbols or celebrities that are commonly used to market products to persons under the age of 21;
        • (v) Images of persons under the age of 21; or
        • (vi) Similarities to products or words that refer to products that are commonly associated or marketed to persons under the age of 21.
      • Neither Watson’s presentation nor the research brief mention hemp products despite assertions from industry members the items were often flavored and sold online with lax age restrictions.
  • Vollendroff complimented the work of the Research Program, which he was instrumental in helping form (audio - <1m, video - TVW). He then inquired about the audiences for the reports. Okey said they were non-technical to encourage people to use them as an educational tool. The team tried to avoid generalizing, since “if it's covered in the news or if it's covered in an academic sense, there are- some of the nuances can get lost.” She wanted the briefs to “help people understand kind of a broader sense of this topic, but also maintain some type of nuanced perspective within the brief, because research is complicated, research is muddied, and we want to be that transparent, non-biased resource, which is why we also…say a lot of what we're going to report. Some of it may align with LCB policies and practices. Some of it may not, because that's the reality of research” (audio - 4m, video - TVW).
    • Requests so far had come from internal sources, and Okey suggested the briefs had been written with that in mind, but they were being publicly published as well. Watson agreed the documents weren’t policy positions, but reflected "timely issues that we’re having discussions about" internally and as part of their efforts on work groups around the state.
    • Vollendroff was bullish on “building this library over time” of research briefs that could help students or counterparts at other agencies.
  • Garrett asked how they could disseminate the research summaries to other state agencies. “I run into a lot of different agencies,” she continued, “people that I talk to, and they tell me something they're looking into, or something they're doing, and I go, ‘well, the LCB has already done that. All you need to do is go to our website’” (audio - 5m, video - TVW).
    • Okey saw potential in a “more streamlined communications strategy” around the briefs which she believed would get easier now that they were being published online. She also called Public Health Education Liaison Kristen Haley a “great advocate for posting our information as well” among public health and prevention organizations.
    • Garrett stressed that some agencies were more involved in aspects of the social equity program—like the Washington State Office of Equity and the Washington State Department of Commerce—or places “we know folks from our industry tend to go to for other conversations.” Vollendroff felt “if people could even potentially sign up to receive, like, new research briefs as they're posted,” that could help the information reach interested audiences. Postman asked if the research documents were being sent out through existing WSLCB listservs.
    • Nordhorn agreed the concept of a dedicated email list had been discussed, and staff had “informally” been in the habit of sharing new materials with interested colleagues at other state agencies. He said with cannabis policy, “national partnerships that we like to develop, particularly with some of the other states that have research programs…this could offer some additional collaboration, and particularly when we're looking at consistency between states.” Nordhorn explained that they’d begun meeting with legislative staff and the briefs were, “something that's a nice snapshot that's digestible and that they could look at” when learning about issues.
  • Vollendorff wondered about crediting subject matter experts at WSLCB as authors in addition to the research team. Okey responded that her staff valued input from subject matter experts, but that her team was expected to be the authors of briefs going forward: “the primary reason for that, again, is to maintain that independence and not to have…someone from this division…signed off or wrote on this…what does that necessarily mean in terms of potential policy changes or shifts?” Vollendroff appreciated her point, saying Hoffman had made similar remarks about the need for autonomy when the unit was being set up (audio - 2m, video - TVW). 
  • Vollendroff was grateful to see staff producing materials around "making informed choices" and communicating risks for vulnerable populations (audio - 1m,  video - TVW). He also asked to be kept informed about the external feedback the Research Program received about the briefs. Okey stated she was also looking forward to getting input, and Watson thanked Haley and others at the agency who’d contributed so far. He further suggested the possibility of “tracking…usage statistics” to gauge the impact of specific briefs (audio - 2m, video - TVW).
  • Postman thanked the research team, and commented, “I've got a bunch of follow up questions, so I'll find time to talk to you all about that at another time” (audio - <1m, video - TVW).