New Mexico launched its adult-use cannabis market April 1 and recorded $1.96 million in sales during the first 24 hours, leaving Ultra Health, one of the state’s vertically integrated cannabis operators, wondering if supply will be able to keep up with demand in the early months of the program.
“We saw a lot of folks turn out to participate in this historic day in New Mexico and cannabis history,” Ultra Health Chief Marketing Officer Marissa Novel tells Cannabis Business Times. “And while it’s certainly a milestone to be celebrated, we are cautiously realistic about what will happen in the coming 12 and 24 months.”
Novel says the nascent market is “very volatile” and ultimately dependent upon the state’s cannabis operators having the production capacity to keep up with demand.
And, in a state where regulators have set production limits on cultivators, she says supply will likely become an issue—and soon.
“While we have all the hustle in the world, while we’re really excited, changes do need to be made on the regulatory level to realize the potential of cannabis legalization in New Mexico,” Novel says, adding that some operators may even run out of product before 4/20.
New Mexico Gov. Michelle Lujan Grisham signed the Cannabis Regulation Act in April 2021 to legalize and regulate adult-use cannabis in the state.
In January, the Cannabis Control Division (CCD) issued an emergency rule that doubled the number of cannabis plants that licensed producers can grow from 10,000 to 20,000 mature plants in an effort to protect patients’ supply of medical cannabis as demand spiked with the launch of adult-use sales.
However, Novel says this rule change did not give operators enough time to build out the additional capacity for more plants or to even put additional plants in the ground and complete the growing cycle before the adult-use market launched in April.
“It was honestly a little too late,” she says. “We needed a change like this to occur in fall 2021 for anything material to really come about by April 1.”
Ultra Health has been receiving inquiries from newly licensed producers, manufacturers and retailers looking for wholesale product, but Novel says the company is also in the market for wholesale trim, flower and other products to keep up with the demand in its own dispensaries.
“We’re doing our best internally to get those harvests in, to get that perpetual grow cycle to the point where it can withstand higher production, but right now, both for Ultra Health and New Mexico, the transactions are greatly outweighing how much harvests of cannabis can replace the material,” she says. “Supply issues are definitely going to be an issue in the future. Right now, we’re doing calculations to see internally how many days’ supply we have left, but it’s much, much lower than we’ve operated on in the past.”
To ensure adequate supply, Novel says another rule change may be necessary to either further increase the plant count limit or remove it entirely.
“Looking ahead, with the supply issues on the horizon, I definitely think we could see a lifting of that plant count to a higher number or lifting it entirely,” she says. “What it will boil down to is the producers who have the capacity to grow more plants—especially outdoor with thousands more plants—those operators should be able to provide for the industry while others begin to ramp up.”
Ultra Health has roughly 40 dispensary locations across New Mexico, and the stores have seen average transaction amounts ranging from $110 to $170 since adult-use sales launched April 1. In the medical-only days, Novel says transactions averaged about $50.
Patients and adult-use consumers are both gravitating toward flower, Novel says, adding that concentrates and edibles sales are gaining momentum as customers familiarize themselves with other product offerings.
Three Years in the Making
Ultra Health has been preparing for New Mexico’s adult-use cannabis market for three years, ever since the company started construction in 2019 on a second greenhouse at its cultivation site in Bernalillo.
“We knew that the days of small production and medical-only in New Mexico were numbered,” Novel says. “We knew that cannabis legalization was coming.”
Ultra Health invested in both its cultivation and retail operations to ensure that it had the capacity to serve the expanded market when adult-use legalization became a reality.
Anticipating increased activity in towns along the Texas border, the company set up retail locations in Hobbs, Clovis and Clayton, and built out several new POS stations within the stores just before adult-use sales launched to handle the influx of customers.
Ultra Health promoted many of its dispensary-level staff to regional manager and district manager positions to prepare for the adult-use market but has taken what Novel calls a “conservative approach” to hiring additional employees.
“We received quite the bump in activities from COVID-19 and the pandemic, where we were seeing a lot more volume, a lot more transactions [and] higher purchase amounts per transaction,” she says. “So, we knew that we had the capacity for a certain volume above our norm. In about the fall of 2021, we started to see those sales from COVID start to decrease. So, volume has been lower than the pre-pandemic bump and the pandemic bump. We knew we had the capacity to push more volume through our stores based on that COVID-19 experience.”
The Five-Year Forecast
This time next year, Novel anticipates several cannabis operators closing their doors due to an imbalance of production and retail; New Mexico currently has over 300 licensed dispensaries competing to sell the limited supply of cannabis available from the state’s licensed producers.
“One-year forecast, we definitely anticipate several if not closer to 100 licensees having to shutter their doors because they don’t have product to sell,” Novel says.
But five years from now, she says the industry can “look forward to a very sustainable and thriving cannabis industry in New Mexico,” once the market consolidates a bit.
Looking beyond New Mexico, Novel says she and the Ultra Health team are “cautiously optimistic” about federal cannabis policy reform, especially since the Marijuana Opportunity Reinvestment and Expungement (MORE) Act cleared the U.S. House for the second time earlier this month.
“It’s a huge hurdle for a bill to even be introduced to Congress, so that is certainly a step in the right direction,” Novel says. “However, we know that getting it over the finish line, getting the Senate to approve it, is a much different ballgame.”
In the meantime, Ultra Health plans to get plants in the ground for New Mexico’s outdoor cultivation season, as well as further expand its cultivation capacity. The company has purchased real estate in Alamogordo, in the southern part of the state, that will serve as a 225,000-square-foot indoor production and manufacturing facility.
Ultra Health has also secured a 36,000-square-foot corporate building in Albuquerque that will eventually house the company’s HR, accounting, marketing and legal services departments.
“We’ve been running the numbers compared to the state’s activities—the statewide total for New Mexico over legalization weekend as compared to the Ultra Health system—and what we’ve found is that about one in four transactions made over that weekend were made at an Ultra Health store,” Novel says. “That was huge for us and our network. Moving forward, the real challenge will be supply. It’s undeniable that the pace is up, that we’re seeing demand at levels that have never been seen before, even with the pandemic bump.”