Total U.S. cannabidiol (CBD) product sales 2014-2022
It is expected that U.S. consumer sales of cannabidiol (CBD) will reach around 1.8 billion U.S. dollars by 2022, which would represent a significant increase from around half a billion U.S. dollars in 2018. Following a similar trajectory, sales of legal cannabis in the U.S. are projected to hit 23 billion U.S. dollars in 2025.
What are the benefits of CBD?
Cannabidiol is a naturally occurring substance found in cannabis. However, CBD does not cause any of the psychoactive effects that come from another active ingredient found in the plant: tetrahydrocannabinol (THC). The health benefits of the plant extract continue to be examined, and the World Health Organization states that CBD exhibits no effects indicative of any abuse or dependence potential. The CBD retail industry is already flourishing, with a wide range of products marketed as treatments for chronic pain, anxiety, and depression.
CBD in the USA: sales by state
With estimated sales of around 730 million U.S. dollars, California had the biggest CBD market in the United States in 2019. Regulations concerning the use of cannabidiols are yet to be clearly defined, and state authorities are having to answer numerous questions about its legality. It is, however, currently illegal under U.S. law to market CBD by adding it to a food or labeling it as a dietary supplement. As of March 2020, the FDA has approved only one CBD product: Epidiolex. The prescription drug is used to treat two rare and severe forms of epilepsy.
TAM. What is it? Why does it matter? How is it calculated?
TAM, short of total addressable (or available) market, is the overall annual revenue opportunity that is available to a product or service if 100% market share is achieved. Further, TAM takes into consideration the products and customer segments that remain untapped. Take Uber, for example, some may see Uber’s service as just a replacement for a traditional taxi company. However, Uber now offers, in addition to ride hailing, scooters & food delivery. This changes (1) who your customers are and (2) the amount of customers you can serve.
Why is TAM important?
TAM’s important for various factors such as:
- Allowing start-ups and existing businesses to prioritize how much effort should be poured into specific products, customer segments, and business opportunities.
- Analyzing investments (modeling & valuation) to understand a company’s estimated and possible revenue growth (i.e. current and future market share).
Example: If a company has $100m in revenue and the TAM is only $150m, guidance of 50% revenue growth may not be realistic as it would assume 100% market share.
How’s TAM calculated?
There are various methods of calculating TAM. Below are descriptions of 3 of the main methods:
1) Top Down Approach – Follows a process of elimination that starts by taking a large population of a known size that comprises the target market and utilizes said population to obtain a refined market segment.
- This method uses industry research and reports to attain the proper estimates of the population. Data providers such as OECD, UN, World Bank, Statista, and CIA World Factbook are useful resources for determining this.
Example: You want to enter the CBD business. Total estimated US TAM CBD oil is $1b. You then filter that down to your specific region & product which are Michigan and oils, respectively.
2) Bottom Up Approach – This is a more reliable method as it relies on primary market research to calculate the TAM estimates. This approach uses more data on the current usage and pricing of a product. An advantage of the bottoms up approach is that a company can explain why they chose a specific segment.
Example: You want to begin selling CBD in the US. You would begin by researching the current pricing & product demand for CBD oil sales in Michigan. Once that is done you extrapolate to derive US figures.
3) Value Theory – Relies mainly on estimates of what value the product will offer and how much of the value can be represented in pricing the product. This method is used when introducing a new product or cross-selling products to an existing customer base.
Example: You are selling oil but now want to venture into edibles and creams. You would use this to try and determine the value-add of the additional offerings.
Considering SAM & SOM
TAM, SAM, and SOM are not only catchy finance acronyms, but also various subsets of the market.
- TAM (Total available market) – refers to total demand for a product or a service that is calculated in annual revenue.
- SAM (Serviceable available market) – TAM that is served by a company’s products or services.
Example: CBD market $1b is the TAM. $200m of the market is related to oils.
- SOM (Serviceable obtainable market) – This is the percentage of SAM that is realistically achieved.
Example: Using the SAM example above, $200m of the market is related to oils. However, that doesn’t mean you are going to up and control 100% of the market. There are other players/competitors. Maybe in your first year you only obtain 1% (or $2m).
Understanding TAM of a potential investment helps serve as a baseline for future growth and management’s expectations with respect to such growth.