Cannabis investors are starting to leave Illinois, says the head of a trade association for craft grow applicants.
Paul Magelli, founder and executive director of the Illinois Craft Cannabis Association, says the state’s delays in creating new licenses are hurting more than just craft grow applicants. “Investors have lost confidence in the market and the state’s commitment to this next set of licenses and have decided to move on elsewhere,” he says in an interview with Grown In.
Craft grow licenses were considered an innovative idea when Illinois legalized recreational cannabis sales in 2019. The legislature created 40 licenses for small businesses that would be targeted at social equity applicants, with the idea that it would be easier to raise smaller amounts of capital to get a quick foothold in the market.
Instead, craft grow applicants have become a sort of forgotten step-child for Illinois cannabis, as the licenses were originally, by law, supposed to be announced by July 1, 2020. But, claiming delays because of the Covid-19 pandemic, Illinois Gov. J.B. Pritzker issued an executive order delaying the licenses.
Magelli has been working to build a single voice for craft growers and infusers since last fall, and as a result, has a lot to say about the cannabis business in Illinois.
[Interview has been edited for brevity and length.]
Grown In: You’re a big proponent of craft growers. Why is it important that Illinois have craft growers?
Paul Magelli: The number one reason is consumer choice. I think craft growers and infusers provide the opportunity for consumers in a way to have a broad selection of products that are diverse in nature. I think that choice is good for the whole market. I think it keeps cannabis in Illinois interesting. And it provides a much more interesting marketplace for Illinois consumers.
GI: It’s coming up on a year since craft grow licenses were supposed to be announced. How many craft grow applicants that you know of have had to quit the hunt and move on to other things?
Magelli: At this point, I think a majority of all applicants have taken a punishing. A majority from our work with the community have lost their property. They’ve lost their zoning. Their teams have dissipated. So they lost key members of their team. And that is not just the employees. Those are core management team members, board members, principal officers.
A vast majority, I would say more than seventy percent, have lost some of those things. The most concerning thing to me is, what I’ve heard in the last couple of months, is an increasing number that have lost or are close to losing their investors. And the theme there is very consistent, which is: [For] Illinois, the investors have lost confidence in the market and the state’s commitment to this next set of licenses and have decided to move on elsewhere.
So, I know a lot of people that have expressly lost their investors. Their investors have withdrawn. There’s a number of others where that has become a sort of fighting concern. The craft or infusion applicants are working hard to try to retain them. I had a discussion just a couple of days ago, where a large craft grow and infuser, a meaningful applicant, is going to dinner to try to save one of their investors because they just simply said, Illinois is not the place for us.
GI: Back in December you told me it cost applicants about $10,000 a month to keep going. Is that still the case?
Magelli: As we got to the fourth quarter of last year that was correct. The carrying cost for many applicants was some combination of property costs and team costs, to continue to forge ahead.
Most applicants at this point have furloughed their employees. I think to my knowledge I don’t think any are still paying. That means lost jobs obviously.
Teams generally have tried to cut their burn rates and expenses substantially, so that they can survive. I’m not sure they’re still spending at a $10,000 rate a month, but the consequence of that has been lost property, zoning, et cetera.
GI: Illinois cultivators can build out up to 220,000 square feet of canopy. Craft grow would start at 5,000, and then have a chance a year later to go up to 14,000. How do craft growers expect to compete?
Magelli: By law, they start at 5,000 and then grow in three thousand square foot increments up to 14,000. That’s how that’s how the regulation is written. There are no limitations on infusers. They are fundamentally only limited by the amount of oil they can acquire. And the amount of capitalization and how big the market is. Infusers do not have similar constraints.
The three thousand square foot increments: It is not clear based on state rule-making, the regulatory side, how those three thousand square foot increments are allocated or when you get them. I’m not aware of any yearly limit. They’re simply allowed to expand as the state of faith in these three thousand foot increments up to fourteen.
As a craft community we don’t believe that five thousand square feet is substantially long-term viable. That begins at somewhere in excess of ten thousand square feet. We would like to see this community granted the rights, given the significant delays to be able to start, at the full fourteen thousand square feet.
That’s one of the things we’ve supported from a legislative perspective and we still hope will be passed in Spring session.
To answer your question: How will craft compete? Craft needs to be distinguished. Clearly on either variety of product and/or quality of product to be long-term sustainable. So, if they’re producing a low quality product, they’re not going to be viable. So, I think what we’ve seen is interesting plans on behalf of craft applicants to produce highly differentiated strains that have specific, unique properties. Or to produce consistently high-quality product, and that’s very different, right?
The other dimension we’ve seen is some unique plans among craft to attract and retain their clientele. So they’ll do that through a dispensary but there’s some unique plans. I think in terms of how you build a recurring revenue model as a craft blower. You build a subscription model as a craft grower.
GI: Will craft growers need successful independent dispensaries to succeed, or have you gotten feedback from vertically integrated companies that they’d like to work with craft growers?
Magelli: A significant concern for the craft community is the diversity and Independence of the dispensary marketplace that they would work with. I think there’s a significant concern that
it will not be sufficient. And it will be dominated by the larger players and therefore opportunity would be significantly or potentially restricted.
I think healthy and diverse, independent segments of the dispensary market is beneficial and helpful to the craft growers.
The flip side is, I think, the craft community is significantly concerned about the control of the dispensary market by a few large players because I think that will significantly restrict.
GI: There’s been a lot of attention paid in Springfield to dispensary licenses, but not much public word from the state about craft grow. Have you heard anything from back channels about when your licenses might be announced?
Magelli: I think we have as of today the same information that, you know, most everybody has that have come out of [Secretary] Jerry Costello and the Department of Agriculture, which is, he was, quoted in a legislative hearing a couple of weeks ago, quote, “very confident that licenses just for craft will be issued by the end of June.”
We cannot see that at this point. In fact, people are significantly concerned about two things: One is, the apparent renewed tie that the [Pritzker] Administration has placed on craft as it relates to dispensaries. Dispensary [licenses] have to get sorted before we’re going to do anything with craft. The state keeps saying “It’s not.” And then the Governor’s office as we hear, keeps saying, “It is.”
The second significant concern is the state had indicated that there would be a fourth round of deficiencies and those have not been forthcoming. Those are for the non-scored sections of the application process. And those have not been forthcoming, and we could imagine that if they were issued tomorrow, it would be two to three weeks, for [them to] return. And then at least a month if not two, to evaluate them. So we’re well beyond the end of June at this point.
The state has zero credibility at this point in terms of establishing timelines and fulfilling them. And I think confidence about timely issuance has dissipated.