A few weeks ago I wrote that the recession is here for the cannabis industry, and investors looking at cannabis companies see that it’s impacting almost everyone. Just a day after I wrote my column, Lume Cannabis, Michigan’s biggest dispensary chain, announced it was closing four of its 30 stores, followed up by an agitated story in the Detroit Free Press that “Michigan cannabis companies struggle to survive”. Then, last week, the Oakland Press declared “Marijuana growers find ‘saturated’ industry challenging as supply balloons, demand slows, and prices plummet”.
To better understand, we need to look at three numbers that have the rapt attention of investors and operators alike: the ratio of dispensaries in a state to population and price per pound. For a quick and dirty look, I grabbed Friday’s prices of the lowest cost flower at Curaleaf adult use dispensaries in four states, and a LivWell adult use dispensary in Colorado. For Michigan, state regulators report retail sales, so I used the average flower price from the latest report from June.
Look at the difference in people per store between New Jersey and Illinois and Michigan. New Jersey is just getting started with adult use sales, so it’s got a small operation. Adult use dispensary numbers in Illinois have been artificially held down through a series of corrosive court battles. 185 new dispensary licenses were finally released on July 22. Meanwhile, Michigan has been a free-for-all, where the only thing holding back the tide of licenses are restrictive local zoning restrictions. Stores have been opening at a furious clip, fueled less by local demand and more by external investors excited about the opportunity to join in the gold rush.
Next, look at the last line of the other two states: Illinois’ and New Jersey’s limited number of licenses are supporting super high prices while more Darwinian markets in Michigan and Colorado are driving them down. Then, consider this: Both Curaleaf and Ascend Wellness have dispensaries in Illinois that are doing over $40 million in business a year. Assume a production and wholesale product cost of $100 per ounce, and since both companies own large, sophisticated cultivation sites in the state, they may be reaping 300% margins on those sales. Vertically integrated companies in Illinois and New Jersey are basically printing money.
But meanwhile, smaller companies with less scale are likely producing weed at $150 to $175 an ounce. That means in Michigan and Colorado, the smaller, less efficient operations are either working on razor thin margins or getting ready to go out of business.
“The big wave coming at us is distressed companies, you’re going to have companies abandoned. There are people calling me, ‘I have XYZ company in Battle Creek. If someone can take over my lease and inventory, I’m out,’” said Brian Schinderle, managing partner at Solidium Capital Advisors, one of cannabis’ earliest investors.
Between Schinderle’s alarm bells and the going price per ounce in Michigan, the Mitten seems like a pretty terrible place to get into cannabis, right? Well, it turns out that the siren call of making money in weed is so strong, there’s still momentum pushing cannabis capital into Michigan, according to Schinderle.
“I still see people building out in Michigan, and I say, ‘What are you thinking about? How will you get your return on capital?’ [They tell me:] ‘We’ll be the best weed, or lowest price.’ It better be the only weed people ask for by name, because it’s so much better, or so much cheaper at quality that you can preserve your margin. Everyone in between will be obliterated, because of the oversupply,” warns Schinderle.
The danger sign to watch for, investors tell me, is a high number of adult use dispensaries per person. Keeping the number of dispensaries from crashing even more in Colorado – which has had an oversupply of stores for a long time – is that it has a large number of “lifestyle businesses” where an owner runs a dispensary, a small cultivation in the back, and only a few employees. If you’ve driven around Colorado outside of Denver, you’ve likely seen dozens of these scattered around rural areas. The best places to look for them are on small highways right next to state borders. The customers aren’t Coloradans, ensuring a steady supply of relatively price-insensitive buyers.
To get there, Colorado went through a massive consolidation in 2020 and 2021, shedding almost 200 retail locations. Today, the state has fewer stores than it had in 2017.
“It’s a much healthier industry now,” said Schinderle of Colorado. “Margins are half of Illinois, but they bulked up and the little guys went belly up.”
But maybe dispensaries are just the canary in the coal mine for the cannabis industry, suggests Landon Bartley, president of the West Michigan Cannabis Guild.
“I would say growers might have a tougher time of it at this moment, because it tends to require such a significant capital investment to get going. WIth the pressures for higher potency, you’re trying pheno hunt. There’s a lot of that [costly] R&D trial and error that will increase for a grower,” he told me last week. “I think it’s going to be real painful.”
Rick Thompson, executive director of Michigan NORML, says this is the shakeout he’s been waiting for. Just like Colorado, just like Oregon.
“There’s optimism for growth in the system itself. But it’s difficult for people to make ends meet right now. Ultimately I think we’ll see a new set of faces. We won’t see many of the people who pioneered the market,” he said. “People are still going to buy cannabis, it doesn’t matter who owns the retail stores, they will still stand. The first wave of people who got gigantic loans, they weren’t realistic.”
In Massachusetts, David Rabinovitz, a consultant and investor, says his state is also ready for a shakeout.
“I predicted this would be the year of musical chairs. Operators with three stores, they’ll get rid of the poorest performing store and open a new store somewhere else,” he said. In the Bay State, operators are limited to owning just three stores.
“A properly structured store should break even at $1.5 million [of sales a year]. If they can’t do that, they risk going out of business at some point,” Rabinovitz said. Many dispensary owners have loans to the hilt, meaning they’re counting on much bigger revenue, he warned.
The trap for new investors is that at first glance, Massachusetts’ sales are still growing at a good clip. But that’s only half the story.
“I tracked the daily revenue and how many were open that day, to get a sense of the revenue per store, many are going up wonderfully until you look at the average store sales,” said Rabinovitz. “Growth is in new stores, not individual store growth. There are more stores opening than people coming in. On a per person basis, everyone’s island is shrinking.”
Prices are dropping in Massachusetts too. Rabinovitz shared with me a price sheet from a cultivator that showed some adult use flower types priced at $1,200 a pound wholesale. If you figure a 30% margin for the retailer, that means Massachusetts’ prices are headed for the same range as Michigan’s.