Part [part not set] of 3 in the series Illinois BioTrack Data

Between March 2019 and March 2020, Illinois cannabis cultivators increased production by 292%. Yet during that time vertically integrated cultivators decreased their overall sales to dispensaries they didn’t own from 86.2% to 72.2% of total sales – reducing supply available to independent dispensaries, according to BioTrack data obtained by Grown In. 

In January 2020, when Illinois consumers rushed stores for the first opportunity to purchase recreational cannabis, vertically integrated companies sent only 56.7% of sales to dispensaries they didn’t own, the data showed. Two companies in particular, PharmaCann and Green Thumb Industries, particularly favored their own dispensaries, creating an intense supply crunch for dispensaries not owned by a vertically integrated company.

The Illinois data begins to shed light on a growing number of complaints from consumers who find they cannot always obtain supply from their favorite independent dispensaries, and growing cries of foul play from owners of those independent dispensaries who claim they are getting the short end of the stick from vertically integrated cultivators.

“Through mid-year 2019, pretty much immediately after the [Cannabis] Tax Act was passed, we began seeing a decrease in our deliveries, and in the second half of 2019 those decreases continued into the first of the year,” said Christine Wildrick, co-owner of Herbal Remedies Dispensary, an independent dispensary in Quincy. 

The vertically integrated operators “are dictating to us for the most part what we can and cannot have,’’ Wildrick said. “It’s obvious that they are supplying their dispensaries and giving them priority.’’

As a result, she said, independent store owners “certainly have had to limit what we could make available on the adult-use menu.’’

The BioTrack data received by Grown In covers March 2019 through March 2020. Grown In verified its authenticity and analyzed it extensively.  BioTrack is a seed-to-sale tracking system that follows every step of cannabis production and sale. State regulators use the data, typically not made public, to monitor security and the health of the industry. 

Illinois law does little to regulate wholesale distribution and supply. The law requires dispensaries to keep an “adequate supply’’ in order to serve medical customers. And the law law says dispensaries may not acquire more than 40% of their supply from any one cultivator.

An industry insider with experience in both dispensaries and cultivators agreed with Wildrick, pointing out that independent operators have no purchasing power. 

“What a vertically integrated company could do [is] go to another vertically integrated company, and say, ‘Let’s do a product swap,’ to keep ourselves at the 40% of shelf space,’’ said the executive, who requested anonymity for fear of losing his job.  By doing a product swap at less than wholesale prices, vertically integrated companies can avoid maintain high profits and their 40% shelf space requirements.

“If all you have is money, everyone has money right now. It’s dangerous to just rely on being able to pay someone. Say someone wanted to pay more money than what was being asked. A cultivation center can’t do that because they have to sell the same product to everyone else at the same price. Even if they wanted to, that wouldn’t be allowed. It’s really putting people at a disadvantage. And then you only have tons of customers – if you have the product,” the insider said.

The strong arms

The Grown In analysis showed that more than any other vertically integrated company, PharmaCann and Green Thumb Industries (GTI) leveraged their vertical integration in early 2020 by reducing overall sales of recreational cannabis to dispensaries outside of their system. 

Until last fall, PharmaCann distributed between 65 and 70 percent of its production to non-PharmaCann owned dispensaries. But, as it began to ramp up production in fall 2019, in anticipation of the coming recreational market, it also began to shift its sales to PharmaCann-owned Veralife dispensaries. By January 2020, state records show, only 11.4% of PharmaCann-produced cannabis went to non-PharmaCann-owned dispensaries.

GTI’s distribution followed a similar pattern, distributing about 80% of its product to independent dispensaries up until September 2019, when it began to ramp up production in preparation for the new recreational market. At the same time, GTI directed most of its supply to GTI’s 3C and Rise dispensaries, sending just 47% of production to non-GTI owned dispensaries in January 2020.

As Grown In reported last week, GTI and PharmaCann together produced 16.6% of total supply by unit in March 2020. That was less than what was produced by the state’s biggest cultivator, Verano-owned Ataraxia (33.9%), and only slightly more than the 15.8% produced by Cresco Labs, second largest cultivator in the state. 

Because overall supply has been so thin in Illinois, with some Illinois dispensaries closing mid-week because they ran out of product, a shift of just a few percentage points can result in dispensaries being unable to serve customers. But Illinois’ rules for exactly how much cultivators need to provide to independent dispensaries are unclear since the law regulates dispensaries, not cultivators.

 A “six-month rule” included in the 2019 law legalizing recreational cannabis includes a rule requiring dispensaries to maintain a medical cannabis supply of, “a monthly inventory level that is comparable in type and quantity to those medical cannabis products provided to patients and caregivers on an average monthly basis for the 6 months before the effective date of this Act.” Since the effective date was June 25, 2019, the average monthly supply basis dispensaries need to maintain is during January to June 2019.

But in June 2019, there were 76,939 medical patients. In May 2020 there were 118,176. Also, the law puts requirements on dispensaries to buy, but not on cultivators to sell to dispensaries. And the law is unclear if supply amounts are supposed to be calculated by unit, price or product type. Under the current regulations, cultivators are free to sell as much or as little as they want to any dispensary, and it’s the dispensaries’ problem to resolve – at their cost.

“Why wouldn’t [cultivators] do that?” said the Illinois cannabis insider. “You can keep the best margin if you sell it to yourself. There are still no rules for selling to dispensaries. There’s still no real official state, top-down information on how to calculate your six-month supply – for adequate supply rules. There is some loose, loose shit going on. So, it’s also COVID right now, so there’s no [state] inspectors going around.”

PharmaCann spokesman Jeremy Unruch disputed the assertion that independent stores are not getting their share of product from vertically integrated cultivators.

“The data shows that independent dispensaries, which make up about 20% of the retail marketplace, received approximately 17% of the whole flower grown in the state,’’ said Unruh, Senior Vice President for Public and Regulatory Affairs. “That’s not very far off the mark for the first few months of an entirely new industry.

“The state has strict rules for how much of a cultivator’s product can be on the shelves of any single dispensary. At all times, we have operated in accordance with those rules,’’ Unruh said.

Expansion work underway soon will double the capacity of PharmaCann’s cultivation center, Unruh said, noting that most other cultivators in Illinois also are expanding.

“This expansion will allow us to offer a fulsome menu of products to a greater number of our wholesale customers at about the same time new dispensaries will be eligible to open their doors,’’ he said.

Green Thumb Industries did not respond to Grown In’s request for comment.

‘Adequate supply,’ for now

Illinois law requires medical cannabis dispensaries to maintain an “adequate supply” of cannabis products for their patients. This requirement expires on July 1, and some independent dispensary owners worry that once that date passes, vertically integrated cultivators will be allowed to employ their full market-force muscle on independent dispensaries.

Portia Mittens, a Kankakee native, owns a cannabis dispensary in Sumpter, Ore., and is part of a group applying for a dispensary in Illinois. The Grown In data tells her, she said, that vertically integrated companies have a leg up in the Illinois market. 

“They are clearly taking care of themselves first and giving the bare minimum to the other stores,’’ Mittens said. “If this is indicative of what will happen over time, it is not fair.”

The state has little regulatory power over how cultivators distribute their products. While Illinois law precludes dispensaries from acquiring more than 40% of their supply from any one cultivator, cultivators are not limited from cutting off supply to individual dispensaries.

Illinois regulators have instead focused on security issues. The Illinois Department of Agriculture has fined cultivators for security issues five times since January 2019, but not for any other causes, according to reports provided to Grown In through a Freedom of Information request. The Illinois Department of Financial and Professional Regulation has also issued no fines to dispensaries, a second Freedom of Information request revealed.

Gov. J.B. Pritzker’s administration has attempted to change the law. During a special legislative session in May, the Illinois Senate passed a provision that would have given state agencies sweeping oversight powers to ensure “a fair and competitive marketplace” for cultivator sales to dispensaries. Although it passed the Senate, the House did not vote on the measure after another component of the legislation attracted the opposition of the Black Caucus and Pritzker. In a hearing before the Cook County Cannabis Commission last week, Toi Hutchinson, Senior Advisor for Cannabis Control to Pritzker, vowed to put the bill back on the table in the General Assembly’s fall Veto Session.

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Editor Mike is a co-founder and the editor of Grown In, a U.S. national cannabis industry newsletter and training company. His career has taken him from Capitol Hill to Chicago City Hall, from...