Wholesale marijuana flower prices plummet.
Michigan, in particular, subject to new dynamics.
Prices of wholesale recreational marijuana in Michigan are now as low, or lower, than those in older adult-use states
– underscoring how new markets are ramping up more quickly and, in some cases, becoming glutted.
Industry insiders say cannabis flower in Michigan is readily available for less than $1,000 a pound on the wholesale market – and often for much less – because of oversaturation as more and more cultivation companies come online in a state with no limit on business licenses.
Connie Maxim-Sparrow, a cannabis consultant and marijuana business license holder based in Muskegon, Michigan, characterized the state’s current market conditions as “unstable” – in particular, cannabis growers are spending at least $800 to grow a pound of flower and getting only $600 for it on the wholesale market.
According to Maxim-Sparrow, a year ago a midgrade pound of indoor-grown wholesale flower that tested at around 20% THC potency would sell for $1,800-$2,200.
Now, that same grower is lucky to get $600 a pound, and she’s heard of some selling for as low as $300.
The dynamics playing out in Michigan could offer a harbinger of what’s to come in other new markets.
In particular: As more multistate operators learn how to quickly set up shop in new regions with many producers, the pace of a newly legalized state’s market hitting an oversaturation point is speeding up.
This is more likely to happen in states without licenses caps or that have many growers – unlike limited-license markets that seem more common on the East Coast.
Michigan began marijuana sales at the end of 2019, and the wholesale market prices now more closely resemble those in older markets such as Colorado or Oregon, where wholesale prices have been falling for a year or more.
Colorado’s adult-use sales launched in January 2014, while Oregon’s market launched in October 2015.
Both markets took longer than Michigan’s to experience product saturation and falling prices.
To survive, cannabis companies across Michigan are tightening their belts, relying on vertical integration and trying to build brand recognition to be more competitive.
Others are limiting their expansion plans or selling out as a wave of consolidation sweeps through the state’s industry.
A few Michigan marijuana retailers have downsized, including major retail chain Lume Cannabis, which closed four of its roughly 30 stores earlier this month.
Meanwhile, Michigan regulators in March implemented new rules, including lower application fees and the removal of licensing tiers, that will further open up the market.
“Everybody’s panicking,” Maxim-Sparrow said.
“Some of us knew this was coming – others are getting caught off guard by the oversupply issue.”
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Any cannabis company executive who has been watching what has happened in other mature marijuana market with relatively unlimited licensing, including Colorado and Oregon, should have seen the market headed in this direction, industry insiders aid.
“We’ve seen this movie before,” said Tyson Macdonald, adviser to and former chief financial officer of Cloud Cannabis Co., based in Troy, Michigan.
“It is definitely happening with an accelerated pace in Michigan.”
Macdonald partially attributes that to a regulatory structure that allows for stacking of cultivation licenses, which has created very large facilities, many of which came online around the same time.
Not limiting licensing also sped up the situation.
Cannabis businesses executives “should have absolutely been aware that this market was going in this direction when there was not a single cap on a cultivation or processing license,” Maxim-Sparrow said.
The pricing situation
Over the past year and half, the state has seen a “ton of new capacity come online,” said Ankur Rungta, co-founder and CEO of C3 Industries, a vertically integrated Michigan marijuana company that also has operations in Massachusetts, Missouri and Oregon.
Rungta, who started out in the cannabis industry with a business in Oregon, said he saw a similar market drop there with overproduction in 2017 and again in 2018.
“Our first market was Oregon, so if anybody should have seen it coming, it was us,” he said.
Yet, Rungta said, the speed of how quickly the Michigan market has become saturated has taken him by surprise.
“We’re definitely getting into a fully supplied or even oversupplied marketplace,” he added.
“That’s definitely putting a lot of pressure on the wholesale market. People are buying the same amount of cannabis; it just costs half of what it used to cost before.”
That’s before the coming fall harvest of outdoor-grown flower hits the market.
“A lot of people are looking at this fall and saying, ‘What’s going to happen?’” Rungta said. “I don’t know that we’ve hit the bottom, to be completely honest with you.”
Macdonald said retailers and manufacturers can buy anything they need for less than $1,000 a pound for wholesale flower.
At Michigan stores, ounces of flower sell for as low as $59-$99, according to Macdonald.
“And a lot of that at the $79-$99 price point, it tests pretty well,” he said. “It’s not terrible product.”
Access isn’t the issue
Some municipalities in Michigan have opted out of allowing marijuana retail stores.
One major area that has yet to open a recreational cannabis store is metro Detroit.
The city finally began accepting license applications for adult-use marijuana businesses on April 20.
That doesn’t necessarily mean there’s a question of consumer access – despite many municipalities opting out of legal cannabis sales.
Maxim-Sparrow said most customers probably must drive only half an hour at most to find a store.
“If you look at a map of Michigan, there’s very few areas that don’t have access,” Rungta said.
Cities such as Ann Arbor are glutted with retail stores, said Mahja Sulemanjee-Bortocek, CEO and founder of High Haven, which owns cannabis business licenses in Bay City, Michigan.
She would like to see municipalities show a better understanding of the economics of cannabis before licensing too many stores in one place.
“They look at it as a revenue stream for them through taxes, which it certainly is,” Sulemanjee-Bortocek said.
But the towns and cities will lose that revenue stream if the retailers can’t turn a profit and stay open, she added.
“It’s a short win for them. Not a long-term situation,” Sulemanjee-Bortocek said.
Turning to vertical integration
Some companies are banding together to increase their brand power through collaborations and white labeling.
Others are trying to become vertically integrated but are running out of capital as they try to build out their retail or cultivation businesses.
Rungta said that a vertically integrated business structure is becoming more important, so a company can have a “hedge or cushion against some of the wholesale volatility that’s out there.”
He expects more businesses will head in that direction over time.
His strategy is to both move a “sizable chunk” of business through company-owned retail stores while also selling on the wholesale market.
The successful companies are those who saw this coming and built their business model around current pricing, not when the market opened and prices were much higher.
Rungta said the companies that will survive have a clear strategy such as offering a value product or a premium product with a business structured accordingly and a reasonable margin to support their operations.
By “reasonable,” he said a 40% gross margin is a good baseline.
“Those people are having success and, in some cases, continuing to even grab market share,” he said.
But, Rungta said, the branding and quality need to match the product for it to work.
As this all plays out, expect to see more consolidation as business are swallowed up by larger ones and some even go under. The amount of capital a business has could be the deciding factor.
“In this environment, it’s challenging for everybody,” Rungta said. “But it’s most challenging for the smaller businesses.”
Bart Schaneman can be reached at firstname.lastname@example.org.
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Story by Bart Schaneman