From Growth to Grit: Michigan's Cannabis - 2023 Retrospective & 2024 Vision An Opinion Piece By: Harry Barash

From Growth to Grit: Michigan’s Cannabis – 2023 Retrospective, 2024 Vision

An opinion piece by Harry Barash

On the outside, the Michigan licensed cannabis market looks like it’s thriving. If you are one of the Michigan licensed or white label brands, your assessment is probably a lot different. Today, Michigan ranks second in the country in terms of retail sales, next to California. Michigan will likely surpass $3B in sales in 2023, which is what the CRA predicted it would mature at. California will likely exceed $5B. Michigan does have higher sales per capita at $229 per resident vs. California’s $135. With Ohio, Illinois, and New York approving recreational sales, there is a good chance Michigan will not hold that position in the next few years.

While Michigan laws allow for excess grow licenses and no caps on all other license types, that will always make it a consumer’s market, which means that manufacturers are going to have to learn how to make it work with the current pricing as the market continues to correct itself, that is until there are changes on a federal level. These adjustments have come at a hefty price. Casualties are happening from both mom and pops all the way to the Sky Mints of the world and a bunch in between.

2023 was a year of learning, a year of growth, and a year of maturity. The Michigan cannabis industry just turned 5 years old and is still relatively new. If it were any other federally legal business, many of the kinks would have been worked out by now. Due to the constant curveballs, the industry is a work in progress and continues to challenge even the best of operators. However, being 5 years old does make it a lot more mature than many other markets.

There are many challenges that still lie ahead, including taxes, overregulation, pricing, oversaturation, and of course, all the fuckery going on. There have been more than a handful of licenses revoked, receiverships, and underfunded and underperforming businesses that have either fallen by the wayside or whose days are numbered. Many are in trouble, not profitable and still struggling to earn the returns they were hoping for and promised their investors. Most notably, a story that seemed to be welcomed by the industry (except maybe some of their employees), no story was bigger than the demise of Green Peak/Sky Mint. They entered receivership and were ultimately acquired by their Canadian lender, Tropics LP for the low low price of $109.4 million. They have since shut down their 56,000 SF cultivation and processing facility in Dimondale (just outside of Lansing), laying off roughly 180 employees. It then defaulted on its lease of a 176,000 SF near Lansing that was still under construction where property developer, Innovative Industrial Properties, Inc. gave Sky Mint a check for $30M to purchase and build out the facility. Skymint had as many as 29 retail locations open at its peak and now operates 22, having shuttered the other stores. While there are still a lot of big players that haven’t been embraced by consumers and the licensed community, Green Peaks’ failure was more because of very poor business decisions as well as the shenanigans taking place behind the scenes, and in some cases open for many insiders to see.

Politicians used the pay-to-play system, which didn’t work out too well for some. Just ask former disgraced Speaker of the House of Representatives turned Chairperson of the Michigan Marijuana Licensing Board President, Rick Johnson, who is currently serving a 55-month sentence for soliciting and accepting bribes during his time on the Board. Johnson, who regularly unfairly voted against qualified candidates, received at least $110,000 in bribes, private flights, and thousands of dollars worth of services from a sex worker. You don’t have to research too long to find out about all the corruption going on at the local level, as many municipalities have been tied up in litigation for years. Warren, Pontiac, Detroit, and many others have seen litigation hold up the industry from either opening or thriving.

As hard as this industry already is, stiffing a vendor only compounds the problem and causes a ripple effect. You don’t pay me, I can’t pay the next guy. It’s a vicious cycle that is a major problem for many licenses that oftentimes are left with making difficult decisions like, do I pay my employees or energy bill this week? The new Facebook group, Blacklist of MI Cannabis, has exposed many bad actors. Some who simply give zero fucks. Some who have made good or are trying to. And unfortunately, others whose names, in some cases with longtime customers, have been dragged through the mud over being 15-30 days late for the first time, over a few grand and have likely caused themselves more harm than good. The CRA is being asked to intervene and perhaps implement policies that include not renewing licenses of those that are not paying their vendors. Nothing will change as long as these bad actors know that there is more to gain than lose by screwing over others. This is not just a licensee to licensee issue. There are many ancillary businesses that have been victim to these despicable and in most cases deliberate actions.

The testing industry definitely needs some major cleaning up. The Cannabis Regulatory Industry has been tied up in court since November of 2021 with Viridis Laboratories, who are being accused by the CRA and other testing labs as having a rap of inflating THC potency results that are seen as extremely high and in some cases not even possible. The CRA has announced that it has allocated the funds and hopes to open their testing lab in 2024 to keep all testing companies honest. There is a very unlevel playing field and in the world of lab shopping for the highest THC, Viridis was producing the highest results more often than all of their competitors. When you have former law enforcement officers who were putting people in jail over the plant running the show, they lost public trust from day 1. That didn’t stop licensees choosing them over the other 20+ labs throughout the state.

Mergers & Acquisitions slowed down in 2023 and look slow for 2024 as some of the more successful companies that are active are taking a much more conservative approach to expanding their footprint. Multi-State Operators look at this market differently due to the compression in wholesale pricing. The Return On Investment is harder to justify when the margins are so slim. Many are taking a wait-and-see approach for people who can’t justify their overinflated asking prices to either come down on price or wait for them to die.

The conversation and reality of rescheduling cannabis seem to lie solely in the hands of the Drug Enforcement Administration (DEA). The January 4th, 2023, edition of MJBizDaily had this to say, “The U.S. Drug Enforcement Administration is currently ‘conducting its review’ of an earlier recommendation that the agency reschedule marijuana, a DEA official recently told a lawmaker. The potential rescheduling started with President Joe Biden’s October 2022 executive order that federal cabinet-level agencies reexamine the drug’s cannabis’ status under U.S. law. Biden’s edict led to an Aug. 29 recommendation by the Department of Health and Human Services that the DEA should move marijuana from its current status in Schedule 1 to Schedule 3 drug of the Controlled Substances Act. Such a move would unlock significant federal tax reform for beleaguered legal cannabis businesses and also likely advance other federal marijuana reform efforts. But before any of that can happen, the DEA must propose a change to federal law after due consideration.” Prior to this, the DEA’s stance on this has been to sweep it under the rug. With 38 states currently with medical marijuana and 24 that are recreational, the DEA can only kick the can down the road for only so long before it has to face this issue head-on. Hopefully, this is the beginning of the conversation. One of the biggest game-changers of rescheduling is tax reform and the elimination of 280E. Which would certainly save a lot of companies that are struggling to stay alive. It could also open the door for many Big Pharma, Big Tobacco, and Big Alcohol companies to enter the market and oversaturate it even more than it is now.

One of the legal market’s biggest challenges and competitors is undoubtedly the caregiver/unlicensed market. Having been a caregiver myself, I understand and believe this all too well. It is estimated by industry experts that the unregulated market is as big as the licensed market. Although the licensed market did hand the unregulated market a big blow as many hydro stores and caregiver grows went dark as prices plummeted, the biggest beneficiaries were certainly the consumers, which is the way it should be in any industry, of course while leaving the rest of the supply chain an opportunity to still be profitable. The problem is, this will never change. If you are entering the licensed industry, you need to go into it knowing and accepting that the gray market will always be around because it will. There is so much weed that is crossing state lines from unlicensed grows getting into the hands of the consumer directly as well as making its way into the licensed shops. There is also a lot of weed that licensees are producing that is going out the back door, in many cases crossing state lines and making its way onto the streets as many of those operators are sitting on an excessive supply of dead inventory. Let’s not kid ourselves either, there are many licensees nationwide that are still dabbling in the unregulated market, as the recent and ongoing investigation of the popular California-based Stiizy brand’s owner Tony Huang has alleged that he is running as many as 18 unlicensed illegal cannabis dispensaries in California. Don’t think for a second this is not happening everywhere.

My prediction for 2024 in a nutshell. Keep your seat belts buckled real tight; it’s set up to be another bumpy ride that I’m sure will be full of more surprises, scandals, and way more failures than successes. There is a new normal in Michigan, a normal that will give many a competitive disadvantage. The industry will certainly still sort itself out through contrition, consolidation, and corruption. I think most of us are cautiously optimistic; however, something has to give in order for that optimism to turn into actionable items. It appears a lot is still in the hands of state and federal governmental agencies to take the correct measures to help put more faith and trust into an industry that is lacking heavily in both.

Harry Barash

Founder | Owner – MiCannaPros | Meet. Connect. Puff.

248-231-9000 (cell) | harry@gomicannapros.com

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