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Published in Economic Development
Barriers, opportunities persist in Michigan’s growing cannabis market COURTESY PHOTOS

Barriers, opportunities persist in Michigan’s growing cannabis market

BY Sunday, September 26, 2021 06:00pm

Michigan’s recreational cannabis market has experienced swift changes in the three years since 56 percent of voters statewide just said yes. 

While the early months in late 2019 and early 2020 saw a supply bottleneck as retail stores opened and commercial growers lagged behind, the market has quickly matured while bringing a host of new issues.

A recent MiBiz roundtable, sponsored by Grand Rapids-based law firm Warner Norcross + Judd LLP, took a deep dive into emerging issues involving racial equity, ongoing barriers to enter the market, industry consolidation, company culture, and legislative proposals that have caused fierce division within the industry. The panel featured:

  • Robert Hendricks, senior counsel at Warner Norcross + Judd, which has a dedicated cannabis practice with 26 attorneys
  • Narmin Jarrous, chief development officer at Exclusive Brands LLC, a vertically integrated cannabis company with four retail stores in Michigan, including in Grand Rapids, Kalamazoo and Muskegon
  • Casey Kornoelje, owner of Pharmhouse Wellness Co., a Grand Rapids-based medical and recreational retailer
  • Peter Marcus, communications director of Terrapin Care Station, a multi-state commercial growing company with Michigan headquarters in Grand Rapids
  • Denavvia Mojet, executive director of the Black and Brown Cannabis Guild, a nonprofit social equity advocacy group
  • John Price, vice president at Lockton Companies, a global independent insurance brokerage
  • Mahja Sulemanjee-Bortocek, founder of High Haven LLC, a vertically integrated startup operating in Michigan and Illinois

The panelists brought a diverse set of viewpoints from legal and risk management experts to small business owners, entrepreneurs and executives at multi-state operations — and all expressed unique backstory before working in cannabis. As the industry continues to evolve, the panel shared a relatively optimistic outlook for Michigan’s market, but also highlighted the need for more inclusivity and a consumer-focused approach.

Barriers to entry

In less than two years since Michigan’s first recreational dispensary opened in Ann Arbor, the state has become the third largest cannabis market in the U.S., behind California and Colorado. A recent Leafly report showed Michigan’s cannabis industry at the end of 2020 employed 18,000 people. Overall sales grew from $420 million in 2019 to $989.6 million in 2020. Year-to-date sales of recreational and medical marijuana have already passed $1 billion, according to the Marijuana Regulatory Agency.

It’s clear Michigan’s market is maturing, but significant barriers to entry remain for new companies, including acquiring real estate, securing financial and social capital, and navigating municipal regulations.

“When it comes to the real estate side of Michigan’s market, I think we all know what kind of a strain that is,” said Sulemanjee-Bortocek, whose startup High Haven looks to open its first Michigan dispensary in Bay City. She has also noticed that build-outs of new retail stores tend to range from about $1 million to $1.5 million, while local siting restrictions can send qualifying property prices skyrocketing.

“That’s definitely been a challenge in Michigan — just the cost of property and things of that nature,” she said. “These are capital-intensive projects. You really need to have resilience with the investors you have at the table.”

Echoing that sentiment was Kornoelje, who first opened Pharmhouse Wellness for medical sales in March 2020 on Grand Rapids’ west side and plans to add commercial growing space.

“Real estate, capital, then municipal or government affairs are the three largest barriers to getting in, with real estate being the No. 1 barrier for me and other small operators,” said Kornoelje, who qualified as a social equity applicant because of a felony marijuana charge in 2002. “To assuage that or make that better, (companies) could look to smaller municipalities perhaps or vacant land where real estate is more accessible.”

Panelists also discussed the “social capital” that’s needed to navigate what Hendricks called “about 3,500 moving parts” of Michigan municipalities that can individually regulate recreational and medical cannabis operations.

“A municipality, its relationship to cannabis, and what changes might happen to the regulations are a crucial part of the cannabis industry,” Hendricks said.

Jarrous tied the local application process into the relative lack of minority-owned businesses.

“In some municipalities, unfortunately, if you don’t know someone or have the connections that make you seem more appealing to the municipality, you’re not going to get in there,” she said. “The cards are going to be really stacked against you. That’s the reason why we’re not seeing the state social equity program being as robust as the state has hoped.”

Equity in cannabis

Indeed, racial equity in the cannabis space remains perhaps the most complex and deep-seated component of legalization. The Black and Brown Cannabis Guild formed to help with the expungement process for people with prior cannabis convictions, and has worked closely with cannabis companies seeking to hire people of color.

The Guild also has been an active participant in the state Marijuana Regulatory Agency’s (MRA)social equity workshops. Despite the state’s efforts, Mojet noted that just 5 percent of state-issued cannabis licenses have gone to Black residents. More broadly, simply talking about social equity isn’t actually moving the needle of including more people of color in the industry.

“The intention is there,” Mojet said. “For all of the well-intended things that have tried to produce equity in the world, I have the same feeling about them all: They’re good, but not good enough.”

While Mojet believes the MRA could always be doing more to improve equity in ownership at cannabis firms, she has turned to working directly with companies that can help with employment.

“The most I can do right now is just ask operators to care,” she said. “I believe activism can work with the private sector very well in that regard.”

Jarrous agreed that it’s on companies to be proactive: “We just have to be demanding more of each other as operators. As operators, if we don’t hold each other accountable, I don’t think we’ll move forward on social equity. We’ll see a small group of people succeeding like we see in every other industry.”

Hendricks said the level of cooperation among cannabis companies, particularly when it comes to company culture and embracing collectivity, “astonishes me.”

“I’ve been practicing law for almost 40 years in West Michigan: I’ve never seen a more transparent, cooperative group of businesses and entrepreneurs as I’ve seen in the last four to five years with cannabis,” Hendricks said. “It doesn’t mean it’s perfect … but that’s a super optimistic element of the goals around social equity.”

Looking ahead

Meanwhile, legislative proposals and M&A activity in recent weeks may offer a sign of the shifting road ahead for Michigan’s cannabis industry.

Bills proposed in Lansing this month have rekindled a yearslong debate over the role of medical marijuana caregivers in the regulated market.

Terrapin Station’s Marcus said the recent dispute over proposals to limit caregiver growing opportunities and subject medical growers to more licensing hints at Michigan’s deep-seated “gray market” culture that isn’t necessarily receptive to large corporations.

“Legacy Michigan caregivers that got in the regulated side of retail understood the Michigan market,” Marcus said. “Your big (management services organizations) from out of state had no concept of the Michigan market. The institutional knowledge is on the legacy side. It’s the people who know about cannabis, quality and the market — they came from the underground side and have watched it grow forever. (Out-of-state companies) know about finance, publicly traded this and that. They don’t know a lot about marijuana.”

Also within the past month, two major acquisitions have kicked off what experts see as a burgeoning M&A market as larger companies look to get a foothold in the state and company valuations remain relatively high. That includes Skymint’s planned acquisition of 3Fifteen Cannabis as well as TerrAscend Corp.’s $545 million deal for Gage Growth Corp.

“Capitalism is very much alive in the cannabis space,” said Price of Lockton Companies. “The mergers and acquisitions will continue at a more rapid pace. The Gage acquisition, with wild multiples in their valuation, is the first domino to fall here.”

These shifts are on top of multiple paths to legalization at the federal level, either with piecemeal or wholesale changes. Hendricks believes this has the greatest potential to disrupt the market as it exists today.

“If you think competition is fierce now, just wait until big pharma, big tobacco and big alcohol are in the business,” he said. “They’re waiting for this to happen, and when it does happen, all of us will have to take a deep breath because it’s going to change a relatively young industry in ways that I don’t think any of us can predict.” 

Read 3305 times Last modified on Wednesday, 06 October 2021 11:18
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