Published in Economic Development
Facing strong headwinds, West Michigan cannabis operators seek new options for growth  SOURCE: CANNABIS REGULATORY AGENCY

Facing strong headwinds, West Michigan cannabis operators seek new options for growth 

BY Wednesday, December 21, 2022 06:30pm

Michigan cannabis prices have plummeted as more competition saturates the market, leaving industry operators eyeing new pathways like consumption lounges to grow their businesses in 2023. 

Companies in Michigan’s adult-use cannabis sector are selling more marijuana than ever before, with year-over-year sales volumes by weight up 106 percent in November. At the same time, however, retail prices per ounce of marijuana flower have plunged 50 percent compared to a year ago, and 75 percent from two years ago. 

To put a finer point on the nosedive in pricing, an ounce of flower that sold for an average of $516.21 during the earliest days of Michigan’s legal cannabis market sold for $95.12 in November, a decrease of 82 percent, according to data from the Michigan Cannabis Regulatory Agency. 

Jarred Biggs, one of the owners of The Botanical Co. dispensary in Middleville and the Bigg Canna grow facility in Edmore, remains optimistic for a market turnaround that will favor retailers next year, and that the state will revisit how it taxes dispensaries.

“I do expect the prices to level out and rise a little more. Eventually, the state will find a way to help change how cannabis is taxed,” Biggs said. “At the store level, the tax is so high that it makes you have to have higher margins just to be profitable or break even. Once they change that, stores will be able to buy from (grow operations) for higher amounts.”

Casey Kornoelje, owner of Grand Rapids-based Pharmhouse Wellness Co., thinks the plentiful supply and low pricing for cannabis could continue for another 12 months. Many operators suspect illicit supply has been returning into the market and affecting prices, he added.

“Unfortunately, for wholesale pricing, it’s hard to say, as we press through some economic headwinds,” Kornoelje said. “The CRA are looking at ways to address this by potentially capping licenses or grower licenses. There are more plants in the ground than retailers licensed to sell at a good margin.”

Landon Bartley, president of the West Michigan Cannabis Guild and principal CEO of Proxima Collective, said cannabis businesses face their share of challenges in the current market. He expects the pace of new cannabis companies opening to slow in 2023 given the market pressures the industry is facing. Bartley also anticipates fewer communities to opt into the adult-use market.

“It was a tough year for cannabis,” Bartley said of 2022. “We have been working so hard at this for so many years and licensing has been such a big issue. It seems like operators still seem to be running up against similar issues.”

Many operators contacted for this report expect cannabis mergers and acquisitions will likely continue into 2023. According to a Michigan Cannabis CFO Outlook report compiled by accounting firm Rehmann this year, 61 percent of companies said they are at least somewhat likely to close on an acquisition within the next 12 months. Thirty-nine percent of companies surveyed by Rehmann are considering or are in the process of selling their business. Of those sellers or potential sellers, two-thirds have revenues in the $26 million to $100 million range.

The obstacles that operators face currently also stem from the industry still being in the nascent stages, Biggs added. 

“Cannabis has only been legalized in Michigan for a few years. You need 15-20 years for an industry to be settled in,” Biggs said. “We got oversaturated with so many people jumping into the market and a few people dropped off, which helps the market.”

As the market continues to mature, retail dispensaries will need to prioritize differentiating themselves from the competition. 

“Early on, if you opened up you would have guaranteed business, and it was the same with grow (operations). But now, it’s so competitive that the only way you can compete is with marketing and branding,” Biggs said.

Seeking sustainability

As an energy-intensive industry, cannabis companies also are seeking out ways to become more sustainable in ways that also help them cut costs. 

David Fettner, managing partner at Highwood, Ill.-based Grow America LLC, which is serving as the general contractor and architect for the Fields Cannary project in Muskegon, said clients face many key decisions in the design phase that can affect their long-term sustainability. 

“There is a lot of emphasis on using solar power, water reclamation, geothermal underground and HVAC energy. That’s really the next step, creating a fully sustainable cannabis grow,” said Fettner, whose company works exclusively with cannabis clients in the Midwest and across the country as an architect and general contractor. 

To that end, many grow facilities have been moving away from using high-pressure sodium lights and switching to LED options because of the associated cost savings and rebates from Consumers Energy.

“Especially with the pricing and everything that has happened this year, switching to LEDs is a no-brainer,” Biggs said. “You save on utilities and I think the quality (of the cannabis) is higher as well.” 

Biggs expects more grow facilities to deploy automation systems such as drippers for water to cut down on labor costs.

“There are quite a few grows that are hand-watering now and I think they will automate soon just to be able to save on labor costs,” he said.

Conversations about consumption lounges 

Meanwhile, Bartley is hopeful that the three new Grand Rapids City Commissioners will be friendly to the cannabis industry and open to approving consumption lounges, which operators including Biggs and Kornoelje expect to become more prevalent in 2023. 

“Consumption lounges are tough because there are very few of them and a lot of leaders want to wait and see if the sky falls,” Bartley said. “We’re very hopeful that Grand Rapids will approve consumption lounges and cannabis events.”

Industry sources said more municipalities are weighing whether to allow consumption lounges, with operators considering creative ways to partner with other hospitality companies on the spaces. 

“(Consumption lounges) are extremely popular,” Kornoelje said. “It’s really going to take us working with the city of Grand Rapids to flush out those ordinances and their appetite for adopting something.”

Fettner believes retailers are making an effort to create experiences at their dispensaries, especially as more retail options come on line and compete for customers. 

“On the design and build side, some of the trends are really creating a concept,” Fettner said. “It’s so much more competitive now and a lot of our clients are creating specific concepts to bring consumers in. There is a lot of emphasis on bringing consumption lounges adjacent to dispensaries. We’ve also been seeing a lot of cannabis-infused drinks, which can lend to more of a bar atmosphere for consumption lounges.”

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