In Michigan, the picture is not rosy either. According to some pundits, as documented in “Grown In,” an online cannabis trade publication, disaster could be looming in Michigan too.
The harsh reality, especially in some maturing legal cannabis states, is that weed prices are in a race to the bottom. Some businesses, burdened by heavy taxes, regulatory costs, and lacking in knowledge of consumer tastes are in deep trouble. This is due to a glut of cannabis overproduction, which will get worse over time.
In California, herb that used to cost $3,000 per pound, is now priced in the $250 to $300 range. In Michigan, a wholesale pound is now selling for around $600 and continuing to drop in price. Scores of farmers, especially in California, are dropping out of the legal market and letting expensive licenses expire. Others are slashing overhead and letting fields lie fallow. Some are merging or partnering with competitors to create greater economies of scale.
On a big picture level, a major study commissioned by the “National Cannabis Industry Association” (NCIA) and conducted by the “Whitney Economic Group” indicated only 42% of canna businesses across the USA are profitable. 21% describe themselves as “breaking even” and the rest are losing money. Some players are doing just fine.
Jerry Millen, owner of the “Greenhouse” dispensary in Walled Lake described his business as “successful” in the ``Grown In” report. He accomplished this feat by catering to a niche market in Oakland County, focused primarily on women and the elderly.
Entrepreneur and long standing industry veteran Ryan Basore (who got his start way before weed was legalized in Michigan) said his operations were “doing just fine.”
“There are two types of businesses out there,” Basore explained. “Those who have very low expense ratios, understand the consumer and are debt free--- and those who are not.” He was partly referring to big outstate cannabis corporations such as those represented by the “Michigan Cannabis Manufacturers Association” (MCMA)some of whom entered the market leveraged to the hilt and unfamiliar with local conditions. They could be in “deep trouble” according to Mr. Basore as crop prices drop.
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| Robin Schnieder |
They’re skillful at what they do, and understand cannabis consumers very well. At the end of the day the best brands will win.”
Well, a few observations are in order, as to where this is all heading in the months and years ahead.
First, the demand for cannabis and its ancillary products is not going away. In fact, it is likely to increase as prices drop and younger folks continue to free themselves from the kind of propaganda their elders in the “baby boom” generation long endured. It is now clear to most observers, that legalization in Michigan and elsewhere has not caused the world to end in an apocalypse of addiction, crime, road rage, mental illness, suicide, juvenile delinquency, teen pregnancies, sloth, homelessness, poverty, domestic violence, low sperm counts and other canards purported about marijuana over the years.
That said, there will be winners and losers, just like in any highly competitive business environment. In the evolving industry shakeout, there will be three types of survivors.
One, industry players whose shares are actively traded on the American and Canadian stock exchanges such as Canopy Growth Corporation, Cronos Group, Curaleaf and Tilray are likely to make it. For example, Canopy is owned by Constellation Brands, one of the biggest alcoholic beverage distributors in the world. Constellation is very profitable, with $8.1 billion in revenue. Its subsidiary Canopy pulled in around $524 million and has yet to make a profit for the last several years. Tobacco giant Altria is also highly profitable with $21 billion in revenue. Altria owns marijuana producer Cronos Group. Cronos had $103 million in revenue last year and its profit margins have been practically nonexistent for years. Canopy and Cronos are fly specks on their parent companies balance sheets.
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| Constellation CEO Bill Newland on "Mad Money" |
Ditto for Altria. Its Cronos subsidiary has about $1 billion of Altria money on its balance sheet. Altria is also in for the long haul and will use the Constellation playbook to dominate the marijuana market when full blown legalization hits.
Two, there is no reason to doubt the scenarios laid out by Mr. Millen, Mr. Basore and Ms. Schnieder. Unless they choose to be bought out, smaller consumer oriented debt free players will survive indefinitely.
Finally, we will always have the illegal market in some form.
I’m not much of an expert on that, except in the late 1970’s I found an appropriately hidden place on my property where I grew four plants for my own use. The plants grew into monsters, producing way more weed than I could use. As a result, I decided to sell the excess for $30 per ounce, when the street price was around $50. That did not bother me one bit. My profit margin was 100%.
