(Source: MIRS.news, Published 08/09/2024) Cannabis insiders say the Michigan cannabis market could soon be past the saturation point, and as other state markets come online it could plateau the amount of tax pulled down by the state. 

The $3 billion Michigan market is facing several challenges, including pending product saturation, low retail margins with high competition, and big behind-the-scenes business turnover that is scaring off the big money in favor of newer markets, said Nick Young, a Western Michigan University professor and cannabis consultant with Hochstedler, Young, and Associates. 

“It’s a pretty crazy time in cannabis right now,” Young said. 

The Cannabis Regulatory Agency reported the average price in June for retail flower, known as bud, was $85.88, which is the lowest point in 2024. The lowest price for Michigan was in January 2023 when the average price hit $80.16. 

Young said the biggest issue was that the market still has 180,000 pounds of product in the market, when typically at this time of the growing season there is less product going into the October and November crop harvest. 

“This is a different year when there will be 2023 outdoor plants that have not yet been consumed when the 2024 harvest comes down, and we really haven’t seen that, yet,” he said. 

He said the growers would be hit first as the price dipped and a plateau in price would eventually plateau the amount of tax being received by the state. 

He said the 2025 market price could end up cheaper than ever by the time January and February roll around. 

“I do think that by February, March next year, we’re going to see some groups that are going to have to make some pretty tough choices,” he said. 

He said to save some in industry, some big players will need to swoop in with tons of capital to stock the inventory needed. 

“I really think that a lot of these small and medium players are going to continue to struggle, because the margins in order to make it are low,” Young said. 

He also said those big investors aren’t willing to put up the capital for the market in Michigan, especially since many East Coast cannabis markets are opening up, along with Ohio, which just came online Aug. 6.  

“If I deploy a couple million dollars on the East Coast, I might get that back in 18 months. In Michigan, it’s a long-term play. Obviously, there are no guarantees,” he said. 

One major indicator of this was that multi-state operators were pulling out of the state or not eyeing the state for start up. 

“If they’re not already in Michigan, that ship is kind of already sailed to some degree,” he said. 

He said what he has seen is the single-store operators starting to band together and co-op to increase buying power from the growers.  

It wasn’t just the saturation of product in the market that was being faced, there was also a matter of licensees still applying to start up in the uphill climb of an ever tighter market. 

The August Primary election saw one local opt-in proposal, but Young said that wasn’t the only way markets were started. He said municipalities and townships could end up opting in to the recreational market through just a vote and the canvassing initiatives were sometimes not the most effective way. 

“I think the amount of investment that it takes to swing a township, versus some of these stores that are really struggling, a license holder could come and pick up an already functioning provisioning center and just outfit it themselves,” he said. 

He said that was what was happening more often than not behind the scenes and the companies didn’t have to throw money at lobbying the township or municipality.  

“I’m seeing a trend of mergers and acquisitions, and people trying to avoid bankruptcy to get out, so they are willing to sublease their licensing or their property,” he said. 

However, the number of stores could continue to expand despite local zoning pushing many retailers into the same space.  He said a recent traffic study showed most people didn’t want to travel more than two miles for their marijuana. 

He said there are concentrated areas with high competition, but others with nothing and the retail market still had space to grow. 

“Within these different municipalities, if there’s a liquor store, there can be a dispensary,” Young said. 

Kevin Kuethe, the chief cultivation officer for Michigan-based Lume Cannabis Co., echoed that Michigan was saturated, but not just with product, but he said licenses, as well. 

"Michigan does continue to grow, but it’s a double-edged sword. The market supply is so hefty that it drops the price so low that the margins get slimmer and slimmer, even if you’re selling more and more and more – The Costco model,” Kuethe said. 

Despite the price drops, he said the sales were still maintaining in the state, which according to the regulatory agency has sold nearly $8.6 billion in product as of June 30. 

“The units being sold in Michigan just surpassed California. So that’s a pretty astonishing number, considering the population difference,” Kuethe said. 

He said only about 10 percent of the 1,773 municipalities in the state opted-in to recreational cannabis, and that the number didn’t seem to be moving much. 

He said the businesses in the defined spaces weren’t getting smaller and downsizing. 

“They’re fighting the market and fighting the price compression with more supply because it’s cheaper to produce more. So that is kind of the cycle we’re stuck in,” he said. 

He said the market was also still competing with the black market, which didn’t have to deal with the fees and taxes that were also chipping away at the profit margins. 

Material from other markets was still entering into the Michigan market, despite a higher crackdown from the CRA. 

“The problem is they’re not going to jail, and they’re not getting their licenses ripped away. They’re just getting a fine and getting slapped on the wrist, and they go back to work,” he said. 

Kuethe said he’s operated in seven different markets over the past 15 years and didn’t understand why the same lessons seen in other saturated markets weren't taken into account when setting up regulations. 

“Lots of guys go out of business. The fail rate is very high. I mean that it makes it a difficult landscape to operate in,” he said. 

He said all the market woes were also exacerbated by the fact that cannabis businesses were still operating in the gray area of the state and not able to get the same help as other businesses or even operate in the same banking system. 

“We can’t go to a bank and get a loan like a marijuana company. If the bank is backed by the FDIC, then they can’t do it. So it all comes from private money or private funding, which then you have to navigate all of those paths,” he said. 

He said those paths usually include higher interest rates on all loans.  

He said Lume has been navigating the fog-covered, craggy waters through innovation and a focus on quality over quantity.  Chasing trends and emerging markets has also helped.  

“Bobbing and weaving with the market is really innovating and focusing on quality. So people get driven to you because they get something they can’t get somewhere else,” Kuethe said. 

He pointed at the cannabis beverage market trend going on, and said Michigan is a top-five market for consuming alcohol. The demand for intoxicating drinks is strong, and alcohol alternatives are big.  

He said many of the businesses were hoping for a correction and because the sales were high didn’t point to an easy market to get rich. 

“It’s not a cakewalk. This is not an easy state to operate in, and you have to be really sharp, both with your finance side and your operations to be able to survive in a market like this that’s taken such a steep downturn,” Kuethe said.