Parallel, Pervasive and Overpowering
Michigan’s illicit cannabis market is the only force controlling price for the regulated market
by Rick Thompson / 4/22/2019
FLINT- The national price of a single pound of cannabis is $1,089.
That’s not just a freakily specific guess, it’s the number published by the market watchdog company Cannabis Benchmarks in their April 19 weekly update. They are the recognized authority on the subject of cannabis pricing in states with regulated programs. In Michigan the price of a pound of cannabis hovers around $2,000.
That’s an important figure to remember, because at the end of the month a lawsuit will be settled by Judge Borrello in the Court of Claims regarding the participation of licensed caregivers and partially licensed cannabis distribution facilities in the state’s medical cannabis business program. Proponents of the lawsuit argue that the infant industry is not capable of supplying enough cannabis to keep retail purchasers happy, and that the retail outlets are poorly distributed across the state. Both of those are true.
Businesses which are licensed by the Medical Marihuana Facilities Licensing Act (MMFLA), the business portion of the medical program, disagree. Fully licensed retail cannabis distributors have tried to push the approximately 50 partially licensed facilities out of temporary operation. Licensed cultivators have lobbied government to exclude caregivers from selling their extra cannabis product in the regulated marketplace. Both industry groups claim they cannot achieve profitability due to the influence of these wildcats on the market.
In truth, profitability of cannabis industry companies will be determined based on their understanding of Michigan’s black market for cannabis.
In a Detroit News article detailing the controversy surrounding the pending Judge Borrello decision one of Michigan’s licensed cultivators complained that he had a room full of cannabis that he could not sell to licensed provisioning centers at $3500/lb. He blamed the caregivers for his strife.
Another licensee complained that he would have to lay off 17 people from his staff because they were not generating enough cannabis sales to sustain his business model. He received his license, cranked his operation up to full capacity, and is not having success moving his merchandise. He blamed the caregivers and temporary operation of those partially licensed facilities for his downturn.
In both instances we see a fundamental lack of comprehension of the pre-existing and fully functional cannabis exchange industry in Michigan.
In the second example an operator tossed open their doors and expected to operate at full capacity from Day 1. That is a poor business model because it fails to take into account that those 300,000 people have an alternate market that they currently use. Transitioning those sales from illicit to licit markets will happen gradually, not immediately. It is impossible for MMFLA facilities to capture all of the purchasing power of Michigan patients.
In the first example the cannabis is simply not priced at a competitive rate. Remember the going price of cannabis is $2,000/lb., not $3500. Unless that cannabis regrows hair on a man’s head or corrects erectile dysfunction, you are never going to sell cannabis at retail in Michigan if you charge 75% more than the next guy does.
But if there are 300,000 registered medical patients, why can’t retail stores keep their cash registers ringing? And why can’t licensed cultivators get $3500 for a pound of cannabis they grew themselves? The unregistered, illicit marketplace is the answer.
The illicit market is parallel, pervasive and overpowering. It is parallel because it operates on a similar track as the regulated market- cultivation, production, distribution. It is pervasive because cannabis produced outside of the MMFLA is in every city, every village and every township in the state. Has been for decades and it always will be so.
The black market is overpowering because of who it serves and how long it has been in place. A frequently-cited statistic holds that there are 1.3 million regular consumers of cannabis in Michigan. Ten years ago all those consumers received their cannabis from the illicit market. Ten years later, in 2019, 300,000 of those consumers are now registered patients, many of whom still use the illicit marketplace to acquire their cannabis.
$2000/lb wholesale is the going price for cannabis in Michigan because that is the price the marketplace will support. To be specific: there are 28 grams of cannabis in an ounce and 16 ounces in a pound, meaning each pound contains 448 grams of cannabis. At $2000/lb that yields slightly less than $4.50 per gram wholesale price.
In the retail world a markup of 100% is typical for goods sold. That increase covers the cost of labor, utilities, mortgage and other expenses. If the markup is typical, the price per gram of cannabis to the consumer in our example would be $9, which is very typical of the current market. Most sales of cannabis occur per gram ($8-12 typical price) and by the eights of an ounce ($35-50 typical price). An eighth of an ounce is 3.5 grams.
These prices hold true if the cannabis is sold at a retail center or if purchased from an illicit market dealer. If patients enter a medical cannabis retail establishment and see a price of $75/eighth, they walk out with their money still in their pocket and they visit a friend’s house instead.
Patients don’t care how much it cost to grow the cannabis. Patients don’t care that you bought matching outfits for all your budtenders or that you borrowed A LOT of money to start the business. If your pricing is not in line with the typical price these patients are used to paying, your stores will be empty and rooms full of pricey unsold cannabis will be the norm.
Typical business philosophy holds that being the first to market means you can dominate the industry, set price points and capture market share. That is true, but the first to market cannabis in Michigan was the illicit trade. They dominate; they set price points; they own the market and the consumers in it. Remember more than 1 million people shop and purchase from the illicit market. Seducing those people into using brick-and-mortar stores will take time, marketing money and high-quality, inexpensive cannabis.
So regardless of Judge Borrello’s decision on the pending lawsuit, Michigan’s cannabis industry is doomed to see a massive wave of businesses failing if they do not respect the price, power and influence of the illicit market. MMFLA companies need to cut costs, run lean, modify profit projections, start slow and scale up to full capacity.
No amount of lobbying, media exposure or cranky whining will change the marketplace. Caregivers are not the problem; partially licensed facilities are not the problem. A poor understanding of Michigan’s cannabis business environment by business leaders IS the problem, along with a misunderstanding of the plant itself, and these misunderstandings will lead to the failure of many MMFLA facilities.
Standard business philosophy does not work in a non-standard industry, and the cannabis trade is the most non-standard of any American industry. Businesspersons who want to shape the industry into their vision of a profitable marketplace will fail because they fail to comprehend the dominant influence of the parallel, pervasive and overpowering black market for cannabis in Michigan.