Unit volume continues to grow, climbing almost 9% in September from a year earlier, as more new licensees open stores. The number of dispensaries in Illinois is 239, up from 173 a year ago.
Nearly five years after recreational marijuana sales began in Illinois, here are some lessons from successful operators who have lived through it.
LESSONS LEARNED
Competition from the illicit market — as well as the unregulated gray market of synthetic hemp-derived products that sprung from a loophole in the 2018 Farm Bill — has pushed down pricing throughout the industry. Nationally, prices hit a new low of $923 per pound Nov. 22, according to Cannabis Benchmarks.
Neighboring Michigan and Missouri, which have less tightly regulated markets and lower tax rates, have added to the competition for Illinois operators.
“Projections called for the Illinois market to be about double what it currently is,” says Tim O’Hern, president of Nature’s Grace & Wellness, which got started as a grower. “The thinking was the overall pie would increase with more stores. As sales (revenue) flattened, it’s carving up the pie into smaller pieces.
“The challenges operators are facing are more policy-related, with the unregulated intoxicating hemp market and a tax rate that’s higher than our neighboring states,” says O’Hern, who also operates in the Missouri market.
The Illinois Senate passed a bill this year to ban most synthetic marijuana products made from hemp, the non-intoxicating cousin of marijuana. Legislators are expected to take up the issue again soon.
At the federal level, there is hope that marijuana will be rescheduled and no longer included among the most dangerous drugs. Such a move would mean cannabis operators could deduct routine business expenses, which would make it easier to turn a profit. The Drug Enforcement Administration is scheduled to begin the final step in the process today with public hearings.
That’s just one economic challenge operators face. Market forces may prove tougher.
“When we opened in Wheeling in February 2023, the average customer was spending $80,” Weiner says. “By May, we had doubled the amount of customers coming in, but they were spending about $50. I can’t explain how deflating it was.
“I was expecting two to three times the revenue we ended up seeing. I was expecting better margins than in the restaurant industry, but it wasn’t the case.”
Given his hospitality industry background, Weiner and his partners pursued an unusual strategy, adding a restaurant, bar and consumption lounge to their Wheeling dispensary.
“The food-and-beverage component worked,” he says. “It did drive people who wouldn’t normally set foot in a dispensary in the door. However, that’s not your core business in cannabis. It’s people who are using cannabis once a day or week, the same way people drink beers.”
It reinforced to Weiner that the only way to thrive in cannabis is to be “vertically integrated” — to be both a grower and seller.
“Not being vertically integrated . . . was a big miscalculation,” he says. “There’s no way to compete. We’re all selling the same product, but our competition is able to sell it for less.”
Weiner declined to disclose the terms of the Okay Cannabis sale. But he says he and his partners — who include Greg Mohr, co-owner of restaurant business Fifty/50 Group alongside Weiner, and former Chicago Ald. Ameya Pawar — made a profit in the end.
“We did well,” he says. “None of us will be able to quit our jobs.”
BUY TO BUILD
Rick and Michelle Ringold, who run Galaxy Labs in Richton Park, planned for vertical integration from the outset.
“We thought from the beginning that vertical integration was the only way to success,” he says. “You can stock 40% of the inventory in your own store. You become your own best customer. It gives you more buying power (with bigger players) who are more receptive to placing our product if we can carry theirs.
“If you’re only in retail, you’re buying from a grower for 50% of what you sell it for. I don’t see enough profit on products I’m not producing to make it successful on grow if we didn’t have a retail location.”
The Ringolds were awarded a craft-grow license but came up short in the lotteries for dispensary licenses. They finally acquired a retail license earlier this year.
Ringold and his wife came to cannabis with capital and experience from operating their own businesses. She’s a CPA, he’s in construction.
“In the early months, we used our other businesses to fund our operations,” he says.
The company has 52 employees in its grow operation and 36 employees in its dispensary. Galaxy’s product is sold in 162 dispensaries.
Ringold says both businesses are profitable, despite overall revenue being lower than their original projections. Cannabis was selling for nearly $4,000 a pound when they won a grow license two years ago. Now it’s about $2,300. He says pricing pressure and a lack of capital are industrywide challenges that weigh on everyone.
“A store has got to sell our product before they pay their bills. We’ve gotten to a point where we’re picking and choosing which stores we want to do business (with) based on payment and keeping their account current.”
Running a grow operation is challenging because it requires far more capital for equipment and facilities than retail.
“We’ve invested multiple millions of dollars in building this out,” Ringold says. “We’ll be focused the next couple years on being profitable enough to pay down debt.”
Despite the unexpected challenges, “it’s still worth it,” he adds. “Overall, we’ve been successful and happy.”
[[{“value”:”When Illinois legislators legalized recreational marijuana in 2019, some saw a short path to riches but it has turned into a slog.
The post What we’ve learned after 5 years of legal weed in Illinois appeared first on Green Market Report.”}]] Read More
