How One State's Cultivation Industry Is Riding the Wave of Rapid Expansion
Dealing with over saturation and staying ahead of the curve in Michigan.
As of January, only about 160 of Michigan's 1,773 cities have formally approved the cultivation and sale of recreational marijuana, according to data from the state's Marijuana Regulatory Agency. As a result, licenses are highly concentrated in a small percentage of the state.
But in March 2021, the MRA announced it would open the recreational marijuana licensing process to a wider pool of applicants. This change in the application process invited applicants and investors from other states. Previously, only applicants who were licensed under the Medical Marijuana Facilities Licensing Act were granted licenses.
Signs of saturation
At the time of writing, the MRA has issued a total of 1,235 cultivation licenses. Many of these are "stacked," with a large cultivator operating under numerous licenses, thereby increasing the total amount of plants they can grow. And with no cap on licenses, there's no limit to how much cannabis Michigan can produce.
If this trend continues, Michigan could experience supply shocks similar to those seen in West Coast states, where businesses were forced to close due to overwhelming competition driving down prices. Michigan's approach to not limiting licenses could present a similar climate for cultivators in an increasingly saturated market.
"I think without additional municipal participation, we're getting close to saturation," MRA director Andrew Brisbo said.
The average retail price-per-ounce of flower in Michigan peaked in February 2020 at $285.50 per ounce. By January 2021, that price fell to $252.04, before plummeting even further to $184.90, as of December 2021. That's a 26.6% decrease in the last year alone and down 35.2% from its peak.
Detroit: The wild card
The biggest market in Michigan hasn't even approved recreational sales yet. Last year a federal judge ruled the city's ordinance of giving preference to longtime city residents was unconstitutional.
Recently, a new ordinance was submitted by a Detroit city councilman. The proposal is to reserve half of the total licenses granted for social equity applicants. The ordinance will soon go through legal review and it's possible we'll see Detroit begin issuing licenses later this year.
It's unknown what impact Detroit's adult-use market will have on the state's total demand for cannabis. It's likely the demand will increase, but maybe not as much as some predict. Detroit has had medical cannabis for some time and those without a medical card can easily travel to purchase cannabis products at a rec shop just 5 minutes outside the city.
Staying ahead of the competition
The cannabis industry in Michigan is highly competitive and businesses will need to focus on how they can improve efficiency and differentiate themselves to gain and maintain market share.
– Reduce costs: Competition pushes businesses to take operational efficiency seriously.
Grow room automation is crucial for large-scale commercial cultivators. Compliance reporting, environmental controls, fertigation and team management can all be automated to save countless labor hours.
"I think for those just getting online, they're going to have to be pretty quick and nimble to get their costs down as much as they can," says Dave Murray, owner of Redbud Roots, a state-licensed cannabis producer and retailer. "If you produce a pound of cannabis for $700 to $800 a pound, you're going to be able to survive. If you're at $1,200 to $1,500 a pound to produce it, you're probably not. It's that simple."
– Develop a strong brand: Quality cannabis products are in high demand, but to stay competitive, cultivators need to focus on setting themselves apart from the herd. A unique, well-positioned brand can be a big competitive edge for operators looking to stay viable long into the future.
A strong branding strategy can be the difference between success and failure in an increasingly competitive market.
– Form partnerships: By collaborating with other businesses, cannabis growers can pool their networks and resources to create more value. Strategic partnerships can help expand reach and attract new customers.
When looking for potential strategic partners, be sure to consider businesses that share your values and have complementary strengths and weaknesses. If you can find a partner that you can trust and collaborate well with, the benefits can be truly transformative.
Michigan's rec market is still in its early days. However, even at this stage, signs of saturation are beginning to show. Michigan cultivators need to focus on how they can differentiate themselves to stay competitive.
Cultivators in Michigan should learn from the market forces at work in other states. Competitive strategies like automation and developing beneficial partnerships can form a shield around your company.