Four years into Illinois’ experiment with legal recreational marijuana sales, the industry looks very different — in ways that are both good and bad.
Big companies continue to face headwinds and are looking for a lifeline from Washington, while many new small companies are defying the odds and pushing ahead to open shops and cultivation facilities.
After years of delay, new license holders are entering the market at a healthy clip, which is helping diversify ownership in the industry and bring down Illinois’ notoriously high prices. There are 173 pot shops in Illinois, up from 113 a year ago. State regulators think 190 could be open by the end of the year.
New dispensaries are crucial to the continued growth of the legal marijuana business, which provided $452 million in tax revenue to the state in the fiscal year ended June 30. Adding new operators also is key to fulfilling promises of social equity that were at the heart of the argument to legalize recreational marijuana. Demand remains strong, but prices have declined, which is slowing overall industry revenue growth while making products cheaper for customers.
Revenue growth had begun to stall in the spring before more stores opened. Through October, recreational marijuana sales statewide were up 5% from a year earlier to $1.3 billion, compared with 14% growth during the same period in 2022. The decline in revenue growth partly reflects falling marijuana prices, as well as competition from other states and cultivators having to compete to supply new stores.
Beau Whitney, who heads cannabis research firm Whitney Economics in Portland, Ore., estimates combined sales of medical and recreational marijuana in Illinois will be about $1.85 billion this year.
“It should be about $2.4 billion,” he says, citing litigation that delayed new licenses as the main culprit that put a lid on sales. “Slow rollout limits access (to product), which limits the number of new customers coming into the legalized market.”
The number of products sold in recent months has been roughly 20% higher than a year ago. Illinois wholesale marijuana prices are now the fourth-highest in the country, according to researcher Cannabis Benchmarks. The state previously had the highest pot prices in the nation.
Erin Johnson, Illinois’ chief regulator for cannabis, says the industry has made significant progress in the past year.
“We’re proud of where the program is at,” she said. “Our market is in a good place. A year ago, there were zero social-equity applicants open. Today we have 59. We’re not at our goal, but we have made a huge amount of progress.
“I’m proud we’re selling a record number of products, which means prices are coming down. Hopefully, fewer people are going to Michigan and going to Missouri. It’s better for consumers.”
Illinois is closely watched by the industry. It’s home to Big Weed: Three of the five biggest publicly traded cannabis companies in the U.S. — Green Thumb Industries, Verano Holdings and Cresco Labs — along with PharmaCann, one of the largest privately held marijuana businesses, are based in Chicago.
Also under watch: Illinois’ experiment in social equity, which attempts to diversify the industry and undo some of the damage attributed to the war on drugs by tailoring licensing efforts to reward people from neighborhoods hit hard by violence and drug crimes, as well as those arrested for low-level marijuana possession.
Illinois’ plan was praised, then criticized for being too slow and complicated. Other states, notably New York and New Jersey, also have struggled to roll out new programs with social-equity goals. And states that allowed nearly unlimited licenses, such as Michigan and Oklahoma, are seeing businesses fail.
Still, funding remains the biggest challenge across the industry for established players and new entrants alike.
Well-capitalized operators have launched multiple stores in Illinois. Six locations have opened under the Spark’d brand, which is affiliated with the owners of Chicago-based Dispensary 33. Six stores debuted under the Ivy Hall banner, including four affiliated with World of Weed, a dispensary chain headquartered in Washington State.
The Hunt for Money
There are signs that more capital is becoming available, but it’s more expensive. Because marijuana is illegal at the federal level, companies can’t access traditional loans. But higher interest rates in the commercial market drive up borrowing costs for weed companies and shrink the relatively small pool of cannabis lenders and investors, who now can more easily find other, less-risky alternatives than marijuana deals.
Building out a retail location can easily require $1 million, with grow facilities costing 10 times that amount.
Akele Parnell, CEO of Chicago-based Umi Farms, has opened an extraction lab in Rolling Meadows and is building out a cultivation facility, as well as a shop in Lincoln Park under the name Marigrow, which is expected to open in the spring. The company has about 10 employees.
Parnell says he’s raised several million dollars and has lined up more funding for the store, which is opening in a former diner. “Once you have revenue and a location, the risk goes down and it’s easier to get capital.”
But “it’s tough,” adds the industry veteran, who previously worked at a cannabis startup and as an in-house attorney for Green Thumb. “Even though Illinois is healthy, relative to other big markets, I think all the new licensees would agree it’s a lot harder than we thought it would be, even if you have experience.”
Illinois legislators recently approved $40 million in loans for new cannabis companies, but the money hasn’t yet been disbursed. Cannabis czar Johnson says the state hopes to have loan applications ready for dispensaries by the end of the year.
The Illinois Department of Agriculture has provided $18 million in loans for craft growers, infusers and transporters. Johnson says 11 craft growers have opened and 16 more are under construction. A year ago, two were open.
A stumbling block has been the amount of space that craft growers can operate. State law allows 5,000 square feet to start, with a maximum of 14,000 square feet over time. License holders have complained it’s hard to finance facilities under 14,000 square feet. Johnson says she plans to work with legislators to expand cultivation space. Such a measure failed in this year’s session.
“It’s been all about rationalization and cost containment,” says Morgan Paxhia of Poseidon Asset Management, a San Francisco-based fund that has been investing in the cannabis industry for a decade. “We still are not seeing much capital flow. Equity has barely returned, and most companies can’t take on any new debt. Some people are extending debt.”
Betting on Tax Relief
All eyes again are focused on Washington for help, but this time from bureaucrats, not legislators. President Joe Biden has directed regulators to reschedule marijuana as a less-dangerous controlled substance, which many in the industry expect to happen in the next several months.
If marijuana is reduced from a Schedule 1 to a Schedule 3 drug, it would lower taxes for cannabis companies, which currently can’t deduct the same day-to-day expenses as traditional businesses. The impact would be far greater than the banking reform legislation that the industry has been pursuing for several years. The future of the SAFER Banking law, which looked promising a few months ago, seems doubtful, given the political turmoil in the U.S. House, tempering some of the enthusiasm for industry fortunes.
Stock prices got a lift in September when the Department of Health & Human Services recommended rescheduling, but they have retreated a bit since then. Verano Holdings’ stock price is up 38% so far this year; Green Thumb Industries’ shares are up 21%; and Cresco Labs’ stock is down 6%. All three stocks are still down by at least half from where they were trading two years ago.
Illinois joined several other states in offering some relief, allowing cannabis companies to deduct business expenses from state taxes — a move that could save them millions a year.
The roller-coaster ride for publicly traded companies flows through to private companies. As stocks slid, valuations of private firms slumped, too. Deals such as Dispensary 33’s planned sale of two Chicago pot shops to Miami-based Ayr Wellness fell through. Just five Illinois dispensary licenses were transferred in the fiscal year ended June 30, down from 17 and 15 licenses sold in each of the previous two years, respectively, according to state records.
“Rescheduling has the biggest immediate impact,” Paxhia says. “We would start to see exits again. Without it, a lot of small companies won’t make it.”
Meanwhile, in Springfield, the cannabis industry is pushing for regulations to restrict the sale of competing hemp-based products, such as Delta 8. Fourteen states, including Colorado and New York, have banned Delta 8.
“We have to move forward to regulating intoxicating hemp, which is a direct competitor to our social-equity licensees,” Johnson says. “I do think the Legislature has the appetite to regulate intoxicating hemp.”