Martin Rasheed was surprised to learn he was among those chosen in a lottery with more than 2,200 other applicants for one of 36 new licenses to open marijuana stores in the Chicago area.
“I’m excited and I’m grateful. I never thought I’d be in this position,” says Rasheed, who works as a trucking broker. “I was an employee of a CBD store, which sparked my interest, and I took a certification class before the pandemic. I thought it was a good opportunity to put my name in the lottery and hope for the best.”
Now comes the hard part. Rasheed and the other applicants chosen in the lottery will have to prove they meet the criteria for the dispensary licenses. They’ll also have to pull together business and operational plans, find real estate — and come up with the estimated $500,000 to $1 million or more that it could take to pay for it all.
The Illinois Department of Financial & Professional Regulation is issuing 55 new retail licenses, adding to a pool of 192 licenses awarded last year.
Since Illinois began recreational marijuana sales more than three years ago, the industry has undergone a dramatic shift. Growth has slowed, in part because of a lack of retail outlets but also because inflation has put pressure on how much customers are willing to pay for weed. Capital is harder to find than ever.
“Fundraising and operations are both hard,” says Irina Dashevsky, co-chair of the cannabis practice at law firm Greenspoon Marder. “There are a lot of regulatory constraints. It’s not rocket science; it’s just cumbersome.”
The state scrapped a painfully long and expensive licensing process that pleased no one and was mired in litigation. But it kept the social-equity provisions aimed at diversifying ownership of the weed business in an effort to undo some of the effects of the war on drugs that hit Black and Hispanic communities hardest.
Applicants who won the most recent lottery will have 45 days to verify they meet the “social equity” criteria, mainly being owned or controlled by someone who lived in an area disproportionately affected by the war on drugs, had an arrest or conviction for marijuana possession or delivery that no longer is illegal — or whose family member meets the criteria. Eligibility also was extended to shooting victims.
Chicago-based tax and consulting firm RSM will determine if applicants meet the social-equity criteria. Tax and consulting firm KPMG scored the applications in the previous round of licensing.
Applicants who meet the social-equity criteria will be issued conditional licenses. They’ll have up to two years to find a location, build out a store and receive a final inspection by the state.
“(The latest applicants) didn’t have to submit detailed business plans, floor plans (or) security plans as part of the initial application process,” Dashevsky says. ”A huge amount of work is ahead.”
Funding is likely the most significant challenge for new applicants. Stocks of big cannabis companies have wilted, making it harder for small companies to find private investors. Because cannabis is illegal at the federal level, banks won’t lend to cannabis licensees.
And significant competition awaits. There are 110 stores operated by medical-cannabis license holders who had a five-year head start. And just 27 of the 192 new licensees have opened stores so far.
“Consumer interest in the product is still there,” Dashevsky says. “There will be enough demand to support the new licenses. The problem is getting the funding and knowing what to do to get open.”
The acquisition of Chicago marijuana retailer Dispensary 33 went up in smoke amid a cash crunch caused by a steep decline in cannabis stocks and a sharp increase in interest rates.
Miami-based Ayr Wellness (OTC: AYRWF) said on Jan. 27 it’s not going to complete the $55 million acquisition of D33, a popular independent marijuana retailer. The deal was announced in November 2021, about a year after Ayr went public. The company’s stock peaked at $36.54 in February 2021 but now trades at $1.29 per share. That spelled disaster for a deal that was to be paid mostly in stock. Cannabis stocks have been struggling for more than a year but suffered further declines after the SAFE Banking Act failed to pass Congress.
“The cannabis market has changed significantly in the 15 months since we agreed to acquire Dispensary 33,” Ayr President David Goubert said in a statement. “Both parties have acknowledged this reality and engaged in good-faith dialogue as we came to the mutual decision to terminate the proposed arrangement.”
It’s the second time an acquisition of a Chicago company has been scuttled by changing fortunes in the industry. Not only is there a broad-based market correction, but cannabis is particularly volatile because the stocks are held largely by retail investors rather than institutions. Three years ago, the $850 million acquisition of Verano Holdings was called off after a change in fortunes for marijuana stocks.
The cancelation of the D33 deal is just one example of how large, publicly traded weed companies are scrambling to adapt to the industry’s woes. Last week, Curaleaf, which became the largest U.S. cannabis company three years ago after buying Chicago-based chain Grassroots, pulled out of California, Colorado, and Oregon, and laid off 4% of its staff and cut payroll by 10%.
States such as these, along with Michigan, are much more competitive because there are few barriers to getting a license to grow or sell marijuana. As a result, prices in those markets have collapsed. Even in Illinois, which has had among the highest marijuana prices in the nation because regulations limit the number of licenses, has seen prices fall even as other costs have risen for cannabis companies because of inflation in equipment and labor prices.
Inflation elsewhere in the economy also has put pressure on consumer spending. Although most marijuana users are still buying weed, many have traded down to lower-priced brands. Sales growth slowed in Illinois in December.
The belt-tightening by large players such as Curaleaf, which have the best access to capital, is an ominous sign for the 192 winners of new retail licenses in Illinois who are trying to get their stores open.
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