As Michigan emerges as one of the top cannabis markets in the U.S., industry experts and operators still face the growing pains of a sector with high barriers to entry and increasing consolidation.
Meanwhile, even operators making strong commitments to ensure social equity feel pressure from municipalities and the state to serve as a model while such requirements are rarely if ever found in other industries.
In a recent MiBiz roundtable discussion sponsored by Grand Rapids-based law firm Warner Norcross + Judd LLP, panelists celebrated Michigan’s legal cannabis market as proving the “sky is not falling” while also covering the state’s shortcomings.
The panel featured:
• Robert Hendricks, co-chairperson of the cannabis industry group practice at Warner Norcross + Judd;
• Trent McCurren, co-founder of The WellFlower Group, a vertically integrated cannabis company with dispensaries in Manistee and Ypsilanti;
• Shoran Williams, general counsel and chief regulatory counsel for Fluresh LLC, a Grand Rapids-based vertically integrated cannabis company;
• Chris Silva, producer and co-host of the Chadwatch Podcast and account manager for Redemption Cannabis; and
• Carly Sullivan, account executive at Grand Rapids-based insurance brokerage Lighthouse Group.
Here are some highlights from the discussion:
How have you seen Michigan’s recreational cannabis industry evolve — positively or negatively — in the past few years?
Hendricks: For me, one of the most important accomplishments is that we did it. By we, I mean the collective we — the industry, the regulators, law enforcement and everybody who was involved in this process in Michigan. We moved forward and established a regulated license (system). I feel like a lot of the doom and gloom predictions that we faced six, eight or 10 years ago at the beginning of legalization in Michigan just absolutely have not come to pass. In fact, to the contrary, the industry has really acted very respectfully in a large measure. The sky has not fallen. On the negatives, we’re still grappling with creating a system that favors the licensed regulated producers and disfavors the black market.
McCurren: The sky isn’t falling. In fact, what is falling from the skies is a lot of cash and revenue for the municipalities. I’m sure that story repeats itself across the state for some of these early opt-ins that decided to let cannabis come in and really reverse their trend line in terms of economic impact. For the negative, it’s such an immature market and without guardrails to avoid irrational actors. It is causing the people with the least amount of resources to be very pinched, if not pinched entirely out. But that’s the free market, too. I’m of two minds on this.
Williams: I have been in this job now for 90 days. I came to this position having been on the outside. It is a very different perspective that I have now. One, because even though we help clients get licensed, we help them navigate local politics. It’s different to be inside of the business to see how the business is run, particularly when it’s at this scale. That’s been an education in and of itself for me, which personally is positive. The positive from a larger industry perspective is the undoing of antiquated ideas about marijuana. That the sky is not falling. Seeing some of that start to turn, I think, is hopeful. What is negative to me is how social equity has played out in every market we talk about. Part of it is because the cannabis industry has been saddled with trying to undo generations of over-policing and bad government policy and then singling out the cannabis industry as the fix for those problems. That, to me, is a very narrow view of social equity versus what I think it should be. It should not be a requirement, it should be the expectation.
Silva: I was working in what we now call the legacy market, before even the regulatory framework for the (Medical Marihuana Facilities Licensing Act) was in place. It was basically the gray market. For me, my constituency is that group of people. Many of those people are the ones who literally paid the money to buy the signatures, to legalize this, to have this industry. I think one of the big negatives is the pricing. The market’s mature, this is the bottom. This is how much weed is going to cost. I personally want there to be a black market forever. There is no rule or law or policy or anything anybody can ever do to stop that. For the consumer, there’s never been a better time. It’s cheap on the streets, it’s cheap in the stores. It’s awesome.
Sullivan: I spent the last eight years in Washington State, and in Seattle specifically. I’m coming from a market that is well established and has been there for a while. As far as the insurance side of things go, Michigan is one of the hardest places for a licensee to get insurance because of the rules and regulations that this state has put on insurance carriers. They really restrict access to the amount of carriers that we can go to. They require that they’re licensed in Michigan and be an admitted carrier, which really shrinks down our marketplace. That being said, across the country, we do have a lot of carriers that are coming on board and are welcoming the cannabis industry with open arms. Once we get past those requirements from the state of Michigan, then we have access to a lot of other carriers that we can go to.
We’re seeing more M&A activity in the sector, feeding into some broader tension between small and large operators. What’s the outlook for deal flow as well as entrepreneurs looking to break into the industry?
Silva: If somebody’s walking in right now, they would have to be the right person to be successful. At this point in the market, you have to be operating pretty lean. Companies that have a lot of overhead — it’s just going to be really tough. The market’s kind of bottoming out. On top of that, the capacity is so intense right now. Walking into a store as a new brand, if you don’t have just an absolute rock-solid connection network of people, you have to know the right person to get into it. This is a really, really tough place to be on the wholesale side. The retail side is probably where there are the most opportunities.
McCurren: I feel a lot of pressure. We’re not super, super tiny, but we’re also not big, so we’re kind of in this middle land where we’ve had enough capital to get going this far, but certainly have shared the same concerns as every other operator, with prices bottoming out and trying to cover our operating costs until we can get to a rational moment. On mergers and acquisitions, I feel like there’s one of those conversations at least every two weeks. Most of them don’t really go very far. The challenge you have right now is a lot of the deals are equity deals and not cash deals. If people are ready to pull their parachute and get out, they want cash. They don’t want equity in an operator who they maybe don’t have a lot of history with or don’t have confidence in their ability to operate. So, you’re getting equity as an offer or you’re just getting so low-balled because they know you’ve got nowhere else to go. If you’re looking at the forces driving the market, all of the bargaining power is in the hands of the buyers, so you’re getting people consolidating that power even more, driving prices down further and leveraging economies of scale.
Williams: I still think there are some opportunities in Michigan because we don’t have even 40 percent of our cities, townships and villages that have opted in for any kind of legalization. I tell people: Go find a place that’s next to a place that has opted in and start talking to that city manager and those city politicians about what the benefit would be for them. But again, that’s a long haul. But if we could get (the) banking (on board), then I think you would get many more communities, townships and villages that would just automatically opt in, which would then open up the market a little bit more.
Sullivan: Our clients definitely reach out to us when something like (M&A) is happening. We take a look at their contracts. We’re a risk management operation, so we’re taking a look at everything, every aspect of their company, and helping them determine if it’s a good move for them. Then we’re also looking at claims history, different parts of the business that they’re acquiring, to make sure that it’s a right fit for them and determining what kind of coverages they have and making sure that they’re going to run and operate just like the person that is purchasing is going to run and operate, so they’re kind of acting as one. It’s definitely a great time for us, especially to get in front of our client and review the coverage, where we might find gaps in coverage, and then consulting with our client through those changes and looking at the contracts that they’re signing and making sure that they’re in compliance.
Hendricks: We definitely are seeing more of that activity and I believe we will continue to see an increase in M&A activity — at least unless federal law changes — because a number of our participants have talked about what this market has done in the last year. I agree with Chris that we’re probably at about that market price. It may come back a little bit, but we’re in a different financial situation than we were a year ago or two years ago. One of the consequences of federal illegality of marijuana at this point is there’s no bankruptcy relief available for businesses that can’t make it under the current financial structure. They can’t go into a Chapter 11, reorganize their finances, come back out and continue to operate. They don’t have that opportunity. We do have state law receiverships, but it’s much less powerful than the federal bankruptcy system. M&A is really the only other alternative you have short of shutting down the business and selling off the assets piecemeal, so I think we’re going to see a continued increase in M&A activity.
We’ve covered ongoing problems with Grand Rapids’ voluntary cannabis social equity program, and how operators are in limbo because they haven’t met some of their commitments. Looking at equity more broadly: What is the government’s role in whether to mandate this within cannabis or any industry?
Williams: Can I just ask the question to the panel as you think about this: What other industry has this kind of requirement? Is there any other industry that has a social equity requirement that you are aware of?
Hendricks: No, not that I’m aware of.
Silva: I understand the concept and I support it, obviously. There needs to be some work done to fix a lot of the unintended losers in the war on drugs. I don’t know that the way that it’s playing out is helping anybody, though. No other industry makes anybody do anything even remotely close to this. I think the problem is these municipalities tie it into their selection process for the zoning and for the initial buildings.
Williams: My proposal is that we expand how we view social equity. And if we expand it beyond just allowing people in these underserved communities to only get in the cannabis space, there are other businesses that are ancillary to operating a cannabis business where people in these communities could enter with less of a regulatory nightmare and the uncertainty of banking that causes so much fear. Why aren’t we trying to figure out how to support other kinds of opportunities beyond giving you a license? What about the rest of the neighborhood that doesn’t want to be in the cannabis business that’s still going to be underserved, underutilized and with a relatively minimal tax base? How are we really making a difference? If we just get two or three people to do a micro business, how is that really undoing what this whole thing about social equity is about? It’s not.
Silva: It seems unfair that our one industry has to be the ones. In theory, the municipalities should just be working on this anyway. There’s so much pressure and so many eyes on our industry in the first place that basically everybody’s doing this on their own. You don’t really need to beat them over the head with it. I think most people are good, and want to do good, and want to help, and be good operators. I just think when they tie it into this stuff and they make the stakes so high on it, it’s just really tough. It’s a tough situation for everybody to navigate.
Hendricks: Maybe we should go back to the drawing board because maybe there are way better ways to achieve the objectives with a method that doesn’t impose these artificial barriers that really are counterproductive.
Williams: I’m OK with the cannabis industry being a leader. I just don’t think it should be the job of the cannabis industry. That’s the problem I have. I’m not opposed to us having this goal to have these objectives. I just don’t think they should be mandated in the industry, unless we’re just going to start mandating everybody.