By: Bill Wednieski
Cannabis is getting crushed. In the investing world a bear market is defined as a prolonged period of depressed pricing. Bear markets come about in weak or softening economies. The cannabis industry in general is currently in this predicament, and acutely so in Michigan. The good news about being a recruiter, CPA, attorney or consultant is you may choose the business owners and industries you perform services for. Like the iconic song from Snoop Dogg, I am going to drop it like it’s hot on the cannabis industry, for now.
Yeah, but sales are increasing
Let’s take a quick look under the hood. Compare Michigan monthly sales from July 2022 of $237 million against January 2021 of $108.5 million, and you’ll note consumers are spending 218% more on cannabis in just 18 months. Awesome, right? Yes, sales revenue is double; however, wholesale prices are down around 90%. When I started headhunting for grower candidates in early 2020, wholesale cannabis flower prices were frequently over $5,000 per lb. if a dispensary could even line up a purchase. Fast forward to today, growers are optimistic to sell flower for $800 lb. Cannabis businesses can’t sustain and operate profitably at these levels.
California recently passed legislation to eliminate the cultivation tax on cannabis in an effort to “stabilize” the industry. California, Colorado and Oregon were the pioneer states in the cannabis industry. It should be non-controversial to say these early efforts were not exactly models of efficient government in action. Not to get political but why do all the states that follow legalizing cannabis, including Michigan, repeat the same mistakes? The automotive industry can sell 17-18 million vehicles annually, so guess how many vehicles the industry builds? Answer: 17-18 million vehicles in a carefully monitored production schedule. The cannabis industry has no such insight or foresight. The Michigan market is flooded with too many dispensaries and too much inventory. Bay City, Michigan is a town with 22 dispensaries which equates to one store per 1,500 residents.
Business for sale, layoffs and closings
Need more evidence? I have never seen so many cannabis businesses for sale. My inbox gets multiple, mostly garbage, solicitations for dispensaries and cultivation facilities weekly. Sadly, some of these are “partially built”, so in other words the current owner entrepreneur ran out of money needed to even finish (financing in cannabis is a topic for another day). Michigan’s arguably largest cannabis business recently closed several stores and laid off nearly 100 people. I have it on good authority that this company foolishly spent $7 million to buy a mediocre retail location less than a mile from my office hoping to secure a recreational license they were ultimately unable to secure. Fiduciary responsibilities and prudence for executives is also another topic for another day, but leaders that do dumb things can and do cost lots of decent people their jobs.
Inability to pay and trends
One of my favorite parts of cannabis recruiting is the characters you come across while recruiting. Early on, a candidate I found shared with me that he had a loaded pistol stuck in his mouth . . . twice . . . while being robbed. In cannabis recruiting you meet a lot of candidates that have been screwed out of equity or showed up for work one day only to find the doors padlocked or alarm codes that no longer work. Three of my last four deals in the cannabis industry have been rocky. One candidate was strong-armed into taking 10% less than his desired salary with a promise of a 90-day review which never came. My most recent client has liquidity issues, and had to reclaim inventory from a customer. I’m now on a payment plan on this one essentially giving my client a 9-month interest free loan and that’s if they even honor their promise to pay.
If the phone rings from a cannabis owner with a search request there is a high likelihood you’ll hear a polite, “no, thank you” from me. The market is too flooded with too many thinly capitalized businesses. I have a responsibility to my employees to actually get us paid, and I have a responsibility to place great candidates in roles with employers that can afford to pay them.