As cannabis legalization continues to move state by state, wildly different markets are shaping up across the country. This is especially true in the Midwest - cannabis legalization has swept the Heartland over the past five years. Ohio, North Dakota, South Dakota, and Iowa implemented medical programs. Meanwhile, Illinois, Michigan, and Missouri opened adult-use markets – and Minnesota will join their ranks soon, having legalized adult-use cannabis in May 2023.
Each state-siloed markets provide unique opportunities within its boundaries. In this blog post, we’ll focus on the four emerging adult-use markets of the Midwest - Illinois, Michigan, Missouri, and Minnesota – exploring how their consumer product markets are shaping and the regulatory choices that led to each.
Minnesota shocked the cannabis world when it “accidentally” legalized THC edibles in July 2022. Hemp-derived THC in 5mg doses (up to 50mg per pack) was given the green light, resulting in a boom of low-dose ingestible products –from standard drinks and gummies to novelties like popcorn and fudge. Because retailers need not obtain a license to sell low-dose hemp-derived THC, 5mg edibles proliferated in convenience stores, smoke shops, and other small, local retail channels.
In May 2023, Minnesota became the 23rd state to legalize adult-use cannabis, and the program, as it’s spelled out in the bill, looks very promising for maximizing market potential. Instead of crushing the emerging hemp-derived THC and CBD edibles market, it strengthened it, allowing for retailers- including liquor stores – to sell “lower-potency hemp edibles” with 5mg THC (from hemp) and 25mg CBD. Allowing psychoactive cannabinoid beverages to be sold in liquor stores will give them a chance to shine in a channel more mainstream than dispensaries and more suitable for its format.
A Better Channel for THC Drinks
At the dispensary, consumers are faced with a decision – purchase a 4-pack of 5mg drinks for $20, or a 10-pack of 10mg gummies for $15. The economics of purchasing by milligram tips in favor of gummies every time. However, in a liquor store, it’s not so unusual to spend $20 on a pack of craft beverages. Within a channel of a similar format and price point, THC beverages have a real opportunity to shine. This will further normalize THC beverages and cannabis use at large and is poised to generate more revenue than states that leave hemp-derived THC in a gray area or keep all THC locked within the dispensary channel.
Currently, in Missouri, Illinois, and Michigan, Brightfield Group’s consumer insights show 14% of cannabis consumers have used cannabis drinks in the past 6 months. This is slightly lower than the national instance rate; 17% of cannabis consumers across the legal U.S. cannabis markets have used cannabis drinks in the past 6 months. It will be exciting to see how THC drink adoption shapes up for Minnesota.
The moral of the Minnesota cannabis story so far: As one of the most business-friendly legalization plans so far, Minnesota is poised to be a game-changing market. While other states are still asking themselves, “what do we do about hemp-derived THC?” Minnesota has an answer: give people access, regulate it to ensure safety, and tax it!
Missouri was the 3rd Midwest state to legalize cannabis and the 21st overall. It has had the strongest adult-use opening of any U.S. cannabis market so far, selling nearly $350 million of adult-use cannabis in the first four months, from February to May 2023. For comparison, Illinois sold less than half that number with a population double the size of MO in its first four months of sales.
The state had a well-functioning medical cannabis program that converted nicely to adult-use. The 63 cultivation centers, 204 dispensaries, and 84 manufacturing licenses awarded to medical operators since 2020 were all able to apply for the adult-use program. Meanwhile, consumers on the East side of the state have enjoyed adult-use cannabis a stone’s throw away in Illinois for the past three years. With lower taxes in Missouri than in Illinois, a swath of consumers gained access to less expensive, local cannabis when adult-use stores opened in February 2023.
Keeping the Supply High
So far, the ease of medical to adult-use plus the large number of operators at the start of the program seems to have allowed the state to avoid significant product shortages, which tend to happen in newly opened adult-use markets. This has kept the dollars coming, so expect to see Missouri sales continue to break records throughout summer 2023. It has also helped the market avoid significant price inflation, allowing cannabis prices to maintain rather than get higher. On shelves in Missouri, consumers can find $40-$45 3.5-gram packs of various strains.
On shelves, at least 105 cannabis brands are already available to adult-use consumers across Missouri. We see a mix of transplant brands, like Wana and ROVE, as well as locally-based brands, like Mo’Dank and Proper Cannabis. For a new market, its product variety is impressive. A given menu will have multiple kinds of baked goods and drinks, a number of concentrate types from FECO to live resin, and a variety of regular and infused pre-rolls.
Missouri is expected to issue 48 microbusiness licenses by the end of the year, including both dispensaries and cultivation centers. These licenses were “designed to allow marginalized or under-represented individuals to participate in the legal marijuana market.” With lower barriers to entry than is seen in similar states with social equity programs, there is a good chance the majority of these licenses will come to fruition in a reasonable time frame.
The moral of the Missouri cannabis story so far: Proper planning prevents poor performance. The state successfully legalized medical cannabis in a way that provided a stable foundation for an adult-use market. If it can continue to open a planned, Missouri is shaping up to be a profitable and consumer-friendly market.
The Illinois cannabis market is struggling to meet its growth potential. The state opened its adult-use market to the existing medical operators, which included MSOs like Verano, Curaleaf, Cresco, Green Thumb Industries, Ascend, PharmaCann, and Jushi. The state looked to have a bright future with the presence of these large operators, plus the plan to grow the industry through an equitable process. Three years later, the vast majority of cannabis dollars are going to the same ones that opened this industry, with a few more licensed brands and only a handful of newly opened social equity-licensed businesses.
While COVID-era delays are partly to blame, the licensing system created expensive barriers to entry that continue to plague the industry. Onerous regulations and restrictions are costly hurdles that have made investment dollars all the harder to come by. Only 3 of the 85 social equity craft grow licenses have received operational approval in Illinois as of May 2023, leaving 410,000 additional square footage of grow absent from the Illinois market.
While the state allows for 30 cannabis cultivation centers, only 21 have been awarded by the state, leaving another potential 1.89 million square footage of canopy space missing from Illinois. Plans for cultivation centers are stuck in the middle of over-regulation and regulatory inaction.
The slow rollout of dispensaries also limits consumer access. Of the 195 social equity licensed dispensaries, only 24 have had their licenses issued as of June 2023, meaning a maximum of 134 dispensaries are open in the state. On the ground, stores report lackluster openings as consumers have had three years to become loyal customers of the 110 other dispensaries operating in the state.
Result of Regulatory Hurdles
The result of these regulatory challenges is some of the highest prices for adult-use cannabis flower in the nation and a smaller market size than expected upon legalization. Despite operating for three years, the median price of flower in Illinois resembles the burgeoning new market of New York or prices in the medical markets of Pennsylvania and West Virginia. The national average price of cannabis flower in the U.S. is $30, according to Brightfield Group Distribution Trends data. In Illinois, the median is $45.
Illinois was poised to be a strong, possibly even equitable cannabis market – pending its rollout went as planned. Looking at the Illinois market unfolding in mid-2020, Brightfield previously forecasted it to be worth $4.3 billion by 2023. But with 2 million square feet of grow space and 171 dispensaries missing from the market, the reality of Illinois in 2023 comes nowhere near that number. We’ve readjusted the forecast for these shortcomings as each year has dragged on, and now Illinois will likely land around $2.4 billion in 2023.
The regulatory hurdles of the “most equity-centric law in the nation to legalize adult-use cannabis” (as was reported in 2020) have stunted the market's growth at the expense of the social equity operators. Those operating today are those able to self-fund with millions, partner up with other licensees to form a group, and/or find resources from out-of-state brands and operators.
The moral of the Illinois story: The best-laid plans often go awry. Future growth of the Illinois market will require more supply and channels than are currently operating, and the state has a long way to go before the current social equity licensees are all operational.
Michigan opened its adult-use market one month before Illinois in December 2019, but their trajectories could not be more different. Michigan’s caregiver-based medical program had been supplying the cannabis consumers of the state for about a decade when adult-use cannabis rolled out, leading to lackluster sales in the first few months for Michigan. Additionally, many municipalities had yet to fully approve cannabis businesses. But with unlimited licenses, entrepreneurs in the state (and from other states) got to work setting up a market.
Growth that Won’t Quit
Shifts in Michigan’s caregiver program throughout 2020 forced some medical patients into the adult-use market. Meanwhile, licensed grows continued to accelerate, and by December 2021, the average retail flower price for an ounce was $185. At this point, Michigan lifted its requirement that cultivation centers needed a caregiver grower with 2 years of experience, making it easier for new entrepreneurs to get involved. At the end of 2021, there were 518 class A, B, and C “marijuana growers.” In May 2023, the state reported 909, with a great majority being the largest class C growers.
With more and more grows, the real price compression kicked in during 2022. By June, an ounce had dropped to $122 and continued to fall in price until January 2023, when the average price of an ounce bottomed out at $80. Since then, retail prices have stabilized at the bottom, slowly gaining value to reach an average of $90 in May 2023.
These affordable ounces are sold out of the state’s 745* dispensaries – a number that continues to increase. Even in the face of price compression and economic uncertainty, Michigan cannabis has forged ahead as we continue to see more dispensaries, more grows, and more dollars in the market.
*745 includes all medical and adult-use dispensary locations where single stores with both medical and adult-use sales are only counted once
Competitive Legal Sales
Of any state so far, Michigan has done a good job of fighting its illicit market with affordable cannabis, plentiful dispensaries, and comprehensive access to medical and recreational cannabis. The caregiver program in Michigan allowed many individuals to legally learn how to grow cannabis very well, and with this wealth of cannabis experience, cannabis in Michigan has its own unique culture around it. No need for “Cali weed” when you have the Midwest’s best in town – and for under $150 for a quality ounce on the adult-use market.
So, while the illicit cannabis market in Michigan is still alive, it is surely not doing as well as illicit markets that run parallel to Illinois, New York, and California. The patient-centered approach to medical legalization plus the lower barrier to entry for illicit growers to go legal have served Michigan well in fighting off the illicit market.
As such, the Great Lakes State is one of the most robust legal cannabis markets in the nation. Michigan has the 2nd largest cannabis market in the country, only to California, which has a population nearly four times larger than Michigan. Michigan will hold its position at least until 2026 when the New York market is expected to overtake it due to its sheer population. However, with New York regulators creating a very messy start to its market, Michigan could hold onto its silver crown even longer.
With a robust market comes a massive array of cannabis brands and product offerings. From fudge to 50mg gummy pieces, single-source rosin to syringes of distillate – Michigan consumers enjoy a high level of variety at very reasonable prices. Dispensaries have true tiers of product, from budget ounces as low as $50 to premium eighths for the same price.
The moral of the Michigan story: More is more! A robust licensing system is giving Michigan consumers unprecedented access to cannabis in the Midwest. More cultivators and dispensaries have translated to more sales, more tax revenue for the state, and more product variety at a lower cost for consumers.
The Midwest will continue to be a dynamic region for U.S. cannabis. With vastly different timelines and approaches to legalization, there are lessons to be learned from each. We’ll watch to see if Minnesota can implement a program as smoothly as Missouri and continue to monitor for when Illinois increases its supply enough to surpass Michigan’s cannabis sales. There are opportunities to succeed in the Midwest, and companies guided by data are the ones finding it.
Published: 6/14/2023