Despite being a top cannabis market in the United States, Michigan largely has been ignored by multistate operators because of the low barriers to entry for new licensees.
However, with plenty of market growth and heavy fragmentation across the supply chain, the state offers a compelling opportunity for efficient private operators.
Michigan’s unlimited licensing for new businesses has spurred heavy fragmentation of market share in both cultivation and retail.
The fragmentation, in turn, has caused price compression. Initially, this was offset by consumer demand, with recreational sales per dispensary peaking at $5 million in April 2021. However, demand has slowed in recent months, and prices have continued their decline.
This highly competitive environment has kept most publicly traded companies away from Michigan.
After 1½ years of recreational cannabis legalization, the market still is not showing signs of consolidation. The largest retail operator owns only 6% of the market, and the largest licensed cultivator owns less than 5%.
This lack of consolidation has led to specialization.
Except for vertically integrated Lume Cannabis Co., the leading operators in the state focus on only one area of the supply chain.
LivWell Enlightened Health, for example, has the leading market share in licensed cultivation and is exclusively wholesaling in the state.
On the other side of the scale, 3Fifteen Cannabis, a leader in dispensary market share, does not have any recreational cultivation.
This supply-chain specialization also proves to prospective investors that less capital can be leveraged to grow market share in a core business function rather than via vertical integration.
The capital generated from specialization can be used to expand the core business or across the supply chain.
As the market matures, consolidation likely will follow. The strongest players in their respective areas of the supply chain will move into vertically integrated businesses, but this will take time because it also requires stabilized pricing and asset counts.
Continued price compression as well as growth in the number of retailers should keep the cannabis industry leaders at bay, allowing the most efficient private operators to establish market share.
Industry leaders will inevitably pay to acquire that share once the market reaches maturity.
Michigan is a rare opportunity for smaller operators to potentially conquer a top market through operational efficiency.
It’s also an opportunity for investors to identify discounted valuations that could drastically expand if they can identify the best operators.