This year is shaping up to be transformative for the North American cannabis industry. To our north, Canada should see a major uptick in derivative pot product sales (e.g., vapes, edibles, and infused beverages), which officially hit dispensary shelves in mid-December, while a number of U.S. states are slated to vote on medical and/or recreational marijuana come November. Considering the nationwide support for medical and adult-use weed in the U.S., it's tough to see a scenario where multiple states don't legalize this fall.
But we're also on the cusp of seeing potentially exponential sales growth in a handful of states that recently legalized adult-use pot. Michigan, whose residents voted to legalize recreational weed in Nov. 2018, and Illinois, whose legislature became the first to legalize the consumption and sale of adult-use pot in June 2019, have both opened their doors to consumers. However, initial sales figures suggest these states are headed in vastly different directions, at least in the early going.
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Illinois' pot industry is running circles around Michigan in the early going -- here's why
On one hand, the Land of Lincoln has seen sales soar since opening its doors to adult-use weed consumers on Jan. 1. The Illinois Department of Financial and Professional Regulation noted that a little over $30.6 million came from adult-use sales to in-state residents in January. Meanwhile, another $8.6 million in recreational pot was sold to out-of-state residents, leading to well over $39 million in first-month revenue. As a reminder, a number of states that border Illinois are among the 17 states to have completely outlawed cannabis, including Iowa, Indiana, Kentucky, and Wisconsin. This makes Illinois something of an easy-access cannabis retailer for residents in these states.
On the other hand, Michigan's recreational marijuana sales have stumbled out of the gate, with a meager $6.5 million in revenue recognized in its first month (adult-use sales began Dec. 1), and $17.7 million brought in between Dec. 1 and Feb. 2.
How is it that Illinois has been able to more than double up Michigan in adult-use pot sales in one month relative to what Michigan has been able to generate in revenue in two months? The answer appears to lie with the licensing process.
You see, licensed medical marijuana dispensaries in Illinois were allowed to immediately begin selling recreational cannabis on Jan. 1. That meant 41 stores that could immediately step in and begin providing adult-use weed to consumers.
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Meanwhile, in Michigan, just four adult-use retail licenses had been issued on Dec. 1, when Michigan surprised everyone by pushing its launch date forward by a few months. According to Michigan's Marijuana Regulatory Agency, the Wolverine State has now issued 43 retail licenses, through Feb. 4, albeit the increase in licensed retailers, and the opening of these locations, has remained gradual.
We've also seen licensing issues play out in Ontario, Canada's most populous province, and even in California, the largest marijuana market in the world by annual sales. Ontario had been working with a lottery system for its retail licenses until the end of 2019, and the result was the issuance of just a few dozen licenses in a province fully capable of comfortably housing 1,000 retail locations. This has led to supply bottlenecks in Ontario and given further rise to an already resilient black market. Ontario has since switched to a more traditional licensing process, but the uptick in retail locations will be gradual. This has been a painful realization for Canadian pot stock investors.
Likewise, California has struggled to drive out its black market presence, in part because the Golden State hasn't been able to effectively license retailers. For instance, the Los Angeles City Council has argued that 100 retail licenses assigned in the city should be redone given that some retailers may have had early access to the online application process. Los Angeles is a huge city and a potential windfall moneymaker for dispensaries, so to see the licensing process still stymied more than two years after adult-use sales launched demonstrates the struggles the industry is contending with.
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Interestingly, Michigan may have the long-term advantage over Illinois
Although Illinois is mopping the floor with Michigan in the early going, the long-term potential of these states suggests that Michigan will have the upper-hand. According to the State of the Legal Cannabis Markets report from Arcview Market Research and BDS Analytics, marijuana sales in Illinois should reach $1.14 billion by 2024, with Michigan zooming to nearly $1.5 billion.
The biggest difference? It's not population, as Illinois has 2.7 more residents than Michigan. Rather, it mostly comes down to (drum roll) the licensing process.
Even though Illinois made the smart move of facilitating recreational weed sales by immediately allowing medical dispensaries to sell adult-use weed, the Land of Lincoln's longer-term licensing policy is sort of a disaster. Illinois wound up capping the number of dispensaries that can be opened by a single company in the state at 10, and also capped the number of license issuances at 110, as of Jan. 1. Even with another 75 licenses being awarded by May 1, Illinois won't have more than 185 open retail locations by the end of this year. This works out to 1.5 retail locations for every 100,000 residents, which is about a tenth of what you'd find in Oregon, relative to its in-state population.
What's more, Illinois' law limits the maximum number of dispensaries in the state to 500. That might sound like a lot, but Illinois could easily support many more retail locations, especially given how long it'll like take regulators to give the green light to push toward 500 stores.
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While this early sales success in Illinois probably has investors of Cresco Labs (CRLBF 2.49%) and Green Thumb Industries (GTBIF 2.46%) jumping for joy, it's unclear if this'll last over the long run. With Cresco Labs and Green Thumb limited to just 10 stores in the Land of Lincoln, they'll really need to stand out to capture a significant percentage of Illinois' $1.14 billion in estimated 2024 sales. It would be in the interests of both multistate operators if Illinois were to revisit its licensing limit in the future, but there's no guarantee this happens. This suggests Cresco Labs and Green Thumb will be actively looking to other states to potentially pick up Illinois' slack in the future.
Make no mistake about it: Illinois and Michigan are two exciting states to watch grow. However, don't be fooled by these early sales figures about which state has the better long-term prospects.
