Michigan cannabis companies change their business models to survive competitive market
As Michigan’s recreational cannabis industry nears its third year of legalized sales, the companies that grow, produce and sell marijuana are making some significant changes to their business strategies.
They’re doing so because the market has gotten increasingly competitive, with hundreds of brands competing for attention. At the same time, relatively few cities in Michigan have opted to allow marijuana sales within their borders.
“Everybody is evaluating their processes given this marketplace right now,” Shelly Edgerton, chair of the Michigan Cannabis Manufacturers Association, said. “Maybe they don’t need to be vertically integrated. Maybe they don’t need 30 retail stores and they only need 20. Maybe they only need to do processing because they do it well, and they have a great kitchen and can really produce whatever is needed. So (they say), ‘I’ll buy my products. I don’t need a grow operation.’ “
This marks a significant shift from the early days of Michigan’s recreational cannabis industry, when many companies’ strategies were to open as many dispensaries as they could around the state and the vertical integration model of growing, producing and selling cannabis was considered one of the best strategies.
The industry has changed drastically since that time.
There were 80 unique cannabis brands that made a sale in Michigan’s cannabis market in 2019, the first year the cannabis market intelligence firm Headset started tracking this data in the state. In 2020, that increased to 512 brands; in 2021, that number rose further to 775. So far this year, 766 unique brands have made a sale.
There are 555 recreational dispensaries in the state selling those brands, the most recent data from Michigan’s Cannabis Regulatory Agency shows, compared with 389 in October 2021, when the agency started tracking the number of active licenses.
Meanwhile, the average retail price for an ounce of recreational marijuana flower dropped to $116.84 in August, the most recent data from Michigan’s Cannabis Regulatory Agency shows, down from $222.42 the same month a year ago.
The reckoning has come
“We knew there would be a reckoning,” said Michael Elias, president and CEO of the Michigan cannabis company Common Citizen. “We chose cost leadership and vertical integration as competitive advantages to dealing with price drops. You’re not guaranteed to win on cost leadership just because you’re vertically integrated but it is a step in the right direction.”
Even though Elias expected marijuana flower prices to decline because Michigan doesn’t cap the number of licenses in the state, two months ago he decided to turn his yearlong strategic plan into a quarterly one after flower prices dropped by more than 70% compared with when recreational sales first started.
“What do we need to do in the next quarter to win?” Elias had to ask himself. “We will put our finger in the water and take the temperature at that point to figure out how to load the next set of quarterly initiatives based on whatever conditions we’re dealing with at the moment.”
Around that time, Elias decided he needed to lay off employees across departments in order to invest in growing the company. Now the company is embarking on a new strategy: buying “best-in-class” retailers across the state.
“Now we’re able to sell our own manufactured products through our own retail channels without significant margin erosion,” he said.
He’s also bringing on those companies’ employees, who are “helping us by sharing that knowledge (of retail) and innovation across the entire enterprise,” Elias said.
Finding a niche
That realization — that it’s difficult for companies to be good at everything — is something the executive team at Glorious Cannabis, a Rochester Hills-based cannabis producer and distributor, has also learned, said Pete Truby, vice president of marketing for the company.
“It’s so difficult to just be good at one or two things,” Truby said. “If you really want to be good at retail, then you have to live and breathe retail and that has to be your focus. If you really want to be a good grower and producer, I honestly think that’s what you have to focus on.”
When Glorious entered Michigan’s marijuana industry in 2019, it looked to the vertically integrated model like many others. But in 2020, it sold three of its retail sites in order to focus on growing as a brand by creating and selling products to retailers that it has found success with, like its infused pre-roll, a rolled joint with hash added to it.
Narmin Jarrous, chief development officer of the Ann Arbor-based cannabis company Exclusive Brands and executive director of the Cannabis Business Association of Michigan, puts what’s happening in the industry this way: “The one thing that we never wanted to do at Exclusive and one thing that we tell our CBAM members is that you shouldn’t do anything because you feel like you have to do it. It’s going to show at the end of the day. It’s going to show that you’re not passionate about this portion of the business and that you’re just doing it to do it.”
Moving away from the Apple Store model
Noxx, a new cannabis company founded by people with deep experience in Michigan’s marijuana industry, recently opened its first dispensary in Grand Rapids. The founders of the company decided their best strategy to compete in this market would be to focus on what they do well: branding.
The company looked at growing cannabis, but pivoted to a model of processing and manufacturing based on the price of flower in the marketplace, Travis Harrison, Noxx’s chief revenue officer, said. Noxx still has a cultivation license, and may choose to grow cannabis in the future, but instead decided it could take advantage of all the flower that’s already out there and create a house brand with it.
Harrison, Noxx’s first employee, said he wanted to create a brand that fully embraced cannabis culture and communicated acceptance and inclusion.
To do that, Harrison embraced the plethora of cannabis brands that are available to Michigan consumers.
“We really hang our hats on having one of the largest assortment of brands in the state,” Harrison said. “We have a brand or product for every walk of life.”
That’s a departure from the experience many companies tried to create with their retail stores a few years ago, Harrison included, which he calls the Apple Store model and often appeals to the “canna-curious,” “where everything’s precious, under glass, and it’s spread out throughout the store.”
Harrison said the customer is winning in this market of low prices.
“It’s certainly hurting those individuals that invested millions of dollars into large operations and operational overhead, but the consumer’s winning and there’s lot of different consumers out there,” he said. “Some consumers want a very high-end product, and they’re not afraid to pay more for that. So it can’t just be an entirely value-driven marketplace either.”
Truby at Glorious Cannabis said on the business side, those who are really good at what they’re doing will survive this period.
“If you’re really good at retail, you will survive that,” he said. “If you’re good at cultivation, you will survive that. And if you’re good at marketing, branding, you’re going to survive, but in this environment, it is very difficult to be good at everything.”