A deep dive of the Michigan cannabis market

This report is created in partnership with Dai Truong of Arlington Capital Advisors. Please read more about him and his work covering the cannabis space at the bottom of the report.

Introduction

In a year where many US cannabis markets are experiencing stagnating or even declining year over year sales growth, Michigan has been able to grow sales, bucking the national trend. Michigan is currently a $2B market, serving a population of 9.9M and is expected to grow to $2.5B by 2025. In this report we will explore the sales growth in the Great Lakes State through data and conversations with operators in the state. We’ll also explore data on top brands, categories, product trends, pricing, consumer behavior and more in the Michigan cannabis market.

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Executive summary

The Michigan cannabis market is growing. Total sales have grown by 28.2% in the past year, making Michigan the second largest cannabis market in the US behind California. When we explore category growth in the market, we find that both Pre-Rolls and Beverages are performing significantly well in Michigan. Pre-Rolls have increased sales 81% in the last year. Beverages are a smaller category, but have grown 276% in the same time period.

Average basket sizes in Michigan have been decreasing, but average units per basket have been increasing, which means customers in Michigan are getting more for their money. Prices have also been decreasing across most categories. For example, popular inhalable categories such as Concentrates, Flower, and Vapor Pens have seen their price per gram decrease between 43%-48% while other product categories have seen prices decrease by 20%. Continue reading to learn more about trends in Michigan and insights from operators within the market.

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Methodology

Data for this report comes from real-time sales reporting by participating cannabis retailers via their point-of-sale systems, which are linked up with Headset’s business intelligence software. Headset’s data is very reliable, as it comes digitally direct from our partner retailers. However, the potential does exist for misreporting in the instance of duplicates, incorrectly classified products, inaccurate entry of products into point-of-sale systems, or even simple human error at the point of purchase. Thus, there is a slight margin of error to consider.

In this report we examine sales from US Headset Insights markets. This includes AZ, CA, CO, IL, MA, MD, MI, NV, OR, FL, and WA.

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Total cannabis sales in Michigan

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In this first graph, we compare total sales across several markets in the US. Through September 2022, Michigan has totaled $1.7B in total cannabis sales. This makes Michigan the second largest US market behind California. Michigan is also one of only three Headset tracked markets in the US that have grown sales over the last year. Other newer adult-use markets such as Illinois and Massachusetts have been increasing in sales in recent months, while legacy markets have seen a decline.

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Year over year sales growth in Michigan

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With a year over year growth rate of 28.3% in total sales, Michigan has experienced the highest growth of any US market so far this year. This comes at a time when the rest of the Headset tracked markets combined have shrunk 5.4% when comparing January through September sales in 2022 over the same period in 2021.

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Product categories

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Product category share in Michigan follows similar patterns to a lot of national trends that we see. For example, Pre-Rolls and Beverages are gaining popularity in this market. Pre-Rolls are the fourth most popular product category and have seen sales grow 80.5% in the last year in Michigan. If current trends continue, we will see Pre-Rolls overtake Edibles for the number three spot shortly. Beverages, while a smaller category, are seeing the highest growth with sales increasing 275.6% in the last year alone. Total sales of Beverages are up to $6.9M from $1.8M during the same period last year.

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Cannabis brand growth in Michigan

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This next graph looks at the number of brands entering the space. After legalizing adult-use cannabis sales in 2018, Michigan saw a sharp increase in brands entering the market to meet demand. However, it seems as though that growth has started to stabilize in the past year. As we can see in this graph, the number of brands with a sale in 2022 so far has been slightly lower than in 2021.

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Top Michigan brands by category

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Here, we look at the top Michigan brands by product category as of October 2022. For the latest information about the top brands by category, check out Michigan’s Best Sellers, updated daily.

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Cannabis basket analysis

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Since the start of 2021, we have seen average basket size steadily decrease while average units per basket has steadily increased. In other words, consumers in Michigan have been getting more for less. With average basket price decreasing by 17% year over year as well as average units per basket increasing by 24%, falling prices are offering a higher value to customers.

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Cannabis prices in Michigan

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Examining average item prices (AIP), we see that market-wide, average item price has been decreasing steadily and shrunk by a third year over year. Average discount, while very responsive to seasonal changes, has increased about 12% from 18.3% in September 2021 to 20.5% in September of this year.

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Pricing is decreasing across most product categories. Popular inhalable products such as Concentrates, Flower, and Vapor Pens have seen their price per gram (EQ price) decrease between 43%-48% while most other popular product categories have seen both their AIP and price per unit of measurement decrease by at least 20%.

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Consumer preferences in Michigan

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The typical Michigan cannabis consumer is reflective of overall US demographic trends. Nearly 50% of cannabis shoppers in Michigan are Millennials with the same proportion of sales coming from Male consumers between the ages of 26-57. However, Michigan does show a slightly higher representation of Female customers across all age groups when compared to other US markets.

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What cannabis operators are saying about Michigan

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Wana Brands

In speaking with Nancy Whiteman, CEO, Wana Brands, she points out that the significant deterioration in the market was due to oversupply, which led to “severe price compression.” Add in a challenging economic climate and you have a perfect storm of a stressed market. Asked about how Wana Brands has accounted for this environment, “brand loyalty and a differentiated product become paramount” said Whiteman. It underscores the need for brands to truly be brands and have a clear value proposition that is compelling to the budtenders and can be easily communicated to consumers. “Brands that rely on discounting, promotions on top of value pricing may succeed in bringing in enough revenue to keep the doors open for a while but it’s not the way to build a sustainable and profitable brand. Wana has focused on premium quality, fair but not bottom of the barrel pricing for our quality, a wide variety of SKUs, and involvement in the local community to both build brand and give back.” said Whiteman.

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C3 Industries

Ankur Rungta, CEO, C3 Industries, which operates 12 “High Profile” branded retail locations and a 36,000 square foot cultivation and manufacturing facility, draws on his insights from all markets (OR, MO, MI, MA) they’re in to navigate the current environment in Michigan. Rungta calls Michigan a “consumer paradise” at the moment–pointing out that its highly innovative and competitive environment has meant price has dropped to a level where it can actually “usurp the illicit market.” While Michigan is a “bloodbath” at the moment, Rungta points out that it's nuanced as there are way too many companies on the production side (900+) that are unable to drop their cost structures as price compression started in wholesale. As soon as evidence of price compression started to show, C3 industries zeroed in on limiting the companies exposure to the wholesale market (which the 12 retail locations help with) as “80% of customers are buying for value” so pricing and assortment is key. In comparing the company’s operations in Michigan with the other states, Rungta compares Oregon to Michigan given its open licensing approach in contrast with Missouri’s market where there’s healthy competition (60 cultivation licenses, 200 retail licenses), but the market is not so limited that  companies can still build an orderly business.

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Lume

Lume is the largest operator in Michigan, with 32 operating retail stores, 250,000 square feet of indoor cultivation, and 3,000,000 square feet of outdoor cultivation. The Company is singularly focused on Michigan, and that verticalization and scale has helped the Company grow in-line with the market. Dave Morrow, CEO, views Michigan’s current state as a glimpse into the future of how cannabis businesses should operate. The company has been prepared for price compression to come and knew they would have to make up for price drops by increasing volume–the company sold 5M units in 2021, expects to sell 9M units this year and 14M units next year. Morrow is quick to point out that “Lume has become one of the best in the country at developing innovative best in class cannabis products designed for high volume, low cost production,” setting it apart from competitors. Coming from a background in specialty retail, Morrow believes those are the foundation of any successful fast moving CPG company. Lume believes the long-term value creation in cannabis isn’t state-by-state license accumulation, but instead, proving out a scalable production model coupled with product innovation.

He believes that scale has created a larger separation between successful and challenged operators in Michigan, as those growing below market rates are low and small-scale operators where declining prices have a higher impact their ability to increase unit sales to keep growing revenue. These operators are not verticalized and the infrastructure is not supported when prices decline quickly. On why Lume closed four stores (Bay City, Cheboygan, Christmas and Southfield) back in July, he explained that they opened three new stores in larger markets in the same month in Grand Rapids, Ann Arbor and Portage. Southfield was a temporary closure as that store is currently licensed for medical sales only and is taking longer than anticipated to get its adult-use license–it will reopen once the city issues it an adult-use license and is anticipated to be a top-five store for Lume. He reiterated that Lume is “absolutely committed to growing and deepening our retail footprint in communities across Michigan,” with plans to open at least 12 new stores in 2023.

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Consolidation / limited MSO attention

While M&A activity in the cannabis space has cooled off overall, and in Michigan, it’s worth noting the consolidation in the state that was happening prior. TerrAscend acquired Gage Growth in March 2022 for $545M and Pinnacle in August 2022 for $28.5M, bringing the Company’s footprint to 17 operating retail locations (three additional locations planned). Skymint acquired 3Fifteen in April 2022, giving it 29 operational retail locations (now around 25 operational dispensaries), with an additional 15+ in the pipeline to be opened over the next year. PharmaCann’s acquisition of LivWell in October 2021 seemed to have been driven by a desire to enter into a top three position in Colorado but it also came with a strong Michigan presence (cultivation, two dispensaries).

Operators we spoke to are still planning to open additional locations (organically and inorganically), especially as Detroit and its surrounding municipalities start to open up. While MSOs have a limited footprint in Michigan (Curaleaf has three dispensaries, Verano has one dispensary, Cresco Labs has Cultivation and Manufacturing, AWH has eight dispensaries and one cultivation/processing), if the market continues to grow steadily year over year, it’ll be hard to ignore when M&A picks back up.

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Conclusion

The US cannabis market as a whole has struggled to grow sales in 2022 after a cannabis boom during the peak years of the pandemic. However Michigan, like other newer adult-use markets, has managed to grow. The Great Lakes State has experienced double digit sales growth fueled by significant increases across nearly every product category. The growing popularity of Pre-Rolls and Beverages in particular have propelled Michigan to be the second largest cannabis market by total sales in the US this year. We’ll continue to monitor Michigan’s growth as it continues its path to maturity. If you’d like help identifying opportunities in Michigan or other legal cannabis markets, sign up for a demo of Headset tools today.

Key takeaways

• Michigan’s total sales have grown by 28.2% in the past year. This is by far the strongest sales growth of any Headset tracked market and has propelled the state to become the second largest cannabis market in the US. This comes at a time when sales in the rest of the Headset tracked markets combined have shrunk 5.4%.
• Pre-Rolls and Beverages are growing in popularity in the state. Representing the fourth largest category in Michigan cannabis, Pre-Roll sales have increased 81% in the last year. Beverages, a smaller category, have seen sales increase 276%.
• Customers are getting more for less in Michigan. Average basket size has decreased 17% year over year and average units per basket has increased by 23.9% during the same period. This is driven by falling item prices and heavier discounting.
• Prices are decreasing across most categories. Popular inhalable products such as Concentrates, Flower, and Vapor Pens have seen their price per gram decrease between 43%-48% YoY while most other popular product categories have seen both their average item price and price per unit of measurement (EQ Price) decrease by at least 20%.
• The number of brands entering the Michigan market is appearing to level off. Increasing sharply in the years after the 2018 recreational legalization. The number of brands in 2021 and 2022 YTD has plateaued at around 700-800 total brands.

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About the author

Dai joined Arlington Capital Advisors in 2021 and leads the firm’s Cannabis practice. Prior to joining Arlington, Dai served as VP Corporate Development for Left Coast Ventures, a CA-based Cannabis Company which completed a qualifying transaction with Subversive Capital Acquisition Corp. to form The Parent Company. Prior to Left Coast Ventures, Dai held various Corporate Development and investment positions at MedMen, Anheuser-Busch InBev, Austin Ventures and Bank of America Merrill Lynch.

Arlington Capital Advisors is a leading investment bank, offering financial and strategic advisory services to the consumer industry. Securities are offered through its affiliate, Arlington Capital Services, LLC, member FINRA/SIPC.

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