On Jan. 1, 2020 adult-use marijuana became legal in the state of Illinois with sales starting at 6 a.m. The first two days saw over $5.2 million of sales across 36 dispensaries selling adult-use products, with over 77,000 transactions on the first day alone. Recent reporting suggests the total has reached $11 million over the first five days.
Clearly Illinois residents have been waiting for this moment and weren’t afraid to open their wallets to show it.
Illinois’ Positioning and Regulations
Illinois is the 6th largest state in the United States with almost 13 million people and 55 million annual tourists. Illinois is also entirely surrounded by states where marijuana sales are still illegal.
This makes Illinois an appealing opportunity as it will garner additional customers from neighbouring states looking to try marijuana and serve as a solid brand-building opportunity in states that will eventually legalize.
Recreational consumers will be able to purchase up to 30 grams of marijuana flower, up to 500 mg of THC edibles, and five grams of marijuana concentrate. There will be a graduated taxation set-up based on THC content, with a 10% tax on products with less than 35% THC content.
Currently, all 55 operating medical dispensaries are able to apply to sell adult-use cannabis as well. Based on available data, 46 have applied and have been approved and one dispensary has been granted the first-ever approval to operate an adult-use only dispensary. In total, Illinois plans on awarding 75 new dispensary licenses by May 1, 2020.
However, similar to Canada, individual towns and cities (municipalities) can opt-out of recreational cannabis sales. While large cities like Chicago, Peoria, and Rockford have all opted-in, it’s unclear exactly what effect this may have on total market size.
Illinois state regulators have also put in place measures to ensure companies are prioritizing medical patients’ needs. Some approved dispensaries have opted not to sell adult-use marijuana, likely due to supply challenges.
Potential Market Size
Overall it’s unclear how big the market will be. One estimate by GMP Securities has it as large as $1.75 billion by 2022, while others think it can reach between $2-4 billion at maturity (beyond 2024).
Looking at the existing medical market, in the month of November marijuana sales were $26.2 million across 54,479 patients who purchased over 945 kg of dried marijuana. Based on sales of $12.35 million in dry flower and $13.8 million in concentrates, consumers paid an average price of $27.7 per gram of marijuana across all product SKUs.
Looking at the short-term, sales will be limited by the supply of marijuana itself. With marijuana holding Schedule 1 classification, there can be no cross-state transfer of product. With only 6 days of sales under our belt, companies like GTI are already limiting sales to medical patients only. Others have had to shut down until more supply arrives.
As of this writing, the Illinois Department of Agriculture has awarded 21 cultivation licenses. Each license permits the holder to operate a maximum of 210,000 sq. ft. of cultivation space for a total of 4.4 million sq. ft. in the state.
Assuming all facilities operate at full capacity for a year and produce an average of 40 grams per square foot, they could produce 176,000 kg. This would be more than enough to supply the legal market as it grows over the next few years. Regulators have also stated they plan to award 40 licenses to small craft growers by July 1.
However, to date companies have not built anywhere near their full capacity, leaving the market in a supply-limited state. This creates opportunities for both cultivators and retailers who can charge higher premiums until supply balances with demand.
Considering the total 2019 medical marijuana sales are likely to be approximately $260 million, the overall growth opportunity in 2020 is significant, and investors should make sure they have appropriate exposure.
Investing in the Illinois Marijuana Market
Currently, there are 36 operating dispensaries selling adult-use cannabis. This number is likely to increase on a regular basis given 46 licenses have been awarded, with more approvals on the way.
Across those 36 dispensaries, there are both private and public companies. The following table breaks down the top dispensary brands currently selling medical and adult-use marijuana across Illinois.
|Company||Type||Brand||Medical Dispensaries||Adult-Use Dispensaries|
|Green Thumb Industries||Public (GTII)||RiSE, 3C, The Clinic||7||4|
|Windy City Cannabis||Private||Windy City Cannabis||4||4|
Based on our understanding of the companies’ Illinois footprints, as well as the early adult-use sales data, we’ve listed the top three companies for Illinois marijuana exposure.
This breakdown considers factors such as dispensaries, cultivation capacity, and total topline impact. As we’ve shown with our look at the Florida market, dispensaries are important, but not necessarily the main factor worth considering.
Cresco Labs (CL)
There is a lot to like about Cresco Labs’ operations in their home state of Illinois. On a high-level, they have the largest potential cultivation capacity, a solid dispensary footprint, and a robust social equity strategy that meshes with the state’s initiatives.
With three cultivation licenses, Cresco can build up to 630,000 sq. ft. of cultivation space across three facilities. With a stated goal of 243,000 sq. ft. by the end of 2019, they are well-positioned to supply dispensaries across the state.
With state-leading cultivation, we also expect state-leading revenues. According to Cresco, they held a 25% market share in the medical market with their 5 dispensaries.
While competition will heat up, achieving this market share with only 5 out of 55 dispensaries (9%) is impressive. It suggests they have built solid brand loyalty and leveraged their strong operations, where they wholesale into 100% of dispensaries.
In November, Cresco also struck gold in Chicago’s license lottery, winning licenses for two adult-use dispensaries in the city’s coveted Central District as well as one in the Southeast district. This will help them maintain their market share of sales in the state.
As of 2019 Q3, Cresco generated $36.2 million in revenues. With the closing of the Origin House acquisition expected in the coming days (Origin House received final approval yesterday), revenues should increase substantially (OH generated $22.8 million in revenue in Q3).
Based on posted sales data and Cresco’s stated market share of 25%, they generate just shy of 40% of their revenue from sales in Illinois. This gives them significant exposure to state legalization and the benefits are supported by early data.
During the first day of adult-use sales, Cresco served 3,145 customers with an average ticket size of $135. That’s good for $425,000 in sales in one day or approximately 13% of total sales. While taxes on these sales is higher than medical, it’s still significant revenue.
While average daily sales for the quarter won’t be anywhere near that high, it’s a good sign for state operators and for Cresco.
However, Cresco’s biggest strength remains its cultivation capacity. Similar to Trulieve’s dominance in Florida, supply will play an important role in determining market share and Cresco has that covered. With early-days in Illinois to be supply limited, their topline should see a significant increase.
Green Thumb Industries (GTII)
Green Thumb Industries is another Illinois-based MSO with significant exposure to state legalization with a state-leading dispensary footprint and solid cultivation potential.
They currently have 7 dispensaries open, with 4 licensed for adult-use. A fifth is expected to begin adult-use sales later in January pending approval, while a municipal vote will be held in March to determine whether a sixth may operate as adult-use.
GTII will have the option of opening two additional dispensaries in Chicago (Northwest and West districts). Looking at state exposure as a whole, GTII has 43 operating dispensaries across their portfolio (as listed on their website), with 7 in Illinois (16% share).
Based on the market share of Illinois dispensaries, GTII generated approximately 15-20% of their revenues from medical sales in the state. While this is much lower than Cresco’s exposure, we again see strength in potential cultivation capacity.
Currently, Green Thumb Industries has two licenses, with a stated capacity of 92,000 sq. ft. across their facilities. While this is less than half of Cresco’s capacity, they have the ability to increase that to 420,000 sq. ft. This also makes them one of three operators with two or more licenses, and one of only two public companies.
Overall, GTII provides investors with solid exposure to the Illinois recreational market. While revenue growth will not be as significant compared to Cresco over the short- and medium-term, their solid production capacity in a supply limited market shouldn’t be overlooked.
Honourable Mention – Curaleaf (CURA)
Curaleaf is another MSO worth considering for Illinois exposure. Their pending acquisition of Illinois-based Grassroots provides them with a foothold in the state.
While Grassroot’s dispensaries, through their brand Greenhouse, are not currently licensed to sell to adult-use marijuana, they have the option if desired. There will also be new licenses awarded throughout 2020 that could be won by the company.
Curaleaf also touts the company as vertically integrated in the state, which means they own at least one cultivation license. This provides them with the opportunity to capture market share in the future in the supply-limited environment.
Given Curaleaf will be the largest MSO by most metrics after the closing of the acquisition, the impact of Illinois legalization won’t be nearly as significant. Overall, they offer a diversified play on the state.
The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.