Ask Our Experts 1/12/20: Illinois Opens Its Adult-Use Market

Q: Adult-use sales began in Illinois this month, with long lines and product shortages. Is that normal? When will the shortages and long lines end?

By New Frontier Data

A: Those are common conditions in newly deployed adult-use regulatory programs, when there are often challenges to support the surge in demand when transitioning from a medical program. Despite such issues, Illinois' retail cannabis sales reportedly rang up an impressive $11 million within the first five days.

The waits and shortages were to be anticipated. There are three key components that generally cause early shortages: 1) Cultivation capacity, 2) testing capacity, and 3) retail access. To review:

1. Cultivation capacity: The strategy adopted by Illinois with respect to cultivation was to transition medical cultivators to the adult-use market, as had been accomplished in Colorado and Oregon. In Illinois, there are currently 21 cultivators licensed to support the state's entire adult-use demand. As New Frontier Data has calculated that there are 1,560,000 cannabis users in Illinois (either illicit or legal consumers), that ratio roughly equates to one cultivator for every 75,000 consumers.
   Defined another way, the Prairie State's total demand for cannabis (based on combined consumption of both illicit and legal sales) is 1.16 million pounds. As detailed in New Frontier Data's The U.S. Cannabis Cultivation Report: 2019 Legal and Illicit Output by State, in order to satisfy that total demand, the 21 cultivators per year would need to respectively produce an average of 55,250 pounds of cannabis, or roughly more than 7x the amount which a good cultivator produces annually (generally between 2,500 and 5,000 pounds per year, depending on capacity and ability). Thus, the state's shortage was to be expected.
2. Test capacity: Constraints in test capacity have been experienced in most, if not all, of the 10 other adult-use states. A lack of testing capacity can severely impact the flow of supply to a market; such constraints were so bad early in the state of Washington, for example, that the price per gram of flower exceeded $30 per gram. Once the constraints were addressed, wholesale prices settled near $3 per gram. As Illinois expands its cultivation capacity, testing will become an issue. Illinois cultivators should expect long throughput times for it, and will be well served to reserve or purchase capacity in advance.
3. Retail Access: Long lines are indicative not only of a lack of supply, but also Illinois' limited number of retail stores to support all its consumers. Based on data from the Department of Financial and Professional Regulation (the regulatory body overseeing dispensaries in Illinois), there are 37 licensed retail outlets statewide, or one outlet for every 42,000 consumers. Lack of retail access is not uncommon in states with newly deployed programs. Canada's market has been operating for nearly 15 months, and still is addressing issues about retail access. Consumers need access on the legal side, lest they continue to purchase through illicit channels. It is an issue requiring extended time to address.

As New Frontier Data's Senior Economist Beau Whitney explains, "the duration of these constraints will rest upon how regulators respond. Current plans call for more cultivators coming online in May, but they are small growers with micro-canopies, and certainly not capable of supporting the demand currently present in the state. Even once licensed, it takes a minimum of 6 to 9 months for a grower to get operational and producing. Test capacity is more a function of certifying labs and bringing them online, but this, too, takes time. Do not expect the number of retailers, either, to increase significantly in the near term."

While Illinois is currently processing applications for retail opportunities (the latest applications have the added complexity of trying to address issues of diversity and under-represented communities) the state will not begin issuing them until the summer.  Even so, the real wild cards in resolving the constraints will be the local permitting processes, local ordinances, and communities opting out. Even having a state license does not allow a business to immediately operate. So, long lines and supply shortages will characterize the Illinois market throughout the short and medium terms. There is no easy fix.

"While this may seem chaotic," Whitney notes, "it is a normal process for newly regulated states. In our U.S. market forecast report, New Frontier Data is predicting that it will take an additional 18 to 24 months before the market will normalize."

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