Legal Cannabis Businesses Struggle to Survive: How Michigan's Unlicensed Market is Crushing Licensed Operators

Michigan’s cannabis industry is rapidly expanding, with sales projected to surpass $3.3 billion this year. However, many licensed operators are struggling to stay afloat, facing intense financial pressure due to price compression, oversupply, and competition from the unlicensed market. A 2023 court ruling, which effectively decriminalized large-scale illegal marijuana operations, has exacerbated these challenges, giving black-market dealers a significant edge over legal businesses.

The court’s decision stems from a case involving Shaaln Kejbou, an unlicensed grower caught with over 1,100 plants. Despite the large scale of his operation, Kejbou escaped felony charges and only faced a minor 90-day misdemeanor due to the Michigan Regulation and Taxation of Marihuana Act (MRTMA) passed in 2018. This loophole has opened the door for illicit dealers to flourish, driving down prices and forcing many legal businesses into unsustainable financial situations.

Since Michigan legalized cannabis, the market has faced a continuous decline in prices. The average cost of an ounce of flower has plummeted from over $400 in 2020 to just $80.14 in August 2023. This significant price drop has been driven by oversupply, with the number of plants being grown by legal operators increasing by 47% year-over-year.

While increased competition among licensed growers has contributed to lower prices, the infiltration of illegally grown marijuana into the market has made it nearly impossible for legal operators to remain competitive. Unlicensed growers bypass taxes, regulatory compliance, and licensing fees—expenses that burden legitimate businesses. With these advantages, illicit dealers can sell their product at far lower prices, further compressing the market.

For many licensed operators, the financial strain is becoming unbearable. Dozens of legal cannabis businesses have already shut down, unable to keep pace with the ever-decreasing prices and rising operational costs. David Morrow, CEO of Lume Cannabis Co., Michigan’s largest legal grower, expressed his frustration with the situation: “They are sending a clear message that following the rules and being compliant is optional. The last time I checked, paying our licensing fees and excise taxes are not optional. Very few cannabis operators follow all the rules.”

The legal market’s regulatory framework, which was designed to ensure consumer safety and product quality, has become a disincentive for compliance. For unlicensed dealers, the risks are minimal, while the potential profits are enormous. Large-scale illegal operations are thriving, often blending their unregulated product into the legal supply chain, exacerbating price compression and undermining the integrity of Michigan’s cannabis industry.

The oversupply of cannabis in Michigan is another critical factor in the financial difficulties facing licensed operators. Legal growers are cultivating millions of plants, far outpacing the demand for marijuana in the state. With the legal market already saturated, the influx of illegal cannabis has only made matters worse.

According to the Michigan Cannabis Regulatory Agency, the state had 3.83 million active cannabis plants being grown by legal operators in August 2023, a substantial increase from the previous year. This glut of product, combined with the illegal marijuana flooding the market, has led to the sharp decline in prices.

Many illicit growers, such as the operation run by Hongrui Enterprises, have taken advantage of the weak enforcement of marijuana laws. This particular case involved a $28 million unlicensed operation that went unchecked due to the court’s ruling, highlighting the economic threat posed by illegal grows. While law enforcement was able to seize the product, the lack of criminal charges means these operations can simply relocate and start again, further saturating the market and driving prices lower.

The price compression caused by illegal cannabis has put legal operators at a severe disadvantage. Unlike their unlicensed counterparts, legitimate businesses must adhere to strict regulatory guidelines, pay licensing fees, and contribute to the state’s excise tax. These costs, combined with rapidly declining prices, have left many operators with razor-thin margins—or no profits at all.

As long as large-scale illegal operations can operate with minimal risk, Michigan’s legal cannabis industry will continue to face economic strain. For law enforcement, the challenge of curbing illicit grows has been made nearly impossible by the weakened legal framework. Meanwhile, the state’s licensed operators are left fighting an uphill battle to remain competitive in a market that increasingly favors those who operate outside the law.

Without significant legislative reform to close the loopholes in Michigan’s marijuana laws, the state’s legal cannabis businesses may continue to falter, potentially threatening the long-term sustainability of the industry.

Is Michigan's legal cannabis industry on the brink of collapse due to black-market competition?