Struggling Marijuana industry hoping for Ohio's Issue 2 to help boost bottom line
Scotts Miracle-Gro CEO Believes Federal Legalization Is Key to Profitability in the Cannabis Industry.
Early this week, Jim Hagedorn, CEO of Scotts Miracle-Gro, showed visitors around the company's hemp center in Marysville, a series of grow rooms featuring a meticulous variety of plants, lights, humidity and soil conditions offering a controlled experiment to determine ideal conditions for the crop.
The center, which Scotts opened less than a year ago, also represents a larger national economic experiment: Can the U.S. marijuana industry become profitable?
Despite marijuana sales growing nationally, the industry has largely struggled to make a dime.
"So many people have been destroyed in this business," said Hagedorn, who has watched Scott's stock plunge nearly 80% since early 2021, in part because of the struggles of its Hawthorne marijuana division.
Companies in the industry, such as Scotts, are hoping for help from Ohioans when they vote on Issue 2, which would legalize recreational marijuana for adults. Early voting is underway across the state for the Nov. 7 election.
Marijuana industry struggles despite state legalization
Such state moves have not, however, helped in the past.
Since the start of 2021, 12 states have approved recreational marijuana use. During the same period, the New Cannabis Ventures American fund, which tracks publicly-traded marijuana companies, plunged from more than $100 a share to about $15 a share.
The largest company on the index, Curaleaf Holdings, illustrates the challenge throughout the industry: During its most recent quarter, the company's sales rose to $338.6 million but its losses climbed to $71.2 million.
"Everybody's so abused in the space," Hagedorn said. "We are all wrecked, as far as value."
Hagedorn and other industry leaders believe the salvation of the industry ultimately lies with federal, not state, legalization. However, they nonetheless believe legalization in states such as Ohio can help the industry.
"The benefit to this is the creation of jobs that never existed," said Kate Nelson, executive vice president of the Midwest and New England regions of Acreage Holdings, which operates marijuana cultivation, processing and dispensary facilities in Ohio and several other states.
"There’s so much opportunity to grow and develop careers," added Nelson, who is based near Middlefield in northeast Ohio. "This would be a positive for so many different industries in Ohio."
More than 6,500 workers are employed in Ohio's medical marijuana industry, and thousands more are employed by companies such as Scotts, producing equipment and more used in the industry.
"The industry employs thousands of workers, employed by medical operators, processors, testing labs, cultivators, dispensaries," said Tom Haren, a spokesperson for the Coalition to Regulate Marijuana Like Alcohol, the group supporting recreational marijuana for adult use in Ohio.
"These are good-paying jobs," he said. "So from an economic standpoint, Issue 2 will generate hundreds of millions in new tax revenue, but it will also generate thousands of jobs within the industry and in general economic development throughout the state — vacant businesses being turned into use, construction trade jobs, and other ancillary businesses like security companies, packaging and labeling businesses."
Ohio's recreational pot market could top $2 billion
In Ohio, sales of marijuana products rose steadily from early 2019, when Ohioans could first buy it, climbing to $4 million a week in plant material by March 2021, according to the Ohio Medical Marijuana Control Program. Since then, sales have grown at a much slower pace, reaching $5.1 million a week for the week of Sept. 30, the most recent week reported.
Nationally, marijuana sales have also grown, from $20 billion a year in 2020 to an estimated $32 billion this year, according to the Brightfield Group, a Chicago company that tracks the industry.
Brightfield estimates the U.S. marijuana industry will grow to $51 billion in 2028. In Ohio, if Issue 2 is approved, Brightfield estimates the market will reach $1.3 billion in 2026 and $2.2 billion in 2028.
"A lot of analysts have been seeing the downturn the past three or four years in the stocks and say, 'Wow, this market is screwed,' but the industry continues to grow," said Madeline Scanlon, Brightfield's cannabis insights manager. "Operators are making slim margins, or they aren’t making money, but if you look at market size, it’s been blowing up, especially in the Midwest."
Black market drives down prices
Experts cite several reasons companies struggle to profit while the industry grows, including oversupply.
"In Ohio, a lot of companies grew very quickly, and there was a lot of inventory, and you’ve seen prices come down significantly," Nelson said.
Michigan, which legalized recreational marijuana in 2018, saw prices decline dramatically in 2022, leading to struggles for the state's cannabis businesses.
Adding to price pressure is competition from cheaper, illegal sources.
"The illicit market is unique to cannabis," Scanlon said.
"The cannabis consumer needs to change their habits from illicit to legal," Scanlon added. "Instead of calling a number and having something delivered, they have to go into a store, show an I.D. and buy something from behind a case that they can’t test, and costs significantly more than they would pay for an illegal service."
But the biggest obstacles are due to marijuana being illegal federally, which presents two huge problems: industry members are denied access to conventional banking, and businesses in the industry must pay taxes but cannot deduct expenses (under section 280E of the federal tax code).
"280E is brutal for anyone who works in cannabis and makes it almost impossible for anyone in the industry to become profitable," Nelson said.
In addition, she said, "raising capital is a huge problem" without access to banking.
Scotts Miracle-Gro feels the pinch
Few Ohio companies have felt the impact of growing pains in the cannabis industry more than Scotts.
The company dove into the industry in 2014 with the launch of Hawthorne, which makes products for the industry, including grow lights, trays and nutrients. At the time, Hagedorn saw Hawthorne as providing a growth engine for Scotts, and fully expected marijuana to be legal nationally in three to five years.
But after a rise in sales, Hawthorne has tanked.
For the most recent nine months, Scotts sold $317.6 million of Hawthorne products, down from $547.7 million in the same period a year earlier.
Hagedorn believes Hawthorne will become profitable "this year, no doubt," but he now has second thoughts about getting into the industry and supports spinning the company off from Scotts.
"It's been a poor investment for us, to be sure, for all kinds of reasons," he said.
