SPRINGFIELD — On paper, at least, Illinois’ adult-use cannabis industry is finally starting to flower as intended.

A long-delayed lottery for new dispensary licenses to social equity applicants finally commenced last year, with some of those new dispensaries now open and others preparing to enter the market later this year.

And sales are still growing, albeit at a slower pace.

In 2022, Illinois dispensaries logged more than $1.55 billion in recreational marijuana sales, bringing in more than $465 million into state coffers, both record highs for the budding industry.

This represents growth from the nearly $1.38 billion in sales and $422 million tax revenue raked in 2021. In 2020, the first year of adult-use sales, the numbers were $669 million and $175 million, respectively.

However, the reality is more complicated. As Illinois weed enthusiasts toke up on the 4/20 “high” holiday, there are signs that Illinois’ legal industry has plateaued with sluggish sales growth as the market closes in on a saturation point while facing new outside competition.

Not to mention that, despite the issuance of new dispensary licenses, there are continued barriers to access for social equity applicants.

Recreational marijuana sales are still increasing, but sales data from the later half of 2022 and the first quarter of 2023 suggest that the growth is slowing.

According to state data, monthly year-over-year dispensary sales growth dipped below 10% in June 2022. It hovered between 4% and 9% every month until this March, when it fell to just 2.9%. It’s a far cry from the exponential growth experienced in the first couple of years of the legal market.

“I mean, obviously, you’re not going to be able to maintain that year-over-year growth like you did in 2020 and 2021, so on and so forth,” said Chris Stone, a Springfield lobbyist and cannabis consultant. “But I think it’s stabilized. I think that you’ll probably see some limited growth again in Illinois. I don’t see it getting any more than 5%.”

Some of this slowdown was expected following the initial ramp-up. But another factor has emerged: Missouri vote to legalize recreational marijuana last year and cannabis products there are taxed at a lower rate.

“I do think that Missouri going recreational has definitely had an impact on Illinois sales in the Metro East … I think it has changed substantially in the last two months,” Stone said.

Illinois recreational sales from out-of-state customers fell to a two-year low in February, the first month of sales in Missouri.

Year over year, out-of-state sales were down 10% in February and 17% in March despite there being an overall increase in sales. Cannabis industry insiders say the effect has been greater in the Metro East region, where dispensaries are in direct competition with Missouri. 

Out-of-state users contributed about 30% of Illinois marijuana sales in 2021 and 2022. But in the first three months of 2023, the cohort has dipped to about a quarter of sales.

Stone said this increased competition from the Show-Me State and the growing popularity of hemp products, which are lightly regulated but can offer some similar effects to cannabis products, could cost the state between $50 million and $80 million in annual tax revenue.

But state officials are not sweating it — at least not yet.

“We’re most certainly aware of some plateauing numbers when it comes to out-of-state sales and the effects surrounding state legalization has had on us,” said Vaughn Bentley, deputy director of cannabis control for the Illinois Department of Financial and Professional Regulation. “It’s something we’re not concerned with, but we are watching it.”

Last May, a Cook County judge lifted an order that put a nearly two-year halt to the issuance of new dispensary licenses. It was in place amid a series of lawsuits over the botched rollout of the state’s social equity program.

Initially, 75 dispensary licenses were to be awarded in September 2020, but that lottery yielded just 21 candidates being awarded licenses out of more than 900 applicants. Many failed to qualify simply because they did not have a military veteran as part of their group, which was worth additional points.

In an attempt to resolve this, state lawmakers approved and Gov. J.B. Pritzker signed legislation in 2021 establishing 110 new dispensary licenses while making tweaks to the application process. 

The lifting of the order allowed new social equity lotteries to finally be held.

Some of those dispensaries are starting to open. According to IDPFR officials, 16 of the state’s 126 cannabis dispensaries are now owned by social equity licensees. It’s progress, but still a small fraction of the 185 social equity licenses that were issued last year.

Industry officials say there are many barriers facing social equity applicants. The two-year delay did not help. But now, chief among the concerns is access to capital.

“I think the state has tried to do a good job in really driving the social equity piece of this,” Stone said. “The problem is that without any finances, it makes it very, very hard for the social equity people to be able to get up and running. And, a lot of these projects, I fear, will end up stalling out.”

Peter Contos, deputy director of the Cannabis Equity Illinois Coalition, said the state failed to live up to the promises in 2019 surrounding social equity applicants and restorative justice programs.

The Cannabis Equity Illinois Coalition is a non-profit working to advance the equity surrounding the cannabis industry in Illinois by working with partners and communities effected by the War on Drugs.

The coalition provides services in expunging past criminal records related to cannabis, teaching people their rights as it relates to cannabis and helping people create community benefits agreements to ensure that local needs are met when new developments come to their town.

Following the initial roll out of licenses and the pandemic, a majority of the license holders have been waiting for years to use their licenses and in some cases, their funding had dried up and are now looking to other states, Contos said.

“These investors are looking at Illinois and they see the issues they see with how messed up the system is and how backed up the program is,” Contos said. “They’re moving to states like New York and New Jersey and they’re looking at places like Pennsylvania and Minnesota that are going to legalize cannabis in the next couple years and to started laying the foundation there because they have already seen that ship sailing on in Illinois.”

Pamela Althoff, executive director of the Cannabis Business Association of Illinois, which represents all state-licensed cannabis operators as well as those who are future social equity applicants and other industry stakeholders, said the largest challenge for operators is finding investors with the capital to build dispensaries and grow facilities.

The state’s Social Equity Cannabis Loan program, launched in 2021, provides loans to social equity license holders through private lenders, but the interest rates on these loans were higher than expected, Althoff said.

In response to this, the state created the Direct Forgivable Loan program late last year. It makes $8.75 million available to social equity applicants to provide immediate access to capital, Althoff said.

The loan amounts will be available per participant based on the business type, according to state documents. This includes craft growers who could apply for a $500,000 loan, infusers who could apply for a $250,000 loan and transporters who could apply for a $50,000 loan.

“There’s a recognition that there will be modifications and revisions, which was the entire premise when Illinois passed legislation for the state to legalize cannabis,” Althoff said. “They did it in a very slow and methodical process in order to be able to evaluate each of the phases and make those corrections or reset the process as it’s rolling out.”

“Like any new industry, you’re bound to run into unanticipated challenges,” Althoff added.

But it’s a race against time, as social equity candidates under the law must be up and running within about a year of winning a license. For many, that date comes in mid-July. 

Insiders say that, like any industry, changes need to be made as conditions dictate.

“The cannabis industry in Illinois is evolving,” Althoff said. “The pandemic provided new challenges that were unanticipated, but we are not an anomaly and we’re seeing the same kind of challenges and delays in other states.”

Althoff said the businesses association is hoping to see the state form a cannabis commission similar to what is already available for gaming, liquor and other services and issues in the state. 

“We should do everything we can to increase that revenue for the state and provide as much guidance and direction for this nascent industry as we possibly can,” she said. “It would be much more unified and consistent over administrations if we had one operating entity.”

That and other changes could be rolled into an omnibus cannabis bill before the end of the spring legislative session. There is a working group of lawmakers meeting on this issue.

State Rep. Kelly Cassidy, D-Chicago, who sponsored the original legalization law, told Lee Enterprises that “we’re just now getting to the point where we’re in the position to make the tweaks we knew we were going to have to make.

“When we first started this journey, we talked about that it takes about five years for a market to mature,” Cassidy said. “During that time you see what challenges are and what you need to fix and I honestly think we had a massive pause button on that five-year-clock. It is time for us to be reviewing these things.”

Cassidy, though not in the current working group, said she has expressed concern about the state’s high cannabis tax rate due to the cross-border sales and that “it might be time to look at that again.”

Other issues that could be addressed include codifying curbside pickup, which was a pandemic-era innovation. And there will likely be moves made to help social equity applicants, including a possible one-year extension on the deadline for their dispensaries to be operational.

Bentley said a legislative fix would be cleanest, but that state cannabis regulatory officials are “also exploring what options we have independent of the legislature to give folks more time.”

But despite the growing pains, Bentley struck an optimistic tone.

“I think as we see the difficulties facing applicants, it does make sense that there’s been a bit of a slow trickle where now we’re seeing new dispensaries come on almost weekly if not sometimes daily at this point,” Bentley said. “I think around the corner, we have a lot more in the pipeline.”

Erin Henkel contributed to this report.