Cresco Labs warns of initial supply hiccups ahead of Ohio launch

With Ohio poised to begin issuing the first of its adult-use licenses next month, several cannabis operators are preparing to become an early player in the new state market. However, one of the largest multistate cannabis operators is warning that the accelerated timeline could lead to supply shortages out of the gate.

During its first quarter earnings call on Wednesday, executives from Chicago-based Cresco Labs Inc. (CSE: CL) (OTCQX: CRLBF) addressed the double-edged sword of an earlier-than-expected start for Ohio’s new recreational cannabis market next month.

Cresco CEO Charles Bachtell acknowledged the positive surprise of adult-use licenses coming out in June, calling it “great news” for the industry, but he also raised a yellow flag about the development.

“That comes with its own potential challenges too,” Bachtell told investors. “The ability to service the significant increase in expected volume in the state of Ohio, just realistically, the CapEx and the expansion plans needed to go from medical to adult use in the doubling, tripling, whatever it may be, it’s going to take more time than nine months to 10 months.”

Most operators, including Cresco, had been making plans based on previous projections that Ohio’s adult-use market wouldn’t kick off until later in 2024. That timeline shifted after state regulators announced this week that dual-use applications – which would provide existing medical operators with the opportunity to sell adult-use products as well – would be ready by June 7.

To ready for the transition, Cresco said it has steadily invested in incremental capital expenditures to expand cultivation capacity at its production facility in Ohio. CFO Dennis Olis said the company expects “a slight increase” in inventory levels in the second quarter as it builds up supply for the new adult-use market.

However, Olis noted most of Cresco’s major production site investments have already been made, and some remaining funds will be needed to expand certain retail dispensaries to handle increased foot traffic and volume.

Cresco took “a phased approach” to capital allocation in Ohio given the uncertainty around how exactly the program would unfold, Bachtell explained. He said there was “quite a bit of risk” from opposition when the adult-use law was approved by voters in November.

For cultivation and retail, the compressed timeline was a curveball. Cannabis companies raised concerns that they might not be able to adequately boost supplies and staffing if sales opened up to all adults so soon after the ballot initiative passed.

While acknowledging potential short-term bottlenecks, Cresco still struck an optimistic tone about navigating the challenges and capitalizing on the lucrative Ohio market opportunity. President Greg Butler projected an initial spike in cannabis pricing before the market stabilizes as more supply comes online.

Medical marijuana dispensaries that had been operating in the state for at least five years as of Dec. 7, 2023, will receive first crack at adult-use licenses to convert to the new market. The state’s new Division of Cannabis Control will also issue up to 50 additional new stand-alone adult-use dispensary licenses, with licensing preference given to social equity applicants.

For multistate operators like Cresco that already have cultivation and retail assets in Ohio’s medical program, the adult-use transition represents a hotly anticipated growth catalyst – supply constraints or not. Other established cannabis companies in the state are also investing heavily to scale up operations.

“We’re all very happy that it looks like a good guy all around where it moved forward faster than expectations,” Bachtell said.