Battling Inflation: Cannabis Companies Feel the PinchInflation reveals that the cannabis industry isn’t untouchable during economic strife.
Throughout 2020, the industry surprised everyone by not only surviving the pandemic but actually thriving in it. Even industry legend, Tommy Chong, was surprised by the sudden shift that came with the COVID-19 outbreak, as cannabis was deemed an essential industry in most legal states.
Throughout the pandemic, even as the discussions of recession loomed on the horizon, cannabis continued to shine – raking in record-breaking revenues. According to BDSA data, the cannabis industry surpassed $17 million in sales in 2020 – reflecting a 46% increase over the previous year.
When most other industries were floundering, cannabis flourished. Could the recession and inflation finally be coming for cannabis?
Is Inflation a Factor for Cannabis?
While a recent report from Headset explains how inflation isn’t impacting cannabis as much as other industries, the winds may shift as the industry starts seeing more bankruptcies, closures, and layoffs. Inflation is forcing owners to decide between cutting costs or cutting people in a once untouchable space.
Interestingly, despite the sharp increase in costs for cannabis growers, this graph from Headset shows that cannabis prices have stayed relatively steady or even decreased in some markets.
A recent article on Leafly suggests that unstable pricing is merely an economics equation. During the height of the pandemic, cultivators ramped up production to keep up with the increased demand. But, as inflation cuts into consumer pocketbooks, demand has declined, and competition is intense to sell off the excess inventory. In other words, the market is flooded.
Bloomberg quoted BTIG analyst, Camilo Lyon, calling the current state of cannabis a “regulatory recession,” describing it with this statement, “Cannabis, with its many federal and state regulatory restrictions still in place, has been driven into recession by slow-moving policy changes.”
But, another report from GreenGrowth CPAs suggests the industry can’t continue to withstand the impact of inflation much longer. Of the 700 cannabis companies evaluated with this survey, 70% claimed they were attempting to absorb the additional expense, and 30% plan to raise prices.
Cannabis Tech Companies Struggling
Layoffs and business closures are unfortunate side effects of an economic downturn. Although the cannabis industry has grown to employ more than 420,000 people, several cannabis-centered businesses have announced layoffs in recent weeks.
- Akerna, a cannabis compliance software firm, announced that they would restructure and lay off 59 workers.
- Dutchie, another tech company with over 700 employees, announced a plan in June to reduce its workforce by 8%.
- Eaze also laid off 25 people in June of this year.
- At the beginning of the year, laid off 150 employees in Vancouver.
- Weedmaps recently announced plans to cut 10% of its staff, sighting a “widespread slowdown” in legal cannabis.
Cannabis Producers Taking a Hit
Many producers are also struggling. A report published last month on EisnerAmper reads,
“Growers have especially been affected by the adverse effects of the pandemic, as well as the war in Ukraine. Ukraine and Russia export 28% of the world’s fertilizers, and wartime disruptions and economic sanctions have significantly reduced those supplies, causing the price of fertilizers to double in some cases. The largest cost increases have been attributed to labor, where wages have increased by 14% on average. Companies have been forced to increase wages in order to keep pace with competitors and maintain employees.”
Unlike other industries, cannabis-based businesses do not get the luxury of writing off their business expenses or claiming depreciation on their assets. So, simple economics tells us that when the cost of doing business goes up, either consumer prices go up, operating costs go down, or company profits suffer.
And it appears that may be the case in cannabis. A recent North Bay Business Journal article references data collected in a National Cannabis Industry Association survey. Of 396 cannabis operators surveyed, 37% claimed they were not profitable.
Other reports also point to the bottom falling out from under mature markets such as Washington, Oregon, and Colorado, as high taxes and a saturated market make competition extraordinarily stiff. The Colorado Department of Revenue reported that marijuana sales in April 2022 totaled just $153 million, a 25% decrease from the same month in 2021. Colorado’s largest cannabis producer, Veritas Fine Cannabis, recently announced the closure of one of its three cultivation facilities and laid off 33 people.
An article from the Colorado Sun recently points to a consolidation in the Colorado cannabis space, noting a decline in collected cannabis taxes. One company, TweedLeaf, had its licenses suspended due to unpaid taxes and subsequently closed its doors at seven retail locations.
Correcting the Course
Without question, the cannabis industry exploded in its first decade. From 2012 to 2022, the industry experienced unprecedented opportunities and rapid expansion. But, as US consumers tighten their purse strings to adjust to the rising prices of essential goods, retail cannabis is suffering a loss.
Business owners are struggling to hold on while they wait for federal legalization. A severe lack of financial services, unfair and exorbitant taxation, and a cash-only format are strangling the industry.
The Game is Far from Over
Yet, while sales statistics and tax revenues may decline in mature markets like Colorado and California, it’s also important to note that other markets are still coming online despite the lack of federal support. Rhode Island approved retail cannabis this year, and several other states have ballot initiatives on the slate for November, including:
- North Dakota
- South Dakota
The retail cannabis industry has been a novelty for a decade, but at its roots – it’s still a business. While early adopting states may continue to see a decline in the coming years, from a broader, nationwide perspective, the industry is still growing. New markets, along with new and expanding growers in existing markets, should take note to keep operating expenses and overhead low.
Buy Used Cannabis Processing Equipment
Naturally, frugal business owners are looking to cut costs, but most times, walking a tightrope between expanding operations and reducing expenses isn’t an easy task. As such, new markets should be taking advantage of the great cannabis consolidation by looking to repurpose used equipment. As businesses close their doors and start liquidating their assets, buying used cannabis processing equipment is becoming easier.
If your company is looking to purchase used cannabis equipment, or if you have equipment to liquidate, contact Cannabis Tech today at [email protected].