Jessica McKeil   |   April 20, 2020

Is Cannabis Recession Proof?

As the global economy takes a COVID-19-triggered downturn, what can the cannabis industry expect?
Jessica McKeil is a freelance writer focused on the medical marijuana industry, from production methods to medicinal applications. She personally found relief through cannabis for the treatment of her panic and anxiety disorder. She is lucky…

Is cannabis recession-proof? Many industry experts have weighed in with a resounding "Yes!" But is this entirely realistic or just wishful thinking? The nascent cannabis industry may come out of the pandemic in better shape than many others, but it's likely to go through a period of significant transition.

Emily Paxhia, co-founder of Poseidon Asset Management, is of two minds about the impact of a COVID-19-related recession. As she told Cannabis Tech, she believes the sector has always faced unprecedented challenges, making it remarkably ready to face whatever the pandemic has in store. But, on the flip side, she expects serious shifts in consumer spending habits and, therefore, consolidations among retailers and producers.

What can we expect the impact of COVID-19 to be on the cannabis industry?

What Does Cannabis Have Going for it in a Recession?

As Paxhia explained in a recent interview with Cannabis Tech's Kristina Etter, "Nothing is easy in cannabis." Since the very beginning, the sector has faced an uphill battle against social opinion, political will, and regulatory setbacks. From her standpoint, at the helm of a cannabis asset management company, Paxhia has seen just how hard it has been for these companies to get financial backing, even during good times.

Founders have had to get creative in building companies and find fundraising opportunities. Now that the global economy is taking a nosedive, cannabis could be uniquely positioned to take advantage of these unconventional financing channels. With cannabis deemed an essential service in a vast majority of legal states, it may make sense to invest in the sector even in times of crisis.

A Look Back at Liquor Sales During Economic Hardship

Legal cannabis hasn't been active long enough to pull accurate predictions from historical economic catastrophes. During the last recession and the 2008 subprime mortgage crisis, few states had any medical cannabis programs, and none had a recreational market.

Liquor sales during recession are perhaps the best predictor of cannabis sales today, although it's an imperfect comparison. According to the numbers from the 2008 recession, consumers still purchased alcohol, and often in even higher numbers than before the recession. Liquor sales grew by nine percent in 2008, also while the unemployment rate hit almost ten percent.

Esther Kwon, an alcohol industry analyst, reported to CNN Money about what he witnessed during the last economic downturn. Alcohol sales went up, and the various service providers benefited immensely. That meant bars, retailers, and wholesalers. Cannabis may expect similar trends during the COVID-19 pandemic. So long as the retailers remain open for sales, the supply chain must exist to feed it.

In many ways, the comparison between liquor-cannabis sales makes sense. After all, both products serve a recreational purpose. During isolation and hours spent binging on Netflix, Paxhia says, "Cannabis is a great companion product." But she goes on to say that unlike alcohol, "Cannabis is a wellness resource." It might see even more significant gains during the recession than can be predicted from alcohol sales because of its medicinal characteristics.

Expectations for Cannabis in a Post-Pandemic World

Paxhia is confident about cannabis in a post-pandemic world, but with a few caveats. Although marijuana is "battle-tested and used to friction," it doesn't mean there won't be significant changes to consumer spending habits.

As she predicts, "Consumer spending behaviors will shift immeasurably in 12 months." Especially as analysts predict a negative GDP during Q2, some consumer products, perhaps leaning more recreational than medical, can expect to see changing buying habits. In Paxhia's opinion, "People's psyche is going to shift for the long haul."

Paxhia is curious to see how consumer buying patterns shift over the next few months and years. With a lack of disposable income, will consumers shift towards Seek out lower price point products and different product types? Will the market shift towards medical and away from purely recreational? There are many unknowns.

What she does expect is a contraction in the industry among branded and retail companies. Everyone, in and outside of the industry, is having to tighten up ship, make intelligent cost-cutting decisions, and fortify their brands to weather the incoming hurricane. It will not be easy, but it may just make for better, stronger companies.

 

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