The cannabis industry made it through the 2020 economic slump – brought on by the pandemic – relatively unscathed due to anxious customers turning to cannabis for therapeutic relief, while others sought its medical benefits. The boredom of isolation also made cannabis an accessible form of recreation. Two years later, many economists believe the emerging recession will not have the same outcome… Can this be attributed to inflation alone, or does the lack of federal action have a part to play, as it so often does?
The Looming Recession
By the end of 2022, it’s almost certain that the US economy will be in a moderate recession as the Federal Reserve raises interest rates to control inflation, according to Bloomberg.
Will the cannabis industry remain as unaffected by the approaching recession as it was during the previous one? The answer seems to be no. Many economists believe that the cannabis industry will be heavily impacted while others have hope that the trend of the previous recession will continue.
Leaders in the cannabis industry cite the lack of federal action in Washington – in the form of cannabis reform and legalization – as the reason for a more pessimistic view. There’s also the problem of growing inflation, which tends to make people slightly stricter with their budgets.
Factors That Would Cause The Cannabis Industry To Succeed – Or Fail
There are also other elements in play when it comes to the cannabis industry’s survival through the recession. For instance, younger state markets with constricted license access – like Florida, Illinois, Massachusetts, New Jersey, and New York – typically have higher wholesale cannabis pricing and a less bustling market.
Cannabis businesses in those states, according to industry insiders, are better prepared to withstand a slump than those in more developed markets like Colorado, Oregon, and Washington, where cannabis companies must contend with overproduction, declining wholesale prices, and fierce competition.
As a result, the pathway and outcome of the recession will depend on each state’s cannabis industry.
Kevin Bush, the Chief Financial Officer of Denver-based Sweet Leaf Madison Capital, noted that “every state operates differently with a separate regulatory structure.”
As it turns out, Cannabis stands as one of the few industries that are experiencing deflation rather than inflation, according to George Mancheril, CEO of Bespoke Financial. Mancheril predicts that while most businesses in mature markets won’t have a very successful year, it’s possible for them to persevere and hang on until 2023 or 2024.
Reform – What Reform?
According to Jordan Lams, CEO of the vertically-integrated cannabis company Moxie, the lack of progress on federal cannabis reform is making it more difficult for businesses to make a profit.
Cannabis customers are feeling the pain of growing costs in the form of gas and food prices, among other inflationary pressures, much like the cannabis companies themselves.
According to Skip Motsenbocker, CEO of Pacific Stone, this could actually lead to cannabis customers buying more inexpensive goods and taking fewer chances with their choices.
According to him, consumers will be less likely to branch out and test new products, choosing instead to stick with brands they know, like, and trust.
Given that the cannabis sector is still in its infancy, it is difficult to say whether it is truly recession-proof, according to Motsenbocker. But historically speaking, if we use the alcohol and tobacco sectors as a benchmark, these industries have shown pretty stable demand during a recession.
The fact that economic downturns often do not impact the alcoholic beverage business was corroborated by Jason Vegotsky, CEO of Petalfast. Instead, we observe that consumers seek alternatives with better value. During a downturn in the economy, cannabis may just follow a similar trend.
Government representatives and economists, on the other hand, make a variety of forecasts regarding the likelihood of a protracted slump in the United States.
According to Ryan Smith, CEO of LeafLink, the cannabis market is well-positioned to prosper regardless of the challenges it encounters. However, Gary Cohen, CEO of Cova Software, disagrees and thinks that this time around, things will be different.
He emphasized how growing inflation is causing customers to have less money in their pockets at a time when they have more options for where to spend it. Moxie’s Lams added that cannabis prices are continuing to drop, which is bad news for companies who want to sell it for a profit.
How To Survive
According to Cohen, recognizing that prices decline as markets mature is the key to success in the industry. He claims that if cannabis firms want to survive this, they need to consider the reality of where this market is heading.
Nirup Krishnamurthy, chief operating officer of Schwazze, has stated that cannabis businesses must have a tight handle on their expenses and that in order to withstand significant price swings in the market, it is crucial for organizations to have a portion of their operations vertically integrated.
Cannabis businesses should examine their profitability and margins using hard data and market trends, focusing on their operations and what they’re doing, according to John Yang, the CEO and founder of Treez
Troy Datcher, CEO of The Parent Company, advises operators to cut costs by 20% more than they believe they need to. He also stated that they should take proactive steps to manage their costs, such as approaching vendors and negotiating lower prices, postponing any unnecessary projects, and managing their operations as effectively as possible.
Will the cannabis sector continue to be as untouched by the upcoming recession as it was during the previous one?
Perhaps, perhaps not – and once more we can thank inaction on the part of the federal government and inflation for our latest cannabis industry stressor. However, it’s not all doom and gloom. Our advice to cannabis businesses is to be smart with their capital in order to continue making a profit.
Enjoyed that first hit? Come chill with us every week at the Friday Sesh for a freshly packed bowl of the week’s best cannabis news!