Will a looming recession sink the cannabis industry, or will it stay afloat?

With the threat of a recession hanging over the U.S. economy, the nation’s cannabis industry appears to be on shakier financial ground than when the last downturn struck two years ago, at the start of the COVID-19 pandemic.

Marijuana companies weathered the 2020 coronavirus-induced recession relatively well, with sales booming thanks to federal stimulus checks and anxious consumers turning to cannabis for stress relief.

The industry emerged relatively unscathed by the recession.

This time around might be different.

Cannabis industry executives point to rising inflation – which tends to curb consumer purchases – as well as the lack of progress in Washington DC for federal marijuana reform.

Other factors are at play, too.

Newer state markets with limited licenses – think Florida, Illinois, Massachusetts, New Jersey and New York – commonly experience relatively higher wholesale cannabis prices and a less competitive landscape.

Industry officials said marijuana companies in those states are better positioned to weather a downturn than operators in more mature markets such as Colorado, Oregon and Washington state.

Cannabis businesses in those states face overproduction, falling wholesale prices and stiff competition.

As a result, a recession could play out differently depending on the state cannabis market.

“Every state is its own story, with a different regulatory structure,” said Kevin Bush, chief financial officer for Denver-based Sweet Leaf Madison Capital.

George Mancheril, CEO of Bespoke Financial, a Los Angeles commercial lender that works with cannabis companies, said marijuana stands out as one of the only industries where businesses are experiencing deflation.

Mancheril expects that most companies in mature markets won’t have a banner year but should be able to slog through and survive until the end of 2023 or 2024.

“That’s a baseline expectation,” he added.

Dim prospects for reform

Jordan Lams, chief executive officer at Moxie, a vertically integrated cannabis company based in Long Beach, California, said the lack of momentum for marijuana reform at the federal level is making it harder for companies to find capital.

Couple that with falling prices and increased costs stemming from inflation, and “it’s probably one of the more challenging seasons the industry has seen,” he said. “It’s a double whammy.”

Like cannabis companies, marijuana consumers are feeling the pinch of rising costs by way of gas and food prices, among other inflationary pressures.

In response, cannabis consumers could purchase more bargain-priced products and take fewer chances on their selections, according to Skip Motsenbocker, CEO of Pacific Stone, a cannabis cultivator based in Carpinteria, California.

“We do think consumers will be less likely to try new products and stay with brands they know, like and trust (and also) offer great value for their dollar,” he said.

Recession-proof?

Taking into account that the cannabis industry is still relatively young, it’s hard to know whether it is indeed recession-proof, Motsenbocker said.

“However, using the spirits and tobacco industry as an anecdotal guideline, historically these industries have experienced fairly steady demand during a recession.”

Jason Vegotsky, CEO of Petalfast, a sales and marketing agency for the cannabis industry based in Irvine, California, agreed.

“If you look at alcohol beverages, economic downturns typically do not hurt the industry,” he said.

“Instead, what we see is the consumer looking for value alternatives. I would expect the same trend in cannabis during an economic slowdown.”

Government officials and economists, meanwhile, offer a wide range of predictions about the possibility of a prolonged downturn in the U.S.

This week, New York Federal Reserve President John Williams said he expects the country to dodge a recession, but other economists believe the chances as much higher.

Economists at Nomura Holdings, for example, said on Monday that the U.S. economy will likely slide into a mild recession by the end of the year as the Federal Reserve raises interest rates to slow inflation.

Cannabis industry executives, for their part, are crossing their fingers.

Now versus 2020

The cannabis industry boomed during the brief COVID-19 recession and the pandemic lockdowns of 2020.

Then, consumers were flush with cash from government stimulus checks and had fewer options for spending their discretionary income, given that travel shut down and restaurants shuttered.

Ryan Smith, CEO and co-founder of New York-based cannabis wholesaling platform LeafLink, pointed to the resiliency of the marijuana industry during the pandemic.

“We saw this during the early days of the COVID-19 pandemic, when brands and retailers quickly adapted to new remote workflows, socially distanced retail models and changing government rules,” he said.

“The cannabis industry is well-positioned to succeed regardless of the headwinds it faces, economic or otherwise.”

But Gary Cohen, CEO of Cova Software, a cannabis POS and tracking software company based in Denver, said the situation is different this time round.

He pointed to rising inflation leading to less cash in consumers’ pockets – this at a time when shoppers have more options for where to spend their money.

Moxie’s Lams noted that “people are out doing a lot of different stuff now. People are going to have to make tough choices in how they allocate their finite funds.”

However, Lams said, cannabis keeps getting cheaper, much to the detriment of the businesses trying to make a profit selling it.

“You can cut costs and reduce staff to save money, but it hurts productivity. It’s a morale killer, and there’s a lot of morale killers out there,” he said.

Tips for companies to survive

The key to success in the cannabis industry is knowing that prices go down as markets mature, Cohen said.

“If you can’t be a good, efficient operator, then you’ll die,” he said.

“If you want to weather this out, you need to think about the reality of where this market is headed.”

Nirup Krishnamurthy, chief operating officer of Schwazze, a Denver-based marijuana company, agreed, saying cannabis companies must keep their costs under control.

“It’s important that you have a certain percent of your business vertically integrated,” he added, saying that can help absorb large price fluctuations in the market.

John Yang, CEO and founder of San Francisco-based cannabis tech firm Treez, said marijuana companies should be reviewing their profitability and margins via hard data and industry trends.

“People need to focus on operations and on what they’re doing,” he said.

Troy Datcher, CEO of The Parent Company, a vertically integrated cannabis company based in California, said operators need to reduce costs by 20% more than they think they need to.

“Be proactive in managing your costs, reach out to venders and negotiate lower rates, defer all nonessential projects and run your business as efficiently as possible,” he said.

Source: https://mjbizdaily.com/how-would-a-recession-impact-the-cannabis-industry/