Will mass layoffs help or hinder the struggling cannabis industry?

Are widespread layoffs in the North American cannabis industry an effective cost-cutting tool – or will they do more damage in an already challenging environment?

Recent mass layoffs in technology, finance and media has prompted some business researchers to argue that widespread job cuts can be counterproductive when it comes to cutting expenses.

“Layoffs often do not cut costs, as there are many instances of laid-off employees being hired back as contractors, with companies paying the contracting firm,” Jeffrey Pfeffer, a Stanford Graduate School of Business professor, told Stanford News in an interview about the massive numbers of layoffs in the technology industry in December.

In his research, Pfeffer has found that tech layoffs also typically fail to:

• Increase stock prices.
• Boost productivity.
• Improve market share.
• Increase revenue.

“Layoffs are basically a bad decision,” Pfeffer said.

Instead of cutting employees, he added, companies should consider alternatives such as salary reductions across the workforce or upgrading worker skills.

But does this ring true in the marijuana industry, which has experienced hundreds of layoffs in recent months at North American companies such as Ayr Wellness and Curaleaf Holdings in the U.S. and Canopy Growth Corp. in Canada?

Looking ahead, more cuts are expected as companies struggle with waning sales, falling wholesale marijuana prices and a dearth of capital.

California-based marijuana consultant Andrew DeAngelo argues that job cuts are counterproductive and warns that layoffs as a result of consolidation can also have a domino effect that ultimately hurts a company’s bottom line.

“Pretty critical people get laid off because (management) thinks they can find someone to do the job just as well for cheaper,” he told MJBizDaily.

“But guess what? They can’t do it just as well, and product quality comes down, and then the customer experience goes down.”

Layoffs can also erase institutional knowledge within an organization, he added.

Plus, there’s the impact on workforce morale.

After recent layoffs at British Columbia-based Pure Sunfarms, for example, former and current employees of the cannabis producer left mixed reviews on the recruitment website GlassDoor.

It “used to be a fun and exciting company,” a quality assurance specialist wrote.

“Gloomy atmosphere after the group layoff (a) few months ago.”

Is cannabis different?

North American marijuana CEOs who have implemented layoffs in recent months acknowledge they’re hard on everyone involved.

But there are unique conditions in cannabis that have made layoffs necessary to survive in the short term, they contend.

Unlike the technology industry, for example, cannabis cultivators and retailers are uniquely challenged because marijuana remains illegal under federal law in the United States.

In addition, marijuana executives assert, companies are facing added pressures as markets mature and competition grows.

Among other things, sales have declined in older markets including California, Colorado, Oregon and Washington state – this after a sales boom following the outbreak of COVID-19 pandemic in early 2020.

In November, California-based multistate marijuana operator The Parent Co. (TPCO) reported a net loss of $31.3 million in its third-quarter earnings.

The company also said it had laid off 33% of its workforce as of Oct. 27.

The decision was expected to generate approximately $10 million in payroll savings.

“That was necessary,” Chief Executive Officer Troy Datcher told MJBizDaily earlier this month.

“We used strategy to make those decisions. We got very clear on who we wanted to be when we grow up.

“And once we made that choice, we decided to walk away from nonstrategic capabilities that we felt other partners could do at more efficient costs.”

One example was distribution.

Previously, TPCO owned dozens of fleets of trucks that were driving products all over the state of California.

The company has since opted to outsource distribution to wholesale platform Nabis for a significantly lower cost, according to Datcher.

“That’s how we’ve been able to maintain a growth mindset and profile,” he said. “Because we shed the things that, strategically, we just weren’t the best at.”

As a result, Datcher said, he can focus on the company’s strengths: brand-building, operations and running stores.

“And we’re going to lean into those capabilities to make sure that we do the best for our shareholders.”

Since the interview, however, TPCO has implemented yet another major change.

On Wednesday, the company announced it was merging with California-based Gold Flora in an all-stock deal.

TPCO shareholders will own 49% of the combined company and Gold Flora shareholders will own the remaining 51%.

According to a news release, the merger is expected to “achieve annualized cost savings of between $20 (million) and $25 million.”

Scaling back as margins shrink

After Canopy Growth said this month it was shuttering its flagship cultivation facility and laying off approximately 800 workers, several CEOs of licensed producers held a news conference to warn the Canadian federal government that hundreds more layoffs could follow if marijuana business taxes and fees aren’t reduced.

Mandesh Dosanjh, president and CEO of cannabis producer Pure Sunfarms, acknowledged at the news conference that his company had already downsized last fall and cut 27 jobs – even though it reported steady revenue growth and a profit for its second quarter.

In an interview with MJBizDaily, Dosanjh conceded that layoffs can be very hard on both outgoing and remaining employees.

But in this case, the layoffs weren’t just about cutting costs, he said. Instead, they were spread across a number of departments where the company had scaled up too quickly.

“We had started to scale in areas and departments where we were getting ready for ongoing growth in the industry,” said Dosanjh, whose company is the marijuana unit of U.S. and Canadian produce company Village Farms International.

“When we thought about what 2023 was going to hold for us, we don’t think the growth in 2023 is going to be as sustained as what we saw in 2020 and 2021.”

But Dosanjh said layoffs can negatively impact the remaining employees, making them feel uneasy, fearful or distrustful toward management.

Dosanjh said the company aimed to reduce the potential negative impact on remaining employees by being as transparent and communicative as possible about how factors such as high taxes, declining recreational sales and wholesale prices impact the business.

That communication also extends to regular updates about the company’s financial health.

“We find that through communication, we’re able to manage uneasiness of the workforce,” he said.

“But it is challenging always for anybody to go through change, and especially when the industry is going through change, it creates a lot of uneasiness.”

Further pressure on the company could be reduced if the Canadian government fulfilled its promise to finish its review of the Cannabis Act and cut taxes and fees, Dosanjh said.

If not, more marijuana layoffs are bound to happen.

“It’s not just cannabis companies that are going to be impacted. It’s ancillary businesses that support our industry,” Dosanjh said.

“Communities across this country are going to have massive impacts. And we’re starting to see that.”

Source: https://mjbizdaily.com/will-mass-layoffs-help-or-hinder-the-struggling-cannabis-industry/