Long ago, entrepreneurs and would-be-millionaires flocked to California any way they could. They crossed continents, oceans, and jungles to get here in search of easy money. We are, of course, referring to the recently busted ‘Green Rush,’ which existed in a world before COVID-19, where maniacal enthusiasm in the potential of the legal cannabis industry was touted across the alternative investment community. Did people think that the recently legalized substance that enjoyed huge margins as an illegal substance must be natural to run a profitable business on in a legal framework, right? Wrong. The short-lived enthusiasm was ended when the reality of running a business with networks of products and distributors that can evoke the wild-west history of many of the states where legal cannabis is most prominent. Companies underestimated their cost and competition, including from still thriving black markets. Investment in cannabis businesses or marijuana-adjacent businesses is risky for many reasons. Not least of which is the cloudy and confusing legal framework you must operate in. Secondly, there is great difficulty in expanding to other states,, in opening new locations, in obtaining loans for equipment or real estate. In short, many of the people who thrived at running grey or black market marijuana operations fail miserably at running legal ones.
COVID-19 Created Unprecedented Demand For Cannabis In Jurisdictions Where It Is Legal
April 20th is the national weed-smoking holiday. Usually, it is by far the peak of annual sales for the legal marijuana industry. However, as lockdowns began to be forcibly implemented by governments across the world, where they could at least, consumers began buying legal cannabis at rates never before seen. The thing is, it does not just exist cannabis users that stocked up on marijuana. According to a recent survey, cannabis use has gone to its highest level ever on a per capita basis!
In Illinois, sales continued to soar through the 4/20 holiday. In Colorado, an online and delivery industry for legal and medicinal marijuana dispensaries sprouted up overnight. Now the industry in the state is advocating to make this a permanent change.
That being said, for all the goodwill that may exist for this budding industry, consumers will likely reduce their expenditures significantly if economic conditions do improve substantially. Another risk is that the higher costs of legal cannabis may drive consumers back into black markets and relegate the legal industry to doom. One thing is clear if the Federal Government cannot with all its might get people to stop using cannabis when it’s prohibited, they aren’t going to prevent people from using it now. State governments have been deferential and even enthusiastic about supporting this new industry. Hopefully, this attitude percolates up into the hallowed halls of the national Capitol.
A Tale Of Two Cities
It was the best of times, and it was the worst of times, well you get it. For many marijuana businesses, the unexpected boom in sales was not something they were able to capitalize off of, mainly if their supply chain had vital components in China. Some essential businesses had their supply chain interrupted right before the massive increase in demand, and were thus unable to capitalize on it. For others who were more agile, adaptable, and prepared, it has been an unexpected goldrush. The reaction of regulators and a government for the first time very much not concerned with anything about marijuana in a very long while has been overwhelmingly positive. In Colorado, for instance, regulations were loosened to allow for curbside pickup to comply with physical and social distancing guidelines. It remains to be seen how many of the developments will remain permanent, and whether the goodwill between regulators and a nascent industry who employs a lot of people will endure. While some believe the loss of local and state tax revenue may remove a lot of the political will for continued prohibition at the federal level, others also fear that the dramatic exogenous shock to consumer spending will outweigh any positives. So, like so many other industries, the future of cannabis legalization is mainly dependent on the course a microscopic virus does or does not take. The sequence of behaviors that our communities do or do not take will also influence the duration of lockdowns. The more time that economic activity is stifled, the more businesses will likely move toward insolvency. The consequences of this in the newly legal marijuana industry are unknown. Many of the credit arrangements and loans existing in the industry do not give borrowers the option to seek bankruptcy protection.. The cream of the crop will rise to the top and will be able to secure financing, based on revenue and projected sales to stay afloat and succeed.
Strong Companies Need Funding to Weather The Storm, Make Acquisitions and Investment
The weaker companies who were more highly leveraged will fail at a higher rate, but not without first a desperate, moral-hazard laden quest for a final monetary lifeline. Lenders should be keen to avoid these actors. Fortunately for the marijuana industry, the culling of the herd will prevent the type of “Zombie” companies that are so prevalent in the publicly traded markets. The powerful motivator of competition during adverse times will likely shape the dominant players of tomorrow’s legal cannabis industry. Those who have the prowess to seize the opportunity should invest, borrow, and expand to the extent that they can. If a significant economic downturn is to persist, marijuana may have counter-cyclical value as an investment class, similar to other vice industries. This will be the first significant economic downturn in which cannabis will be widely available for legal use.
After an incredibly impressive initial surge that many likened to hoarding or panic-buying, the industry held its breath in anticipation of the April 20th holiday. The results of sales across the country were mixed, but generally, pundits who predicted a significant drop-off after the initial spike in sales were proven wrong. Here is an interview with marijuana business leaders across the country if you are interested in a more detailed picture of their individual and localized experiences.
Potential Emerging Trends In Cannabis Industry
The coronavirus crisis has left no industry untouched in its rampage against the global economy. However, cannabis retailers, in particular, which was already at a watershed moment and existed on shaky ground, are perhaps more subject to dramatic changes than most. The changing economic realities for state and local governments may make cannabis too low a financial fruit to avoid picking to refill their dwindling coffers. The massive amount of fear, anxiety, and apprehension is also translating into different consumer behavior. Consumers seem to be tending to purchase higher amounts of edibles and other non-smokable forms of marijuana, which appears to be driven by the fear of having a compromised respiratory system.
Some marijuana industry leaders suspect that the impetus for this trend will also drive a much broader interest in health and wellness products and supplements in general. This would primarily benefit CBD and Hemp players in the cannabis industry, who can legally sell their product as long as it is derived from Hemp anywhere in the United States.
Other leaders have noticed that consumers are making more conscious choices toward sustainable brands. The blow-over from the respiratory illness caused by cheap additives in mostly unregulated products has become sticky in consumer’s minds and was perhaps augmented by the focus on the global health crisis.
One small cannabis operator put it this way:
There will be more mainstream CBD companies, and consolidation of the industry to include more vertically integrated multi-state operators that can withstand market volatility. Small cannabis companies, such as ours, have proven resilient in times of crisis because of our small pool of employees, making layoffs unnecessary as we weather the storm of a global pandemic. Being in the industry for several years has also allowed us to maximize production efficiencies and maintain several months of product in inventory, allowing us to pause average production to pursue expansion goals. This take shows how it is not only large operators that will be able to withstand the coming upheaval. Well managed small operators have just as much opportunity to expand their margins and their business as large ones, sometimes more so as they have the chance to enter new markets and expand that bigger guys don’t. The key is in management and having enough cash to weather the storm. The truth is that uncertainty is higher for the cannabis industry and most other sectors than it has been at any point in most living people’s lifetimes. Companies that need financial help in expanding, opening new locations, or regulating working capital should look to specialty lenders who operate with experience and authority in the cannabis industry like Bespoke Financial.