Nearly two weeks into their designation as essential healthcare providers by the State of Illinois, cannabis retailers are learning how to serve more customers amidst a cash-strapped industry and global economic crisis.
No longer inundated with directives from the Center for Disease Control and the state of Illinois about things like in-store customer distancing requirements and employee temperature checks, investors and executives in the industry can – to some extent – go back to focusing on growth and operations.
Case in point, dispensaries that restricted sales to medical customers at the onset of societal physical distancing are optimistic that limited recreational sales will resume in the coming days. According to research firm BDS Industries, 95 percent of dispensaries in the United States reported sales spikes in March, even with staffing volatility that persists due to layoffs or employees not showing up for work.
“All of this is accelerating normalization,” said Jeremy Unruh, a regulatory and public affairs director at Chicago-based PharmaCann, which operates retail, processing and cultivation facilities in multiple states. “We are making accommodations now that otherwise would have taken a lot longer to learn and implement. People are now also realizing that the sky does not fall when you sell cannabis.”
Ordering in a solution?
The prospect of dispensaries delivering cannabis directly to consumers in Illinois, a pipe dream when recreational sales began January 1, is gaining momentum. State Representative Sonya Harper (D-6) recently introduced legislation to legalize delivery for medical and legal cannabis. Harper suggested to the Chicago Sun-Times that Governor J.B. Pritzker sign an executive order legalizing delivery.
Last month, Michigan Governor Gretchen Whitmer stunned industry observers when she signed an executive order that legalized delivery in her state within a period of days. While nobody expects Illinois to follow-suit anytime soon – the application to transport cannabis in Illinois was pushed back to April 30 – the conversation has begun to shift on to how to make the essential product more accessible to more consumers.
An industry already in need of “drastic changes”
While recreational cannabis sales in Illinois topped $40 million year-to-date through February, the industry as a whole has been struggling through an extreme capital crunch. The valuations for most publicly traded companies collapsed in 2019, which brought ramifications throughout the sector.
Due to the quasi-legal status of the plant, cannabis companies have limited access to traditional funding sources like bank loans and private equity investors. Capital now required to upgrade cultivation and processing facilities to meet increased demand largely is coming from selling assets to Real Estate Investment Trusts (REITs), which include Chicago-based New Lake Capital and New York-based Innovative Industrial Properties.
For the wider cannabis ecosystem, which includes ancillary technology, agriculture and professional services companies that don’t touch the plant, today’s dark days are in some ways similar to the dot-com bust 20 years ago. The challenge is to stay alive long enough to create value in a nascent industry with enormous growth potential that is still finding its footing.
“It’s not just about survival,” said cannabis investor Michael Gruber of Northbrook-based Salveo Capital. “It’s about coming out of this stronger and as a leader.”
Success requires a faster pathway to meaningful revenue, ruthless prioritization of expenditures, and a focus on technology and business processes that drive growth with fewer employees.
Many companies won’t survive. Their best people and pieces will resurface where there is more capacity. Breakthrough sector-specific innovations and new companies will emerge from industry veterans and a wave of new transplants.
While these times are particularly scary for so many reasons, the sense among investors is that there will be more opportunities to buy low in an industry that will prosper as more people get high.
“I see a lot of new companies that are well-positioned that focus on cloud-centric computing, remote telehealth services, online commerce fulfillment, and anything to do with the last mile for cannabis transactions,” explains Gruber. “I also continue to believe that now through the end of the year will be some of the best opportunities we’ve seen for troubled and distressed companies. The bad overall situation in many ways serves as cover for companies that already needed to make drastic changes.”