How will the fledgling cannabis industry – which came of age during an historic period of market expansion – withstand a coronavirus-infused bear market and economic downturn?
“You have significant players who are already distressed,” explains Mike Luce of Chicago-based High Yield Insights. “Of all the exogenous factors strategists looked to – tariffs, 2020 elections, legality, etc. – no one was game planning for a pandemic. Not every company is prepared to cope with it.”
The first generation of significant companies in the sector were already experiencing a liquidity crunch.
Investment firms like Chicago-based NewLake Capital are quickly acquiring properties, dispensaries and other assets of impacted cannabis companies, including Chicago-based Cresco Labs, Grassroots Cannabis and PharmaCann. (NewLake, incidentally, was co-founded by Pete Kadens, co-founder and former CEO of Chicago-based Green Thumb Industries.)
“Lots of companies will go away, and a good number of interesting acquisitions will emerge”, predicts Michael Gruber of Salveo Capital, a Northbrook-based VC firm focused on the cannabis sector. “That being said, the industry will be here. For the most part, I see cannabis as being an anti-recessionary product. People will continue to buy.”
Of course, human beings have had at least a 2,500-year relationship with the plant. Cannabis has long been a multi-billion dollar underground industry.
In Illinois, despite irregular access to product, recreational consumers spent more than $75 million on legal cannabis through the first two months of 2020. More states are legalizing or at least loosening restrictions to purchase medical cannabis.
However, if an economic downturn ensues, will recreational consumers still line up to pay close to a 40 percent tax rate for products they can less illegally procure from the underground market?
“Unless you already have the illicit market as an option,I don’t know if we’ll see a lot of shift,” says Luce, who is scheduled on March 25 to present on “Creating data-driven decisions on cannabis” to the Chicago Innovation Roundtable at TechNexus. “More likely, we may see consumers shift from higher priced categories like vapes and edibles to lower-priced options like flower.”
Sales of alcohol – long-considered recession proof, although in 2009 took a dip – can serve as a useful but not entirely complete proxy when projecting how cannabis sales would fare in a downturn.
Anyone 21 and over, for instance, can easily buy a six-pack at the local convenience shop. Cannabis, particularly in Illinois, is not nearly as accessible as there are currently fewer than 50 dispensaries across Illinois that are licensed for recreational sales. Further, the fast-tracking of the June 2019 legislation to meet a January 1, 2020 launch date meant that growers and processors could only have so much supply available on day one.
As we are observing, in Illinois there is not enough product right now to meet demand. Supply chains will take months to normalize, as more cultivation capacity is built in-state. It may take years for the federal government to approve transportation of cannabis with THC across state lines (hemp and CBD is another story).
Expect similar commercial restrictions in the next wave of states on track to legalize recreational sales, most notably New York. Like Illinois, legalization would likely come via state legislation (as opposed to a ballot referendum) giving states more authority to limit and control inventory.
“Supply and demand can vary drastically by market,” says cannabis entrepreneur and investor David Friedman or Chicago-based Panther Capital. “Demand outstrips supply in heavily regulated states but less so in more developed states like Colorado.”
In these unprecedented times, nobody has a crystal ball. There is no predicting how our society’s response to coronavirus will impact our economy, much less the sales growth of an emerging and to date vastly expanding industry.
We won’t have clarity on this – or much else – until we are on the other side of the pandemic.
In the meantime, if you’re so inclined and practice rigorous social hygiene, smoke em if you got em.
