drop in wholesale cannabis prices in many states over the past year can be traced to a few key factors:
Regulatory missteps, high taxes for consumers, and competition from still-thriving
illicit markets are contributing to the industry’s current woes.
Additionally, in states that were early legalization adopters like Colorado,
Michigan, and Oregon, production capacity has caught up to the needs of
the mature market and supply continues to outpace demand.
It’s also become clear that lowering retail prices does not lead
to an increase in demand. Many cannabis cultivators and retailers are
experiencing the painful realization that they’re selling a product
with profit margins that are eroding as widespread legalization takes
hold, and the signs of industry change are already becoming apparent.
Closures and Consolidation in the Cannabis Industry
As with any industry undergoing a period of distress, a separation of the
wheat from the chaff is underway. Businesses that were operating well
enough to remain solvent when cannabis flower was well over $1,000 a pound
are struggling to stay afloat, downsizing and laying off staff.
Others are part of an increase in
consolidation across the cannabis industry as they seek buyouts or negotiate business contracts and agreements that
will allow them to continue to operate or recoup what they can prior to
Multistate operators (MSOs) and
private equity groups that are already in the industry are taking the opportunity to increase
their positions within the market, pad their balance sheets and grow.
As large operators with access to capital, they are well-positioned to
not simply weather the current market conditions, but also to take advantage
by adding industry assets relatively cheaply.
Meanwhile, lower-tier producers are trying to diversify their product offerings
or wondering what’s the best way to renegotiate contracts or how
to transfer their cannabis business licenses.
Industry Fatigue: A Chance to Get Out
For an MSO, those cheap assets are not necessarily small, craft companies
or dispensaries that have established themselves with loyal customers
and top products, but they are more often businesses that are simply not
performing at a level or standard that allows them to survive.
Along with those companies, some legacy or long-term independent operators
(mom-and-pop stores) are taking the opportunity to leave the industry.
In Colorado, for example, it has been
a decade since adult-use cannabis was legalized, and some of those original industry players have simply
had enough. Intense and overbearing regulations, extreme tax rates, and
the current state of the industry make it a good time for some of the
old guards to get out while their business is still profitable. And those
profitable businesses with a proven track record of proper operations
justify a higher price than enterprises operating in the red.
What’s the Best Move for a Cannabis Business License Holder?
It is interesting that while wholesale cannabis prices have plummeted,
consumers have not seen a significant change in terms of pricing on the
retail side. Growers and manufacturers are accepting lower margins instead
of passing increased costs on to consumers—but it’s an unsustainable
practice. Those high taxes, intense industry competition, and continued
pressure from illicit- and gray-market entities are the main factors preventing
price hikes, and they’re not going away.
While wholesale cannabis prices will eventually stabilize and possibly
increase once supply goes down, the general trend indicates that wholesale
prices will not return to the levels of years past.
Business owners must strategize and weigh their options: Stay the course
or sell the brand? What are the best ways to maximize the value of the
company? Invest in capital improvements to boost operational efficiency,
or dial back production? Does it make sense to diversify by adding extraction
capabilities, and are the compliance headaches worth it?
The business of legal cannabis is complex: Contact Cantafio & Song’s
cannabis legal team now for the counsel of the highest caliber.