The severe 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.
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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 shutting down.
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.