While the academics and PE investors are attempting to gauge the impact that COVID-19 will have the legal cannabis industry, they are neglecting to look at what will happen in the illicit industry which still accounts for more than 75% of all sales in the Country, despite widespread adult use legalization.
For the past 12 or so years, since the legal and licensed dispensary market opened in Colorado, legal cannabis has been chipping away at the market share of the illicit industry. In a bull market this was easy to do. Consumers had more discretionary money to spend, so paying more at a retail counter than from “their guy” was something many were willing to do, at least some of the time. The selection and convenience of going to the store to pick out exotic strains of flower, novel vape carts, or a host of edibles products made the trip to the store fun, even if it meant paying 30% more than they would have from their local supplier.
But realistically, those days are over. When the next unemployment numbers come out tomorrow, more than 5 million American’s, most hourly employees, will have lost their jobs in two weeks time. As a Nation we have never seen unemployment numbers like this. Not in 1929, or 1987, or 2002, or even in 2009. This is unlike anything we have ever seen and it is expected to get much, much worse over the next several months. And no matter what kind of short term stimulus we expect to see from the Federal Government, it will not pay these workers what they were making before. This will affect every spending decision they make going forward as American’s triage where their money will be spent.
But wait, cannabis is counter-cyclical, right? Recession proof. In good times, people consume. In bad times, people consume. Shoot, every paper in America was telling us that cannabis sales spiked significantly as COVID hit and that most states were considering cannabis to be an “essential business” meaning that stores would stay open throughout the duration of the pandemic. So what’s the problem? While history has shown that cannabis use happens in every economy, what is not as certain is where that cannabis comes from and at what price point is it purchased.
Already since the initial spike in sales, we have seen an immediate decline suggesting that the spike was largely due to pantry stocking. As more people become increasingly reticent to leave their homes, they have stocked up on many items from canned goods to toilet paper, to alcohol and cannabis. But we have not come even close to seeing where this decline ends, as the financial impact from unemployment will not have hit most Americans yet. Some will start feeling it today as rent and insurance and car payments are due. For others, with some savings, it may not be for several more months. But it is coming.
So if the consumer has less discretionary spending, and cannabis is in many ways recession proof, how will this change behavior? It will most certainly inure to the benefit of the still well-entrenched illicit market. As variety of product becomes less important than price, buying behaviors will change. If the shop is selling eights of mids at $40 pre-tax, and about $50 out the door, and the guy down the street is selling a comparable eighth for $30, knowing which boutique strain of OG Kush becomes a very trivial distinction if the bag appeal is roughly the same.
But this leads to the larger question, and that is: Who will be supplying this cannabis to the seller and ultimately to the consumer? The answer is likely the hobbyist cultivator and extractor. If the 2009 recession taught us anything about cannabis cultivation it was when people are unemployed and need to feed their families and pay their rent, cultivating cannabis sure is a viable way to supplement those unemployment checks. Ask any hydroponics store owner who there customer base was in 2009 and 2010 and they will tell you it was primarily people with 2-4 1000W lamps in a spare bedroom or garage pumping out enough cannabis for their own consumption, as well as 10-20 of their buddies. This is how they made their money when there were no construction jobs and restaurants weren’t hiring. These guys only turned off their lights and stopped growing when the economy was so strong that they were fully employed again and it was easier to buy their cannabis than grow it. From 2012 until three weeks ago the hobbyists largely let the commercial cultivators handle the production because they had better things to do.
That is now no longer the case and you can be sure that those lights sitting in the basement or attic collecting dust can be turned back on in a matter of days. You want a data point to look at to back channel this theory, don’t just look at sales in dispensaries, look at the sales of hydroponic and organic nutrients from online retailers starting about a month from now. They are going to spike in a very meaningful way. The hobbyist grower and extractor is coming back. Logic dictates it and economic necessity demands it. So while cannabis may be counter-cyclical, it will be the illicit market that thrives as the unemployment rate increases.