The word “inflation” has dominated headlines and earnings calls this year, and a survey from a leading national cannabis accounting and advisory firm solicited feedback to gauge how such rising costs are affecting the sector.
In a month-long survey this year asking operators a series of questions regarding the impacts of inflation on their cannabis operation, GreenGrowth CPAs found that one in four operators reported planning to raise prices in the near or immediate future to combat rising inflation costs.
Based on its findings, the firm believes customers could see as much as a 10% price increase on retail purchases.
Out of the respondents who participated in the inaugural Cannabis CFO Survey, more than 50% believe the cannabis business environment has declined in the last 12 months.
“The cannabis business landscape is ever-changing,” GreenGrowth Founder & CEO Derek Davis said. “And, in order to provide accurate financial data to our clients, we have to consider the economic impacts of rising inflation costs, as well as other factors that can impact the business performance of cannabis companies. Through surveying our customers and cannabis operators in general, we’re able to compile enough data to provide a detailed analysis of how cannabis operators are feeling the economic pressures of today.”
Last year, GreenGrowth CPAs’ findings showed a 76.6% positive or very positive assessment of the current cannabis business environment. This year, only 44% of cannabis leaders reported a positive or very positive assessment of the current business environment — a decrease of more than 30% in the past year.
GreenGrowth CPAs found last year that more than 70% of operators saw some or significant improvements in the cannabis business environment. According to this year’s data, 50% of operators reported some or significant decline in the cannabis business environment in the last 12 months.
In last year’s data set, the firm found that more than 70% of respondents who reported some or significant decline in the cannabis business environment were in western states. The firm’s updated survey showed a similar stance, with 66% of respondents claiming some or significant decline in the cannabis business environment across the west. Only 16% of operators east of the Mississippi rated the business environment in a decline.
Almost two-thirds — 70% — of operators intend to absorb the additional costs and “ride it out” before increasing costs to their customers, versus the other 30% of retailers who reported plans to increase prices to combat rising inflation costs.
The Blame Game
GreenGrowth CPAs allowed respondents to rattle off as many contributing factors they blame for the rising inflation issues currently impacting the economy, “since there are generally various reasons contributing to rising inflation and economic downturns.”
According to last year’s data set, the top two reported issues facing operators were supply chain snarls and difficulty hiring labor.
This year, the difficulties and shortcomings are being attributed to “the challenging political landscape” between “the impacts” of the Biden Administration and the “lingering effects” from the Trump Administration — in addition to supply chain challenges.
In the survey, over 40% blame the Biden Administration for the current inflation issues while more than 30% still blame the Trump Administration.
More than 20% blamed foreign influences such as Russia, China and the full-scale proxy war in Ukraine for rising inflation. Elevated energy prices continue to eat at company margins and consumers’ wallets, too, with nearly 20% of respondents blaming petroleum companies for costs associated with rising inflation — especially as oil giants continue to report raking in record profits this year.
However, supply chain issues take the cake — with more than 40% of respondents attributing rising costs to supply chain challenges.
While cannabis CFOs are indicating to the firm that they plan on raising prices by at least 10% this year, BDSA analyst Andy Seeger does not believe such a move necessarily reflects the limited pricing power operators currently wield.
While price compression “is happening almost everywhere,” the degree to which operators try to squeeze out margins through passing along costs differs among markets. In a saturated legacy market such as California, prices have dropped 25-30% in a year. Other legacy markets such as Colorado, Oregon, and Washington are seeing prices fall as well. Prices in Illinois are still elevated, though.
“I don’t really see cannabis rising as an economic good,” Seeger said in an interview. “The consumers are still price searching. Everything’s still coming down. Rising in price would kind of go against a lot of that movement.”
Consumers in the nascent industry are also still curious, he said, as falling prices have given those the chance to try a range of products rather than establish brand loyalty.
“Blue Dream is not always going to be on the shelf like a Bud Light,” he said. “It’s harder to maintain that consistent shelf set in cannabis, so there’s this constant churn. And because consumers are already highly promiscuous, there’s this idea that the stoners are just trying everything for the first time.”
This is the first time legalized cannabis has faced a recessionary downturn. If it can weather the storm has yet to be seen. Companies have been eating their own margins, and many have pivoted toward crisis mode as a lack of regulatory action and a tightening landscape threatens the sector.
“Is it a sticky good such as beer?” he added. “It’s one of the last ones you put down if you’ve been laid off and one of the first ones you pick up when times get better again. We’re not sure if cannabis is as sticky as alcohol.
People have ingrained alcohol into their daily and natural habitual uses. Cannabis is not as normative. It’s not as ingrained or integrated into consumers life choices yet, except for maybe some who are heavy stoners. So, it might be a little bit easier to put down for the average consumer.”
August 15, 2022 at 9:56 am
The idea that firms will raise pricing in the cannabis industry is not credible. The pricing direction in nearly every market is downward, and some of the oldest markets like Colorado and California have particularly negative dynamics. None of the companies have sufficient market power to unilaterally raise prices.