Adam JacksonWater isn’t the only thing drying up in the West.
Legacy cannabis markets, such as Colorado, face increased headwinds from a crowded supply side and new markets, according a to a report from cannabis data firm Headset, all of which points to a market correction.
“While this doesn’t soothe the negative impact on businesses today,” the report said, “the frustration or potential panic towards the current state of the industry can be redirected towards understanding long-term trends and re-stabilization of the industry.”
Cannabis sales surged during the first year-and-a-half of the pandemic due to a flood of cash, demand and free time, yet consumer behavior eventually adjusted as the in-person pressures of the pandemic subsided.
Since then, companies have been scrambling to cut costs amid falling wholesale flower prices and congestion across retail and cultivation segments.
“In the data, we find that the sales growth during the pandemic was exceptional and that the softening of demand in recent months may be a correction to a pre-pandemic normal,” the report said.
Stretching the Sales Horizon
From February to July 2020, Colorado’s total adult-use cannabis sales swelled by 63%, up 20 percentage points from the same six months the year before.
That trend continued through the first half of 2021. However, consumer behavior started to shift by the second half 2021.
“With millions of people suddenly faced with more options in how they chose to spend their time after many months of restrictions, we began to see cannabis sales retract through the end of 2021 and the start of 2022,” the report said.
Between June 2019 (pre-COVID) and June 2022, sales in every market increased, though Colorado’s growth was the softest in this period at 4%.
Oregon sales increased 25% over the last three years, even though the state experienced a 20% decline in monthly sales since June 2021. Washington reported an increase of 17% in sales growth over the same period.
Jay Czarkowski, co-founder of Canna Advisors, credited for opening one of the first licensed medical dispensaries and cultivation facilities in Colorado in 2009, does not believe people are consuming less cannabis. Rather he thinks that consumption is seeing a wider spread as more legal states pop up throughout the U.S., especially in ones near the Centennial State.
“Historically, people would come from all over to Colorado to buy weed and then send it home,” he said. “Well, there’s better places to do that now.”
Closer Look at Colorado
Cannabis taxes and fees collected by Colorado so far this year have fallen 21% from the same period last year as shops shutter and layoffs continue. Cannabis flower prices tumbled 46%, down from $1,300 per pound last year to $700 per pound in July.
Despite this, both basket volume (number of items purchased at one time) and basket size (total cost of items being purchased) skyrocketed over the past two and a half years, according to Headset data.
Basket size remained much higher than the pre-pandemic normal through late 2020 and early 2021, while basket volume underwent typical seasonal shifts, “albeit at a higher total than ever before.”
However, from June 2021-June 2022, total basket volume decreased by seven percentage points and average basket sizes have decreased by 10%.
“The spend per trip is having a slightly larger effect on Colorado’s cannabis sales totals than the total number of customers walking into stores,” the report said.
The total volume of flower sold in Colorado peaked in July 2020. Since the fourth quarter 2020, the total flower volume sold in Colorado have been steady.
Average price per gram of flower products, however, has been much less stable.
Due to increased demand, the average price of flower rose through 2020 before holding steady around $5 for nearly a full year.
The price of flower in Colorado has been dropping rapidly since last summer, decreasing to $3.38 in June 2022. The report attributed the drop to increased competition and excess supply as consumer demand retracts.
Thrive or Survive
While large players have the luxury of scale and capital, the evolving situation makes survival for smaller operators more difficult than ever before.
Jesse Channon, chief growth officer at Columbia Care (OTCQX: CCHWF), said that much of the movement reflects the natural heating and cooling of business and the broader economy, but government inertia on banking and taxation created undue pressure on those “that would have made it if it wasn’t for a lack of support,” he said. “I think that’s a shame.”
“Every year, more and more people enter the pan to integrate cannabis into their lives, and they come from all walks of life,” Channon said. “It’s not like we’re just cloning 24- to 30-year-old males in every market and that’s why cannabis has grown. That’s not the case.”
Vince Ning, co-founder of the Nabis, a cannabis wholesaling platform, analogized the dilemma to an onion.
“The global economy has gone into a bear market, and then within that, the cannabis industry also kind of suffers as well because there’s already a lack of capital due to banking issues,” he said. “So, we kind of – by transitive property – get caught in the rough as well.”
As interest rates rise and the landscape tightens even more, Ning said that a dearth of capital-raise activity throughout the industry has cornered brands into consolidation, leaving some behind entirely.
“I think a lot of operators in cannabis who built their businesses around being able to raise money, or bring in external capital to fund their businesses growth, are now starting to have to look at their financials and say, ‘Hey, we actually have to build a profitable business here. It’s not all about land grab,'” he said. “And so, the tone and the sort of mentality of operators in the industry now is, ‘How can I reduce costs?’ And that’s led to a lot of consolidation conversations.”
Czarkowski takes a more laissez-faire approach.
“I really don’t have a whole lot of sympathy for folks that complain that they’re getting shut up by bigger players, you know?” he said. “If you had a small operation, and you could delight the customer – you can create a top-notch product, top-notch customer service at a good price – you’re gonna crush any big player.”
Some companies can afford to eat the losses while others have perished. Earnings will continue to disappoint, but by 2023, year-over-year comparisons should sting less, according to the analysis from Headset.
“Sales in 2020 should be treated as an anomaly and properly adjusted when used both for forecasting the future and measuring present growth to avoid the base problem,” the report said.
Despite the plight, one thing remains true to industry veterans.
“Colorado will always be one of the crown jewels of the cannabis world,” Channon said.
