Less than one-quarter of cannabis businesses are profitable and the industry is “running on fumes,” according to the results of a survey published last week.
According to the report compiled by Whitney Economics, “data suggests that most U.S. cannabis business operators are worried and unprofitable. Operators continue to be impacted by taxes, strict regulatory rules, and lack of access to capital. Only one quarter (24.4%) of respondents reported profitable operations.”
The report, which focused on Q3 and Q4 of 2022, found that 34.4% of respondents are breaking even and 41.1% are losing money.
The figure represents a sharp drop from a report compiled by Whitney Economics last year,
which found that 42% of cannabis operators are profitable. Overall, the latest report found that more than 70% of cannabis operators have seen their profits decrease over the past year.
The report, titled “Cannabis Operators Sentiment & Business Conditions Survey,” describes an industry in crisis with a poor short-term outlook.
“The national cannabis industry is at an inflection point, as it appears to be close to breaking and there are very few options remaining for operators to cut costs.”
The report adds “overall, the industry is running on fumes, with little left in the tank.”
Overall, the short-term outlook for the industry is poor and will remain so in 2024 before improving in 2025, according to the report.
The report’s authors looked at sales figures for cannabis in Q3 2022 and found that more than two-thirds of respondents stated that their sales had decreased over the previous quarter. Overall, the authors of the report state that there was a reduced basket amount (spending per transaction) for cannabis customers during this time period, which caused a “stepwise decline in overall revenues.”
The report states that two-thirds of respondents had reduced their prices in Q3 2022 and only 9% had seen their prices increase and laid the blame largely on oversupply.
“Under normal business operations, excess inventories lead to price reductions. Business operators try to clear their excess inventory by stimulating demand with lower prices. This was a strategy used by some cannabis retailers. At the same time, suppliers who had excess inventories had to take a similar approach. These approaches have led to a race to the bottom of pricing. With consumers spending less and suppliers forced to decrease prices, the overall industry has suffered both revenue and margin losses,” the report states.
In addition, more than 60% of respondents stated that their input costs have risen while they are also dealing with a drop in profitability, sales volume, and prices.
The results of the latest Whitney Economics survey show a continued downward trend from the previous year’s report. In that report, only 22% of California cannabis operators reported that they are profitable, and only 42% of all operators reported the same.
The report found that when it comes to profitability, “women respondents and non-white respondents are faring much worse than white, male respondents.”
The latest survey included 26 questions and polled 224 respondents from 13 states including Arizona, California, Illinois, Massachusetts, Maryland, New Jersey, New Mexico, New York, Oregon, South Dakota, Utah, Pennsylvania, Utah, and Washington.
The authors stated that there was a strong regional bias to the report because 90% of the respondents are based in Oregon.
Of the respondents, more than half are cannabis cultivators, and over a third are retailers. A small minority were in ancillary or non-plant touching roles.
Towards the end of the report, the authors lay out more than two dozen top issues that the U.S. cannabis industry is facing. These range from the lack of federal legalization to falling prices to “way too much product,” over-regulation, competition from the black market, and the “government is trying to micromanage everything.”
The authors call on policymakers to adopt a more business-friendly approach to legal cannabis.
“Up to this point, state policies have been focused upon capturing consumer demand and generating tax revenues. The data clearly show that many of these policies are destroying business opportunities in the cannabis industry,” the report states.
The report focuses on two “crucial needs” that could benefit the legal cannabis industry - banking and the reining in of the black market.
“Two critical needs will benefit the legal cannabis industry. First, normalization of banking services which will allow for capital improvement and standard of living improvement for those currently forced to live off the grid. Secondly, we need increased federal, state, and local law enforcement to block the insidious underbelly of the black market,” the report states.
While the findings are bleak, a glimmer of hope for the cannabis market is found in one of the key business insights of the report. Efficient operators will set themselves up well to weather the storm until 2025 when the authors of the report expect cannabis demand to accelerate.