It’s been roughly a year since Canada legalized cannabis use, and the year has been a rocky one. The Marijuana Index, which tracks cannabis stocks, has shown more than a 50 percent decline in value. And larger companies like Aurora and Medmen implemented measures to cut expenses and limit risk exposure. What does this mean? Is the entire cannabis industry is doomed to fail? Or are these simply growing pains for a marijuana industry trying to find its way? To answer these questions, a deeper analysis is in order.
Major Challenges for the Cannabis Industry
For any new industry, environments can either pose challenges for success or facilitate the path toward success. When it comes to the marijuana industry, the environment has certainly been challenging to say the least. Despite the legalization of cannabis in some states and in Canada, regulatory barriers pose some of the biggest barriers to success. Specifically, the amount of red tape retail stores must overcome to obtain licenses has been significant. This not only impedes supply, but it also increases costs. And higher costs naturally mean higher prices, which has allowed illegal marijuana sales to still flourish.
These are not the only hurdles that the cannabis industry has had to face. Along with the legalization of the marijuana industry came significant restrictions on advertising. Also, mysterious vaping illnesses have also curbed sales in the cannabis industry. And perhaps the most notable barrier for the marijuana industry is access to funding. Declining share prices combined with varying policies regarding its legality have made investors wary. Altogether, these factors represent the perfect storm that more than accounts for the cannabis industry’s struggles.
Possible Solutions to Weather the Storm
For the larger players in the cannabis industry, some strategic moves are already being made to survive short-term challenges. For Aurora Cannabis, that means reducing expenses, cutting short-term debt, and improving liquidity. (For more on Aurora Cannabis, check out this Bold Business profile on the company.), they have embraced policies that reduce expenses, cut short-term debt, and improve liquidity. This has been achieved by canceling some planned projects and by issuing shares in an effort to preserve cash. Other companies in the marijuana industry, like Pax and Medmen, cut jobs and temporarily pulled back on some initiatives. Overall, the sentiment is simply that the current issues are temporary ones. If the marijuana industry can wait it out effectively, the strong potential for success remains.
One of the most challenging problems, however, remains access to capital and funding. For companies like Aurora, they enjoy access to a $360 million credit provided by a syndicate of Canadian banks. For large medicinal marijuana industry companies, FinCanna Capital Group offers financing for top-tier businesses. But for smaller startups that rely on venture capital, fewer solutions exist. For now, reducing expenses and scaling back operations may be the only viable options available until the climate changes. Without a doubt, the cannabis industry remains in its infancy from a legal perspective. And surviving while the industry matures might be the means to “weed” out those who will enjoy ultimate success.
Glimmers of Hope and Positive Change
While the last year has seemed rather dismal for the marijuana industry’s stock performance, positive changes have occurred. Recently, the U.S. House of Representatives introduced a bill that no longer labels marijuana as a Schedule I controlled substance. Likewise, the passing of a farm bill advanced hemp cultivation in the U.S. for CBD production. And if the U.S. eventually legalizes marijuana, the cannabis industry will likely see nearly a dozen other countries follow suit. Any of these developments could mean serious revenues for those currently in the marijuana industry.
At the same time, Canada is about to launch into its Cannabis 2.0. This version of legalized cannabis extends use to edibles, beverages, and vape products. This similarly has the potential to bring new products to the market that consumers prefer. This could also undermine existing illegal marijuana sales as retail stores increase. And finally, advancing legal use paves the way for much-needed research in the marijuana industry. If science further supports the array of health benefits already touted, this could be a game-changer. And in fact, preliminary studies already are showing these types of positive results (What health benefits? Check out this Bold Business story here.).
A Potential Banner Year for the Cannabis Industry
While a massive turnaround in share prices for marijuana stocks isn’t likely to happen overnight, progressive improvement should be expected. Many of the positive developments cited may come to fruition in the upcoming year. If they do, then access to funding and capital will increase, and this will help boost stock values. From this perspective, 2020 will likely be a telltale year for the marijuana industry. Certainly, many unknowns exist. But likewise, several indicators suggest the cannabis industry may be in much better shape this time next year.