It was 2014 when the first legalized marijuana purchase took place in the U.S., where Colorado legalized the recreational use of cannabis. As a result, a new market emerged that would bring forth great opportunities for would-be entrepreneurs. In the years to follow, Colorado and other early adopting states enjoyed a rising demand for cannabis products. However, this landscape now appears to be shifting in a downward direction. New risks for cannabis businesses have accumulated, raising questions about cannabis in the future. It may well be that the cannabis boom has peaked, which introduces concerns especially in states recently legalizing marijuana. New strategies for success may therefore be required.
(The government is finally softening on its marijuana stance–read more in this Bold story.)
It’s not uncommon for nascent markets and industries to go through similar adjustments over time. Those early to market often enjoy greater profits and high product demand that declines over time. As others enter into the competition, prices fall, and things stabilize. But for the marijuana sector, the risks for cannabis businesses far exceed these traditional pressures. This industry in particular faces financial, regulatory, and even alternative product pressures that many markets don’t. These are the major issues facing the industry and questioning what cannabis in the future will look like. Certainly, some cannabis businesses will persevere and survive. But it may not be the safe haven for success that it’s been for years.
Downturns for the Cannabis Sector
The actual cannabis boom can be well said to extend into the pandemic. With everyone locked down at home, it’s perhaps not surprising marijuana demand rose. For the first two years, cannabis suppliers couldn’t keep pace with consumer needs. Cannabis in the future looked to be a solid bet, and as such, suppliers double-downed on growth investments. But like Peloton and a few other companies, post-pandemic realities soon set in. Excessive supplies drive marijuana prices down while new risks for cannabis businesses like CBD emerged. In the last two years, the cannabis sector has seen a serious decline in revenues as a result.
To put things in perspective, global cannabis industry revenues paint a pretty accurate picture. In 2020, revenues from marijuana sales exceeded $2.2 billion. However, in 2023, cannabis revenues had fallen to $1.5 billion. Certain states also felt the pinch as tax revenues from sales declined. Colorado’s tax revenues from these sales totaled only $282 million this past year. This represented a 30% drop from taxes received two years prior. Understanding this, it’s not surprising that financial risks for cannabis businesses have grown. Many enjoyed 50% profit margins in the early years that have since fallen tremendously. This is leading many of the major cannabis firms to contract operations in an effort to better compete. Several companies have shut down some of their locations with layoffs also being common. And some smaller firms have closed their doors altogether. Cannabis in the future will definitely look quite different as a result.
Key Pressures in the Industry
The pandemic and its aftermath notably affected the cannabis supply and demand curve, upsetting many cannabis markets. But this was certainly not the only new risks for cannabis businesses. Being illegal at a federal level, cannabis firms are restricted from accessing federally-protected banking systems. As a result, many must utilize smaller banks that require sizable fees to manage the large cash volumes present. While many politicians are trying to change this for cannabis in the future, these barriers persist currently. In addition, cannabis businesses also face state regulations. These include not only taxation requirements but several others as well. Seed-to-sale tracking, contaminant testing, and licensing and renewals all add to operational costs as well. Profits margins have been negatively affected by these factors across the board.
(Cannabis companies still need banks–read why in this Bold story.)
One of the notable risks for cannabis businesses that wasn’t anticipated pertained to the alternative hemp sector. CBD products including infused beverages, gummies, and baked goods provided an alternative to marijuana. And since CBD and hemp products are mostly legal throughout the nation, these businesses had an advantage over cannabis ones. This was particularly true in states where recreational cannabis use wasn’t allowed. Though many thought cannabis in the future would be preferred to hemp and CBD, this isn’t necessarily the case. These developments further drove down marijuana demand as well as prices and profits. Combined with excess supplies, taxes, regulatory costs, and banking fees, risks for cannabis businesses have become overwhelming.
Maturing in a Volatile Market
In Colorado, recognized as the most mature cannabis market in the country, several smaller businesses have closed. The pressures noted above prevented them from being long-term competitors in the market. But for many larger firms, the risks for cannabis businesses today are forcing change. For companies like Maggie’s Farm and Curaleaf, that means closing some shops and operational sites. It also means reducing human resource costs with many of these firms currently in a hiring freeze. And for others like Veritas, it means downsizing operations and outsourcing talent. Two years prior, Veritas had 144 employees, but today, it only has 21. In each of these instances, firms are reducing expenses in order to better compete. And in a maturing market, this will be what cannabis in the future will look like.
In many ways, the cannabis industry parallels others that have gradually matured over time. High profits attract greater competition and variety, which means there’s less of a pie to share. Over time, those firms that adapt and embrace change find new opportunities to exploit. This may well be the case as the risks for cannabis businesses mount. Cannabis of the future will therefore look quite different than what the early days looked like. This should be an important lesson for cannabis firms in states where marijuana legalization just occurred. And it’s not a bad lesson for businesses in other industries as well. Indeed, the boom for the cannabis industry may be slowing. But a cannabis industry will persist, and successful firms will adjust accordingly.
The medicinal uses for cannabis are undeniable–read more in this Bold story
