Cannabis firms ignore inflation at their own peril

Welcome to the 'New Normal'

Inflation is accelerating around the world, with serious implications for every cannabis firm.  Weed companies are especially at risk given their razor thin operating margins, high fixed costs and hyper-competitive pricing environment.  With non-edible retail prices falling everywhere, many in the industry have been complacent in a worldview that sees prices go one way. That belief has been shattered, as prices are beginning to inch up.  

If you are under 50, you may not truly comprehend what the real-world business impact of inflation truly is.

Inflation 2022:  Prepare for the ‘new normal’

Critical input costs like labour, energy, product hardware, ingredients and fertilizer have risen on average 4%-20% this year, tracing to labour shortages, the war in Ukraine, excessive government C19 stimulus spending and Chinas’ supply chain hiccups.  Inflation is also triggering rapid interest rate increases around the world, driving up the cost of capital and stifling available investment.  Rates are expected to continue rising to the end of 2022.

Rising costs is not the only problem:

- Business forecasting becomes much harder, especially when there is no historical learnings & data to fall back on;

- Margins slowly but inexorably compress, hampering cash flow and reducing profitability. Inflation is pernicious;  prices tend to rise across the board and on all inputs;

- Market share is tougher to keep.  Many of your competitors will not match your cost-recouping price increases;
 
- Falling real incomes could reduce consumer demand.  Remember, for most users cannabis is a discretionary purchase.

How do you mitigate the effects of this ‘new normal’?  

You need to act quickly and decisively.  Some of the measures I am recommending to my clients include:

1. Improve your cost visibility – you can’t manage what you can’t see;

2. Implement strategic pricing management – In considering the elasticity of demand of your products, which products can you take up pricing while minimizing volume risk?  Where do you need to hold the line on pricing to protect your volume and market position?  

3. Undertake a procurement review - make sure you are dealing with the most competitive suppliers and the best value inputs;

4. Turn fixed into variable costs – Explore which non-core functional area (e.g., HR, sales & marketing and IT) can be outsourced;
  
5. Improve cash flow management - Look to negotiate better supplier payment terms, close revenue leakages and lock in input prices at today’s levels.

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