Cannabis Leaders: Ready for the Recession?
Most are not...
We may inadvertently and quite quickly be slipping into a recession, if we are not in one already. The evidence is everywhere.
Inflation is at a 40 year high, interest rates are rising quicky, and economic growth is slowing. Looming on the horizon are more geo-political, climate and pandemic shocks.
Recessions are periods of low or negative economic growth, featuring rising unemployment, slowing wage growth and reduced business investment & consumer spending, especially around discretionary purchases.
A case can be made that the demand for cannabis, like other ‘vice’ products is impervious to recessionary effects. However, the relative newness of the legal cannabis market does not include a period characterized by a recession and/or high inflation.
Fact is, we don’t really know how cannabis demand will be impacted. Some current indicators are worrisome; many legal markets are experiencing slow or flat growth.
Looking just at market demand doesn’t tell the entire story of how consumption and the industry will be affected by a recession. Lets consider the impact on consumers and businesses.
Consumers & Retailers
Consumers may change their behaviour in the following ways (some of these reverberations occur in other consumer goods categories):
- Move down the product quality, feature and image ladder e.g., shift purchases from premium to value brands and take more advantage of retailer discounting;
- Purchase smaller product sizes and weights;
- Seek out lower cost physical or online retail channels;
- Make fewer impulse purchases or indulge in new products i.e. older brands often gain market share;
- Switch from legal cannabis to other categories (e.g., alcohol or the illicit market) that have a lower ‘cost per buzz’;
Producers & Wholesalers
They could respond in a myriad of ways:
- Extend out their payables;
- Postpone or cancel investments around M&A, IT and capacity expansion;
- Negotiate deeper discounts from their input suppliers;
- Pay closer attention to cost and demand forecasting;
- Scrutinize their discretionary spend in areas like marketing and talent management;
Cannabis firms have a variety of ways to cope with the consequences – lower market demand, shifting consumer tastes, margin compression - of today’s recessionary environment:
Proactive producers should be: simplifying their strategic plans and prioritizing high ROI/quick time to value initiatives, relooking ways to maximize revenue (e.g. via pricing management) and cutting unnecessary costs including outsourcing non-strategic activities.
Prudent retailers will be streamlining their operations, minimizing inventories and category-managing their assortments. They will also be negotiating harder with producers and wholesalers around puchases, listing fees, co-op marketing plans, and inventory buy-back programs.
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