Coping with cannabis inflation
No longer a nice to do, but a need to do
Inflation is at a 40-year high - and possibly heading higher. This isn’t good news for cannabis companies with slim margins, who can’t easily prune their cost base or have the brand equity to justify higher prices.
Product hardware & packaging costs (particularly for anything out of China), fertilizer, shipping and labour are the main inflationary culprits. It is debatable whether the price increases are permanent, but they are tangible and have a real impact on profits.
Raising prices is not so easy in cannabis. The market is hyper-competitive especially for cultivators and retailers who don't have strong brands and must compete with illicit providers (who don’t face the same taxes and compliance costs).
To cope with inflation, managers will need to consider three questions: 1) what costs to pass along to their customer; 2) what costs to absorb and; 3) which costs can be reduced over time. I have used this simplified analytical approach to help my clients make these importance decisions:
1) Deconstruct your fixed and variable cost base to understand where your cost inflation is coming from and from whom;
2) Determine which increases are permanent (you need to pass along to customers in the short term) and transitory (where you need to hold the line for competitive reasons);
3) Understand which suppliers to push back on (where you have lots of leverage, minimal risk) and when to look for new suppliers (you have zero leverage, high risk). Try to secure some new consideration (e.g., better payment terms) if you can’t roll back their price increase;
4) Communicate to the market why you have and have not raised prices. Where necessary, deliver some new, visible product value to offset the optics of your price increase;
5) Tackle your semi-fixed cost base by shifting procurement to lower cost suppliers, outsourcing non-core activities and rationalizing your product portfolio.
#inflation #costreduction #costs #China