Cannabis.net recently put out a piece called, “The Cannabis Industry Ponzi Scheme – Is a Sale a Sale if No One Actually Pays the Bill? (Or Taxes?)”, that questioned how valid the reported revenue streams are in the marijuana industry if no one actually has the cash to pay the bills and invoices. Accounts payable and accounts receivable are very different monsters with cash in the bank being important right now in the cannabis industry.
The article talked about revenue vs. profit as some of the best cannabis headlines talk about how many billions the cannabis market will be forth in 2025, 2028, and 2035. We just found out the big difference between what a market is worth, what the market’s sales numbers are, and what the profit in the industry actually is, or lack there of profit.
Fast forward to a great piece today on the Green Market Report written by John Shroyer titled, “Two Dozen Publicly Traded Cannabis Companies Lost $4 Billion in 2022”. The article goes into great detail about how cannabis companies took it on the chin in 2022, and how some of the charges were one-time write downs and write-offs. The overall theme from interviewee Alan Brochstein is that 2023 has to be better because it couldn’t get any worse than 2022.
A quick fact check of a Forbes article says legal cannabis sales in America in 2022 came to $30 billion, about $3 billion short of MJ BIZ projections for the year.
Back of the napkin math says $30 billion in revenue and a negative $4 billion in profit is a not a viable business model, but people get confused with “market size” and “sales”, and don’t focus enough on “profit margin” and “profits”. A great example is the supermarket industry. According to Statista super market sales topped $848 billion in America in 2022, but did you know supermarkets operate on razor thin margins of 1% to 3%.
In general, the profit margin at a grocery store is between 1% and 3%. But, as with most things, these numbers don't tell the whole story. Even though big grocery stores have low profit margins, they still make money because they sell a lot of items in a lot of places.
Selling a ton of product at low margins to make money (quantity volume over quality specialized products) sounds just like a commodity, much like the cannabis industry is heading for with Federal legalization and international trade. At some point cannabis will have a Futures contract and be traded the same way corn and soybeans are traded, it is a plant that grows in 8 to 12 weeks, indoor or outdoors.
But I digress….
Is 2022 the bottom and it “can’t get any worse”? Well, yes, those companies did take one time write down and write off charges, but many of those charges HAD TO BE ADJUSTED DOWN due to new market pricing and conditions. So, to say 2022 is the bottom, implies the industry has reached some sort of stability on costs, pricing, and margins. None of that is true in the least sense, in fact, maybe just the opposite as Federal legalization and interstate commerce will drive prices down on both the legal and illicit markets. Once international trade starts in one form or the other, that will lower price and margins even more as low labor costs and sunny climates will have distinct advantages. Think it is crazy that cannabis will be shipping worldwide soon? Colombia is already shipping medical cannabis around the world, especially to Europe, under resolution 539 of their constitution. Their cannabis quality is so good nations are already fighting over getting their hands on a strain called Creepy.
Yes, those $4 billion in losses do not include every brand and every company in cannabis, but it gives a great 5,000-foot snapshot of cannabis retail in 2022. The article even mentions a few companies that turned a profit. Remember, those MSO who are publicly traded are the smart ones how have the resources to vertically integrate in each state and scale up when “Mom and Pop” cannabis shops can’t do that. The wicked smart and rich guys who can vertically integrate and scale only lost $4 billion on $30 billion in sales.
Some of those write downs won’t be on the books in 2023, but some of those tax bills the MSOs are kicking down the road might have to be paid as well. Who is to say that the free fall in cannabis prices doesn’t continue for 2023, or for that matter, into 2024 and 2025 as new states legalize and new black markets start operating in each state.
Cannabis retail is ugly right now but if you think you kissed the ugliest pig with lipstick, wait until you see next year’s profit margins and based on big sales numbers. If we are lucky, maybe the industry only loses $1 billion instead of $4 billion.
The two biggest paradigm shifts in the future for US cannabis, interstate commerce with Federal legalization, and international legalization and trade, are both net negative for US cannabis companies as black-market sales and shipping both domestically and internationally will take off. Smaller suppliers can compete on ecommerce sites with publicly traded MSOs. Their moat of lawyers and building leases come crashing down when small state operators start to drive traffic to their own cannabis stores and start shipping product by USPS and UPS.
Wait until “Mom and Pop” operators learn how to use Facebook Ads and Tik Tok influencers.
Right now, it is only $4 billion in losses because those MSOs hold the key to legal supply in many states, when that lock gets broken down by interstate commerce and internet orders, $4 billion in losses may be looked like the glory years before there was so much competition on the selling side.
Oh yeah, don't forget to read about how Chalice Farms, Oregon's 3rd largest dispensary chain, just went belly up and into receivership since cannabis companies don't get the luxury of bankruptcy protection.
CANNABIS INDUSTRY NUMBERS, READ ON...
IS THE CANNABIS INDUSTRY ONE BIG PONZI SCHEME OF NO PAYMENTS?
