The initial intention of governments to impose high taxes on cannabis has backfired and now legal operators are struggling to survive. With overproduction and competition leading to a decline in prices, the entire industry is concerned. However, is this situation truly negative? Should the sector be worried if cannabis prices continue to fall?
The challenges facing the cannabis industry are not a matter of some operators thriving while others flounder; instead, every operator grapples with difficulties. Although the big companies are managing to stay afloat, albeit precariously, they too are facing a challenging situation.
The major players in the cannabis industry need sales to the extent that some are investing heavily in legalization efforts to grow the legal cannabis market. A notable example is Trulieve, the largest provider in Florida, currently providing significant funding for Smart & Safe Florida's campaign to pass a recreational ballot measure in 2024.
Similar situations exist in other locations, although not all customers know the various additional costs businesses charge. One such example is slotting fees, which are payments made by companies to have their products placed on shelves, similar to renting space on a shelf. This tactic, used by supermarkets, ensures that a new product has to sell power without public familiarity.
However, these fees are typically intended to be one-time payments. If a product proves its worth and generates sales, it remains on the shelves. If it fails to perform, it is removed. The fact that dispensaries continuously implement these fees suggests a financial shortfall that cannot be met through conventional means.
Recently, widespread layoffs and restructuring efforts are occurring at numerous major cannabis companies. From Clever Leaves Holdings and Canopy Growth to Curaleaf, the prevailing news headlines revolve around cannabis companies experiencing financial losses. Recently, Nasdaq issued a warning to Aurora Cannabis due to its stock price falling below the threshold required to maintain its listing on the exchange. Aurora has a limited timeframe to rectify the situation if it wishes to retain its status.
The declining sales in the industry directly impact government tax revenue, leading to significant concerns. Governments cannot collect the desired taxes, while companies report substantial losses. In recognizing the issue caused by overproduction, California became the first to address it by lowering exorbitant taxes to assist operators. However, implementing this solution took several months.
The crux lies in recognizing that high taxes and excessively stringent regulations are the primary causes of these challenges. While a thriving black market poses significant competition, the legal market can be competitive if heavy taxes and costly regulatory procedures do not burden it. Despite the evident need for action, governments must take appropriate time to respond appropriately.
The black market serves as a reminder to consumers of the fair market value of cannabis, especially when legal markets tend to overcharge. The black market is also susceptible to factors like overproduction; however, it can adjust prices more readily since excessive government taxes and regulations do not burden it.
Despite their illicit nature, black market operators keenly understand the measures required to maintain competitiveness and profitability. They grasp the importance of adjusting prices to attract customers. This underscores the fact that if black markets can successfully lower prices while remaining profitable, legal markets should also be able to do so.
In a recent MJBizdaily article, Beena Goldenberg, CEO of Organigram Holdings, a Canadian cannabis producer, expressed concerns about the industry's current trajectory. She stated that many producers have expressed their reluctance to engage in a race to the bottom, yet the market is heading in that direction. Goldenberg cautioned that low prices could negatively impact the industry's sustainability. She further highlighted the alarming trend of cannabis ounces regularly being priced below CA$100.
Goldenberg's statement highlights an interesting yet unfortunate truth about legal cannabis markets. She suggests that despite the availability of knowledge, the markets need to be more focused on long-term sustainability. This is evident in the fact that large-format pricing in specific markets has reached a point where the products are being sold at a loss, even considering the cost of production and the excise tax burden.
Does Goldenberg's statement make sense? It's worth considering that the black market also incurs production costs, implying that if they can manage it, so can a legal market. If the production price seems excessively high, it likely refers to the costs associated with overly strict regulations rather than the actual cost of production. Additionally, the burden of excise taxes can be seen as governments prioritizing their financial gain rather than fostering a sustainable market.
Significant reductions in excise taxes lead to lower prices. Certain states impose excise taxes exceeding 30%, while even lower rates hover around 15%. Notably, most of these taxes are categorized as "sin taxes." Addressing the issue requires eliminating excessive taxes and removing unnecessary and burdensome regulations imposed on companies. By doing so, the industry could witness positive changes and improved conditions.
When Beena Goldenberg says that it's unsustainable if cannabis prices drop, she is referring to legal markets that comply with government regulations and taxes. This statement does not apply to the black market, which can still operate and remain profitable with lower prices because they are not subject to the same regulations and taxes. Therefore, the unsustainability she speaks of is specific to legal markets that cannot sustain their operations and remain profitable if prices drop.
The cannabis industry faces a variety of challenges as it expands and evolves. Governments' hefty taxes and stringent regulations have reduced sales, which has impacted both businesses' and governments revenue. Meanwhile, the vibrant black market serves as a reminder of reasonable prices, and the legal markets might profit by imitating them.
It's crucial to balance price and sustainability in the legal cannabis industry. As industry executives and policymakers seek solutions to these problems, one thing is certain: the cannabis business is here to stay, and it is up to us to shape it into a vibrant, egalitarian, and sustainable marketplace.