Ask Our Experts 3/30/20: The Prognosis for Legal Cannabis Amid the COVID-19 Pandemic
Q: Beyond its vast socioeconomic impacts, how do you expect the fallout from the coronavirus to affect the legal cannabis industry, specifically?
By New Frontier Data
A: The COVID-19 pandemic has undeniably been a shock to the global economy. A recent New Frontier Data survey revealed that while 40% of respondents were concerned about contracting COVID-19, nearly twice as many (78%) were concerned about its negative economic impacts. Such concern may be exacerbated by a steady stream of media updates presenting a rather grim prognosis. However, the prospective situation in the cannabis industry may not be as bleak. New Frontier Data and CohnReznick recently conducted a webinar discussing navigating capital constraints and global crises. The shared insights offer opportunity to review the current situation analytically.
It is worth considering market fundamentals: There are now 60+ countries having legalized cannabis in some form (i.e., medical, adult-use, or industrial hemp). Globally, consumers spend nearly $350 billion each year and legal demand has grown by over $20 billion annually. There have also been some economic headwinds gathering. In the last year, some of the irrational exuberance that catapulted cannabis stocks into the spotlight has been replaced by a focus on strategic profitability. This was accompanied by a decline in many of the largest cannabis companies’ market cap, beginning in 2019 and continuing through today.
Future growth despite the impact of COVID-19 will depend on a few factors. First and foremost, the scale of supply chain disruptions and consumers’ access to products. Such issues will be eased or intensified depending on how consumers’ spending habits change during a potential recession, and respective cannabis businesses’ status as essential or nonessential businesses enabling or preventing their operation.
Thus far, several states—including California, Connecticut, Maryland, and Washington—have deemed cannabis operators as essential businesses. At the same time, spikes in adult-use sales have been reported. While the numbers are less extreme when averaged out over three months of spending, it is clear that consumers are stocking up. Such patterns have been predictable, given that consumers’ most commonly cited reasons to use cannabis or CBD are relaxation, stress relief, or anxiety reduction.
There remain several marked opportunities for the legal cannabis industry in the current environment:
On the business side of things, CohnReznick reminds that the cannabis industry is well positioned to weather the storm. The IRS has extended the personal and corporate tax-filing deadline from April 15 to July 15, which serves as a de facto short-term, interest-free loan from the government. Several states have taken further action by implementing property, sales, and excise tax remittance, providing potential short-term, cash-flow relief.
While such policy considerations may help reduce the pressure felt by the cannabis industry, there is little doubt that more challenges loom ahead. Virtual and remote working will require more implementation of security and data privacy safeguards. Facilities that were under construction or in the planning phases may be delayed. Legalization efforts seem likely to be slowed in the short term, though may gain momentum in the post-pandemic economic recovery.
Overall, the outlook for the cannabis industry remains optimistic. CohnReznick noted that when it comes to navigating capital constraints in a global crisis, cash is king, and there are few industries so accustomed to operating in a capital-constrained environment as cannabis.
A more in-depth examination of the global cannabis industry and markets will be shared on April 2 during New Frontier Data’s Global Cannabis Town Hall: New Economic Realities.
