Ask Our Experts 3/9/20: Coronavirus and CONAVID-19 Afflicting the Cannabis Market
Q: Though American cannabis markets vary state by state, what impacts are expected from the coronavirus and CONAVID-19 pandemic?
By New Frontier Data
A: In December 2019, the Chinese government reported the first confirmed case of coronavirus-caused COVID-19 disease. As of March 7, the number of reported cases has increased beyond 102,000 cases and 90 countries, with nearly 3,500 reported fatalities. The World Health Organization (WHO) raised the risk assessment for the global spread of coronavirus to “very high”, and the U.S. Centers for Disease Control (CDC) declared its spread throughout the United States as “inevitable”.
Beyond the impacts on public health, reverberations are being felt in economic markets. The Washington Post noted a seven-day, 13% decline in the Wilshire 5000 Index, reflecting paper losses of $4.6 trillion.
With more than 90% of the cases appearing in densely populated China, the Chinese government has taken extraordinary measures to contain the spread of disease. According to the New York Times, more than 760 million (approximately 54%) of the Chinese population are under quarantine or travel restrictions. Factories are shuttered. Businesses are closed. And travel has been tightly restricted. Factory activity fell to a record low in February, and the timeline to resume full production is uncertain.
The implications of a sustained work stoppage in China’s manufacturing economy and its impacts on broader international markets cannot be overstated. By the end of February, cannabis companies were reporting shortages for vape hardware, representing a proverbial canary in the manufacturing coal mine in terms of disruption to broadly vital industry inputs. If China’s factories remain shuttered, major aspects of the cannabis supply chain — from cultivation lighting to retail packaging – will predictably experience shortages.
As the likelihood for sustained disruptions to the Chinese supply chains worsens, cannabis operators are advised to seek alternative suppliers to minimize disruptive risks for their operations, and where no alternatives exist, stock up on mission-critical inventory. Dun & Bradstreet calculates that some 51,000 companies globally have at least one direct supplier in Wuhan, that more than 5 million companies have one or more tier-two suppliers in the region of COVID-19’s epicenter, and that no fewer than 938 of the Fortune 1000 companies have tier-one or tier-two suppliers.
The implications of coronavirus extend well beyond supply disruptions.
While the potential implications for the cannabis industry’s supply chain are consequential, the international economic impact could extend exponentially beyond, costing the global economy a projected $2.7 trillion.
Business operations may be disrupted by the inability of key personnel to get to work.
In businesses where key roles cannot be automated or operated remotely (e.g., cultivation, processing, packaging, construction, events) the inability for mission-critical personnel to get to the office may prove highly disruptive to business operations. Companies should prepare measures for redundancy and continuity of operations measures against potential exposure or infection of essential staff.
Cannabis conferences and events will be canceled impacting a key channel for business development and education.
The disruption of cannabis conferences — from cancellation of next week’s SXSW to postponement of next month’s ICBC Berlin — offers an early indicator of disruption to industry events as the disease spreads. With over 100 major cannabis conferences scheduled for 2020, the impact of a sustained outbreak on conference and consumer event businesses could be acute. The timing of the outbreak, in the lead up to the busy April season for cannabis, many of the consumer-focused 4/20 cannabis festivals may be postponed or canceled to minimize the risk of community transmission.
Canna-tourism markets could see acute declines in nonresident demand.
Tourism-dependent regions should prepare for the possibility of steep declines in regional and international travel. With the number of canceled flights growing as we head into the busy spring and summer travel seasons, it is likely that many consumers will postpone or cancel upcoming vacation travel.
Domestically, operators in regions that see peak domestic tourism in the spring and summer, especially those in cities that host large festivals and social gatherings, should begin contingency planning for lower than usual demand and a high number of cancellations in the coming months due to containment efforts.
Coronavirus may change cannabis consumer culture, and product demand.
In social settings, cannabis is often consumed communally, with the sharing of joints and vapes, and using the same mouthpieces when consuming concentrates. With coronavirus being highly contagious, public health concerns may transform social consumption from a shared experience to a more individualized one. This may have implications for the types of products consumers choose, where consumers purchase their cannabis (e.g., delivery vs. brick and mortar), and where, and with whom they choose to consume. While it remains too early to tell the full extent of the crisis on consumer behavior, brands should closely monitor sales and consumer feedback to ensure they can respond quickly to any sudden changes to purchasing and consumption habits.
Extended school closures will be especially challenging for employees with limited childcare options.
Seattle’s North Shore school district’s decision to close schools for two weeks to contain the virus will likely be replicated by other jurisdictions. Cultivation, manufacturing, retail, and other sectors that rely on in-person operations should prepare for employee schedule disruptions as the staff who lack access to childcare stay home to care for out-of-school children, or self-quarantine following potential exposure by a family member or friend.
While overall consumer demand is expected to be unaffected, lower-earning among shift and gig-economy consumers may drive higher demand for lower-cost products.
Cannabis consumers who work in hospitality sectors are likely to be acutely impacted by the decline in demand due to containment efforts. While New Frontier Data expects cannabis demand to remain stable, the shift in economic fortunes among employees who work fewer hours, lose their jobs, or face steep healthcare-related costs will lead some consumers to become much more cost-conscious, in elemental ways:
1. Bargain hunting: Searching beyond consumers’ regular dispensary for cheaper options for their preferred brand.
2. Downgrading: Buying less-expensive versions of preferred products.
3. Tax avoidance: In high-tax markets like California, some consumers may revert to the unregulated market to reduce purchase costs to the greatest extent possible.
The full impact of the CONAVID-19 outbreak on the cannabis industry remains to be seen. However, just as public health officials advise the public to not panic but to be prepared, so too should the cannabis industry begin to prepare for potentially acute disruptions to business operations, supply chains, and consumer behavior.
New Frontier Data will continue detailed monitoring of the cascading effects of the outbreak, and the strategic implications for the industry.