Cannabis Players Battle Challenging Market, As Federal Legalization Lags

Despite the spread of recreational sales into new states, the cannabis industry continues to face major business challenges, with operators battling ongoing black market sales, falling prices, and a lagging legalization push at the federal level. In a survey of cannabis businesses conducted in the third quarter of last year, Whitney Economics found that fewer than 25% of cannabis operators in the U.S. report profitability, down from 42% the year prior.

Whitney’s report delves into shortages and surpluses in materials, services, and labor inputs against future expectations as well as expected revenues, profits, margins, costs, and other basic business measurements. While 25% of respondents reported profitability, 34% said they were breaking even and 41% said they were losing money. Sales were down for the majority of survey respondents in the quarter, with 67% reporting sequential sales declines, 18% reporting them flat, and 15% seeing an increase.

Those tough conditions evident last year remain current, according to Whitney’s analysis, with inflation and other macroeconomic conditions impacting consumer spending patterns on cannabis and shrinking basket sizes. In line with that, 71% of respondents in the survey said their profit margins had decreased while 22% said they had stayed the same and only 6% said they had increased.

“Investors have pulled back, the consumer behaviors have changed, and regulators have a stranglehold on the cannabis operators,” Whitney notes. “The culture is not business-friendly, and growth opportunities are hard to come by. Operators have had to learn how to do more with less.” The research group sees the industry at an inflection point, where regulators will need to respond to some of the challenges hampering the business before they’re impossible to reverse.

The survey found that the best positioned markets in the U.S. right now are those which launched recently but not too recently. Mature markets like those on the West Coast have stagnated and exceptionally new markets like New York are struggling with their rollout and weathering the shift in consumer behavior that occurred before the habits of legal-market purchasing had been established. On the other hand, states like Illinois and Michigan are performing best because they still have a runway for growth and locked in consumers before inflation and post-pandemic normalization changed spending habits.

Large companies appear better positioned than smaller operators. The other decisive factor remains access to capital, an ongoing regulatory hurdle that has choked investment and growth in the industry. But the biggest challenge to the regulated cannabis industry remains the illicit market, which continues to eat into regulated cannabis sales. On the first front, U.S. senators have signaled that a committee vote on a cannabis banking bill is likely in the works for this month; on the latter, both New York and California have stepped up enforcement of black market sales recently, aiming to bolster legal operators.

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