Pot stockpiles, supply chain disruptions, and CBD hand sanitizer: How the cannabis industry is preparing for - and reeling from - the coronavirus pandemic
AP Photo/Peter Dejong
- People are stockpiling pot as many cities order non-essential retail stores to close, in an effort to combat the coronavirus pandemic.
- Despite strong sales numbers, investors, experts, and analysts told Business Insider that the fallout from the coronavirus pandemic will be dire. They said that it will disrupt supply chains, hurt startups, and accelerate a shakeout period for cannabis companies.
- Some investors say the companies that are best prepared to weather the chaos will emerge as the industry's leaders when the pandemic subsides.
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All around the world, there are pictures surfacing on social media of lines stretching around the block.
Yes, there are lines at grocery stores and pharmacies - the essential survival needs during the pandemic-induced quarantine sweeping through major cities. But people from Toronto to San Francisco to Amsterdam are stockpiling another essential: marijuana.
For the cannabis industry at large, however, investors, experts, and analysts Business Insider spoke to for this story said the fallout from the coronavirus pandemic will be dire, in that it will disrupt supply chains, hurt startups that don't have enough cash to weather the storm, and accelerate a months-long shakeout period that was already underway before the first coronavirus cases showed up in the US.
"Any predictability that was left in the cannabis industry has effectively gone up in smoke due to the potential health risks and disruption brought on by the novel coronavirus pandemic," Marc Hauser, a San Francisco-based attorney and the vice-chair of Reed Smith's Cannabis Law Team wrote in a note. "With the spread of the virus, affecting not just individuals, but capital markets, supply chains, and work environments as well, the already challenged US cannabis industry now faces even further risk of destabilization."
Some analysts were even more pessimistic. Andrew Carter, a cannabis analyst at the investment bank Stifel said the coronavirus pandemic is likely to be a "crushing blow" for the industry.
AP Photo/Steven Senne
Is cannabis recession-proof?
Still, the old saying that vice industries - historically speaking, gambling, alcohol, tobacco, and firearms - are recession-proof seems to apply to legal cannabis's first big test.
Cannabis dispensaries, both online and in-store, have seen record sales.
Ross Lipson, the CEO of the Oregon-based online dispensary software startup Dutchie, told Business Insider he's had record sales over the past week, and that trend is showing no signs of stopping.
"Sales are just through the roof," Lipson told Business Insider. "We've seen an uptick across the board."
Last Thursday - shortly after Trump declared a national emergency and a day after the World Health Organization officially deemed it a pandemic - sales started to spike "aggressively," he said.
Dutchie blew out its sales records, setting an all-time record on Friday. That trend carried over through this past weekend, with the company's platform handling over 50,000 orders and $5 million of transactions.
On top of that, Lipson said the stockpiling is real: The average cannabis purchase on Dutchie's platform is around $92 per customer. The average since Thursday is $115, a 20% increase.
On Monday, Lipson texted Business Insider to say the company had broken a new record, with 20,000 orders and $2.2 million in sales. Sales climbed again on Tuesday, and set new records on Wednesday with 25,000 orders topping $3 million in sales.
"Every day this week we've seen an all-time daily record," Lipson said, adding that most of the orders are either online or through curbside pickup.
While Lipson, who's based in Bend, Oregon, said the dispensaries he works with haven't yet felt the supply chain impact of the coronavirus-related shutdown, that could change quickly, depending on how long the shutdowns last.
And that brings up a key question, says Lipson. While many adults use cannabis purely for recreational purposes, others rely on dispensaries for prescribed medicine.
"What's the classification here?" Lipson said. "Are dispensaries pharmacies? They're in their own little box."
AP Photo/Peter Dejong
Contact-less deliveries, hand sanitizer, and latex gloves
On that front, San Francisco on Tuesday allowed cannabis dispensaries to stay open for medical patients after including them in a city-wide shutdown over the weekend. Many dispensaries around the US and Canada have moved to online-only operations as well, per press releases and social media messages sent to Business Insider throughout the week.
Amanda Denz, the chief marketing officer at Sava, a California cannabis delivery service, told Business Insider that sales jumped three times over the normal amount this past weekend.
"I think people are worried that in a few weeks their favorite products will be gone," Denz said.
She said each of Sava's delivery drivers will be outfitted with latex gloves and alcohol-based hand sanitizers, and will be instructed to wipe down products and surfaces like door handles in between each delivery, similar to food delivery services like GrubHub.
That customer care seems to extend to New York City's illicit cannabis delivery services as well. One delivery service advertised in a text message to regular clients a "no-contact" drop off service, and said each of its delivery people will carry latex gloves and hand sanitizer, per a tip received by Business Insider.
AP Photo/Peter Dejong
Squeezing out smaller CBD and cannabis startups
For smaller operators in legal states, the coronavirus pandemic is creating more difficulties than a temporary sales boost can fix.
Colorado, for instance, doesn't allow cannabis delivery service in the same way California does. Cannabis customers in Colorado can place orders online, but they have to physically go to the dispensary to pick up their products.
Johnny Kurish, the CEO and general manager of Boulder's Helping Hands Herbals, said he was forced to close his two locations.
"We're waiting and holding," Kurish told Business Insider over the phone. "If delivery was an option, that would save our business."
To Kurish, the biggest challenge of having stores be closed for an indeterminate amount of time is figuring out a way to pay employees.
"I'm not holding my breath for federal assistance," Kurish said. "They're still working out our tax laws."
'It's a war-zone out there'
Jim Higdon, a former journalist, is now the CEO of Kentucky-based CBD company Cornbread Hemp.
Cornbread Hem mostly sells to retailers like high-end organic and natural-health-food stores. The crippling effects of the pandemic on the global economy mean that the startup's retail partners are suffering, too.
"It's a war-zone out there," Higdon said. "The last thing they're thinking about is onboarding a new product. They're just trying to keep their shelves stocked."
Higdon said that his company's cash position is strong and that it's doubling down on e-commerce.
"We'll weather the storm. But it's [coronavirus] hurting our ability to grow, but it's not hurting our ability to maintain our position," Higdon said.
Higdon's comment belies a larger problem in cannabis, one that isn't necessarily caused by coronavirus, but exacerbated by it: Many cannabis companies are over-leveraged and are running out of cash.
Supply chain issues and an accelerated shakeout
The North American Marijuana Index, which tracks a basket of cannabis and cannabis-related stocks, has tumbled over 60% this year, building on 2019's rout.
On the private side, cannabis startups have struggled in recent months to raise growth-stage money as cannabis-focused investors, for the most part, are tapped out and reticent to invest in an industry where companies have wiped out millions of value in recent months.
"Startups are some of the most fragile companies out there," Catherine Dockery, the founding partner of Vice Ventures, told Business Insider in an email. "Most companies we speak with express their runway in months - so this sort of adversity is especially challenging for the early-stage investment community."
That dynamic will present itself in two ways as the US and Canada move towards more widespread lockdowns, says Pete Karabas, the founding partner of the cannabis-focused Key Investments.
"Private cannabis companies who have raised capital recently and have cash on their balance sheets should be in good position to weather the storm," Karabas said. "On the other hand, private cannabis companies who are in the process of fundraising or had plans to do so in 2020 will likely struggle to raise capital."
Those companies, Karabas said, will become distressed assets, where acquisitive buyers will be able to dictate the terms of the deal.
And second, the larger shock to the global economy and the stock market means there will be fewer investors who will be willing to invest in riskier, early-stage cannabis companies.
"We believe investment managers with dry powder will ultimately benefit from such an environment since capital dedicated to cannabis investments will become more scarce," Karabas said.
For operators, though, having cash is paramount.
"There are three main risks right now, the way I see it," Jon Sandelman, the CEO of New York City-based Ayr Strategies told Business Insider over the phone.
"If the employees can't come to work, you can't make your product. You can't grow your product, and you can't service your customers. Second, if the customers don't want to leave home, you have no revenue. And third, if your balance sheet is not strong and your operations are burning cash…it's about optionality - do you have the financial means to stay alive if business drops 15-20%?" Sandelman said.
To that end, Sandelman said his company has the resources to persevere, but others may not.
That will accelerate the trend of "massive consolidation" Sandelman sees in the cannabis industry.
"In bear markets, there's massive dispersion and those who plan for this day, who are disciplined and excellent stewards of capital, they'll be the survivors," he said.
Graphic by Business Insider
'Planning for the unknown'
Nick Kovacevich, the CEO of Kush Bottles, a publicly-traded manufacturer of cannabis packaging, was forced to pull his company's financial guidance because of the coronavirus outbreak.
"We're planning for the unknown and that's obviously very challenging," Kovacevich said. One of the key challenges is the impact to supply chains, since most cannabis packaging and vape devices are produced in China, which has shut down large portions of its manufacturing economy to combat the virus since December, he said.
If the economy stays shut down, "that's going to be a dire reality for cannabis because none of these companies have strong enough balance sheets to survive a broader shut down of the industry, whether it's two weeks, three weeks, or four weeks. They just don't," Kovacevich said.
All this means that for companies in the cannabis and hemp space, it's time to get creative.
Ryan Lewis, the CEO at Global Cannabinoids, a hemp and CBD company, is doing just that. The company released a cannabinoid-infused, alcohol hand sanitizer last week, which it says is an "ideal ingredient to add in the fight against viruses."
While CBD does have antibacterial properties - and hand sanitizer is crucial during a pandemic - it's important to note that there is no compelling research to show that any cannabinoid can kill the coronavirus.
To Mitch Baruchowitz, the managing partner at Merida Capital, a cannabis-focused private equity firm, the economic fallout from the pandemic could create an opportunity for savvy startups and investors.
"It's important to consider that access to capital could be constrained for an extended period and that companies without large capital reserves or easy access to capital should run as lean as possible, even if that means curtailing growth," Baruchowitz wrote in a letter reviewed by Business Insider.
"Companies that survive the current chaos are likely to emerge as winners, so chaos will arguably elevate these companies."
- Read more:
- Green Bits, a cannabis startup backed by Tiger Global, quietly terminated over 40 employees in a bid to cut costs
- A key executive departed cannabis-vaporizer company Greenlane Holdings two days after the company laid off 31 workers
- Embattled cannabis retailer MedMen quietly terminated 128 people in February, filings reveal
- Cannabis company Acreage just cut 40 jobs following a strategic review, and it's the latest sign of a tough environment for cannabis sellers
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