CANNABIS: the NEW ESSENTIAL Cannabis’ “Essential” Designation Will Drive Sales Higher Even During the COVID-19 Pandemic
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Intro-Blue, LLC | 617-454-1088 | [email protected] | www.intro-blue.com | Volume 37 | 4/1/20 CANNABIS: THE NEW ESSENTIAL Cannabis’ “essential” designation will drive sales higher even during the COVID-19 pandemic. We discussed in last week’s Stash report how cannabis sales saw a sharp surge in March as part of consumers’ stay-at-home strategy. These sales are likely to be boosted further by the classification of marijuana – especially medical marijuana – as “essential” in many U.S. states, which means that cannabis businesses can stay open amid coronavirus-related forced closures and stay-at-home mandates. In some states, officials have enacted temporary new policies such as expanded delivery services or curbside pickup that make it easier for consumers to get access to marijuana while respecting social distancing measures. Others are allowing doctors to issue medical cannabis prescriptions via telemedicine instead of requiring that they conduct in-person examinations. Key cannabis states are leading this trend, including 1) California where all licensed marijuana companies are allowed to continue operating, 2) Colorado where medical dispensaries can stay open while recreational cannabis shops are limited to curbside pickup, 3) Illinois where both growers and retailers have been classified as “essential,” and 4) New York and Oklahoma where medical marijuana companies can continue to operate. (See chart below for state classifications and click here to read details of state regulatory mandates). We believe that the “essential” designation makes cannabis a consumer staple and lends further credence to our thesis viewing cannabis as a recession-proof defensive industry. According to BDS Analytics, 65% of cannabis consumers use it on a daily basis. These are typically medical consumers for whom cannabis is needed to treat conditions like stress, PTSD, anxiety, insomnia, nausea, pain, and multiple sclerosis. For recreational users, cannabis is a source of relaxation, sleep aid, coping with mild anxiety, and fun. With 3.3 million Americans applying for unemployment insurance, stress levels are only going to increase in the weeks and months to come and in the absence of other avenues of relaxation and recreation – gyms, restaurants, yoga classes – consumers are likely to turn to cannabis as their escape of choice. An analysis of historical data shows that alcohol sales were steady during the financial crisis of 2008/2009, implying that demand for substances like cannabis, alcohol, and tobacco is likely to show greater resilience than other products even if the U.S. economy were to enter a recession this year, as consumers are likely to prioritize their budget to include marijuana purchases. This makes the cannabis industry relatively recession proof – akin to consumer staples – a thesis we have discussed earlier (read here and here). However, falling income levels and rising unemployment mean that cheaper cannabis products are likely to find greater favor with consumers, a trend that could boost the illicit market and hurt the premium product launch plans of cannabis operators. A 2009 Nielsen consumer survey – taken near the official end of the last recession – suggested people drank less expensive beer, wine, and spirits, and 50% of them were actively seeking out the best deals to preserve capital. We believe this trend could play out in 2020 as well. On one hand, cannabis will benefit due to the small ticket size of marijuana purchases. On the other hand, consumer preference for cheap products will dent the Cannabis 2.0 plans of cannabis operators that were aiming to ramp up sales of high- margin products to consumers starting in 2020. It will also mean that legal operators will find it difficult to compete with the lower- priced illicit market, a trend that could slow the pace of illegal to legal value migration in the U.S. cannabis industry. Chart 1: States Allowing Marijuana Businesses to Operate Despite Lockdown/Stay-at-Home Orders Source: Intro-Blue, Marijuana Business Daily CANNA NEWS COVID-19 U.S. marijuana businesses are ineligible for coronavirus disaster relief, federal agency confirms. The federal Small Business Administration (SBA) reiterated on March 23 that marijuana companies are not eligible for disaster relief loans to lessen the blow of the coronavirus outbreak. Because cannabis remains illegal at the federal level, the marijuana industry is being denied access to these aid opportunities, including programs administered by SBA. The agency’s Northwest branch confirmed that in a response to a tweet from a cannabis business owner who inquired about eligibility. “With the exception of businesses that produce or sell hemp and hemp-derived products [that were federally legalized under the 2018 Farm Bill], marijuana-related businesses are not eligible for SBA-funded services,” the post states. An SBA spokesperson similarly clarified that marijuana companies aren’t getting a cut of the federal dollars being appropriated for business disaster relief. Read More (Marijuana Moment) Coronavirus stimulus package covering hemp industry signed into law. A new $2.2 trillion package designed to prevent the U.S. economy from collapsing has room for hemp businesses and farms. The relief package signed into law on March 27 allows legal hemp operators to seek loans and direct aid to help keep their businesses afloat. The measure includes: 1) $10 billion for Small Business Administration emergency grants, with up to $10 million of emergency relief per business; 2) Up to $50 billion in borrowing authority for the U.S. Department of Agriculture’s Commodity Credit Corp., often called CCC; and 3) $100 million in grants to improve rural broadband. Read More (Hemp Industry Daily) Coronavirus prompts shift in U.S. adult-use marijuana product sales. Not only has the coronavirus pandemic altered how U.S. adult-use cannabis consumers shop, it’s also changed what they’re buying. According to point-of-sale data provided by Seattle- based Headset, the market share for edibles in California, Colorado and Washington state’s adult-use markets have all increased since March 13 – which was the Friday before the first weekend that concerns about coronavirus in the U.S. began to seep into the mainstream. The market share for edibles in California’s recreational cannabis market March 13-21 increased 3.3 percentage points over January and February. Edibles now account for 14.9% of all adult-use cannabis sales in California. Flower gained share in Colorado and Washington state, while vapor pens’ share of the market increased in California and Washington state. Flower and vapor pens are both inhalable forms of cannabis, showing that consumers aren’t eschewing those segments of the market amid the coronavirus pandemic. Read More (Marijuana Business Daily) Chart 2: Adult-Use Cannabis Dollar Share by Category & State: Jan/Feb 2020 to 3/13/20 – 3/21/20 Source: Intro-Blue, Marijuana Business Daily, Headset Legal cannabis industry sees record sales as customers facing coronavirus crisis stock up. What’s happened in the last month is something new. “We had our largest sales day ever,” Steven DeAngelo, so-called “father of the legal cannabis industry,” said. “Sales are up 20-25% at all locations.” Across the country, sales are sky high in states where legal cannabis has been declared “essential medicine” during state shutdowns, allowing stores to stay open. Customers appear to be stocking up, and many stores are shifting to delivery. It’s also possible the industry is reaching new customers who, until now, have bought their pot illegally, but want to now take advantage of regulated product delivered to their doorstep. DeAngelo said Harborside is hiring drivers as delivery ramps up. Even though California calls cannabis essential medicine, he said customers do not need a medical card to buy. Anyone over 21 can make a legal purchase. Read More (CNBC) Coronavirus continues to redefine the cannabis supply chain. Panic buying and a lack of access to overseas suppliers could force cannabis businesses to rationalize their supply base and centralize purchasing at the corporate level, says Colin Kelley, operating partner for private equity investment firm Merida Capital Partners. Cannabis companies with multiple locations can potentially hedge against future disruptions and boost productivity by moving procurement functions from the departmental or division level to the corporate office, Kelley says. A centralized approach to purchasing may open opportunities to streamline the supply base and take advantage of preferred vendor programs, Kelley says. In addition to offering favorable pricing, larger distributors or preferred suppliers may help companies manage inventory levels and replenishment, he added. Read More (Cannabis Business Times) Cannabis industry not immune to hoarders amid COVID-19. Even the black-market cannabis supply is not safe from unsavory hoarders. Canadian cannabis activist Steven Stairs said there are many people with a critical mental health need for weed that are, at times, struggling to get product. Some light up to deal with post-traumatic stress disorder or depression or clinical anxiety among a number of other issues, including pain management, according to Stairs, who added that in the best of times, it’s enough to be able to function. With COVID-19 settling in, these issues can escalate, he said. But those who need it to function are running into cases of people buying large quantities of cannabis on the black market due to its cheaper price than legal bud and with higher potency, among other reasons. Read More (Winnipeg Sun) Marijuana dispensaries remain ‘essential’ under Ohio stay-at-home order. Ohio Gov. Mike DeWine has announced a stay-at-home order in his ongoing effort to combat the outbreak of coronavirus. The order will go into effect at 11:59 p.m. March 23 and remain in effect until April 6, at which point Gov. DeWine and his administration will re-assess the situation.