Economist Beau Whitney is forecasting a return to normal growth for U.S. cannabis.
Cannabis Cultivators, Processors & Retailers Will Face First-Ever Demand Slowdown in Q4
Massive growth in demand for cannabis during 2020-2021 is not sustainable in the coming years. 2022 will represent an inflection point, and a return to normal demand.
The Covid-19 surge in demand for cannabis products is slowing as workers transition back into the office after nearly two years of working from home.
Cannabis operators must consider how to navigate the uncertainty of slower demand growth in advance of the post-covid era.
Operational discipline will define winners and losers: cultivators, processors and retailers will be wise to tap the brakes now and slow production, so they do not have to adjust to a larger correction later.
U.S. Cannabis Experienced 35% Year Over Year Growth During Covid-19
The U.S. cannabis industry experienced a huge boost in demand during the Covid-19 period of 2020 - 2021. Over the past 18 months, growth has been far stronger than normal. The combination of three major factors resulted in back-to-back 35% year over year demand growth for cannabis in the United States:
The designation of cannabis as an essential business during Covid-19
The expansion of legal adult-use state markets
The implementation of work from home policies, directly impacting tens of millions of workers
Demand for cannabis in the United States will slow overall, and Whitney Economics is predicting that a return to work will be a key driver to this lower demand. This demand slowdown will be more visible in mature state markets, while the impact may be masked in newer markets that are just ramping up. Although some analysts are calling 35% growth “the new normal,” the data appears to prove otherwise. This is particularly true in mature state markets like Colorado, Washington and Oregon.
Softening Demand in Canada is a Warning Signal For U.S. Cannabis Operators
Canada is a canary in the coal mine when it comes to understanding the impact of returning to work on cannabis demand. Some leading Canadian cannabis brands saw a stepwise decrease in demand almost immediately after workers began returning to the office in the spring and summer of 2021. In some instances, businesses saw a sales reduction of 30% - 40% from the higher Covid-19 baseline. The U.S. cannabis industry experienced significant growth in 2020 and 2021, but demand is currently in the process of resetting. A reduction in the rate of demand growth for cannabis will have a ripple effect throughout the supply chain, and undisciplined operators will end up holding the bag.
Operational Discipline Will Determine the Winners and Losers
Over the next 6-12 months, cannabis operators must remain disciplined in how they run their businesses. Those operators who monitor demand and respond quickly to changes during this period will rule the day. Those who are not as sophisticated will face challenges such as higher costs and larger inventory levels that will directly impact their bottom lines.
U.S. Cannabis Will Experience 18% Growth in 2022 and 12% Growth in 2023
Whitney Economics is forecasting a return to normal growth that is in line with market growth before the covid era. Now that people are beginning to return to work, the cannabis industry gradually will return to more normal growth rates. For the foreseeable future, revenue growth looks strong and steady for cannabis retailers, but not over-the-top. Therefore, U.S. cannabis sales revenues are forecasted to increase 18% in 2022 and 12% in 2023. This forecast is based upon Whitney Economics analysis of how much new state markets capture legal demand and based on its proprietary model of accurately predicting illicit to legal market consumer transitions.
U.S. cannabis operators will be wise to begin preparing for a Q4 slowdown in cannabis sales, as back to work policies in Q4 2021 and Q1 2022 begin to take a bite out of the demand.
Do Not Plan For Continued 35% Demand Growth
The cannabis industry must not plan for 35% growth in 2022. Operators in the cannabis industry must instead plan for a gradual slowdown in demand. Less demand generally results in over supply and downward pricing pressure across the cannabis supply chain. Those cannabis businesses that do not react to the changes in the market will likely face some real challenges for the next 6-12 months, until the supply chain has established a new equilibrium.
This is the First Real Demand Downside Event that U.S. Cannabis Operators have Experienced
After years of positive growth, this may be the first instance of demand softness. Even though overall demand growth will remain positive throughout the decade overall, it will be interesting to see how operators respond to slower growth. The next three months will be very telling.
About Whitney Economics:
Beau Whitney is the founder and chief economist at Whitney Economics, a global leader in cannabis and hemp business consulting, data, and economic research. Beau has provided analysis and policy recommendations at the state, national and international levels and is considered an authority on cannabis economics and the supply chain. Whitney Economics is based in Portland, Oregon and serves a global clientele.
Beau Whitney, Chief Economist, Whitney Economics
© 2022 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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