By Trent Overholt
As many businesses throughout the U.S. went into survival mode in March due to the financial pinch of the health crisis, the cannabis sector has shown its ability to withstand operational challenges and capture increased demand from consumers to emerge stronger than ever.
In the beginning of quarantine, cannabis was deemed by state and local governments in nearly all legal markets as essential to people’s health and well-being, which after a very nimble operational reset of the cannabis retailers, fueled strong growth. Now, 2020 is proving to be a breakthrough moment as the cannabis industry attains new heights of legitimacy for a historically villainized and highly-regulated industry.
Despite the pandemic, retail sales numbers have been consistently strong, and in fact, some large markets have been showing an upward inflection in retail sales growth since March. This has led to increased consumption from regular (identified as daily or weekly) consumers, in addition to the uptick from ‘canna-curious’ consumers looking to test natural products that can provide relief from common ailments. As sales have increased in this challenged environment, we are starting to see a new ‘green rush’ for cannabis investors wanting to participate in the next financial boom. The space is seeing unprecedented interest and demand from consumers as they flock to licensed retailers and delivery services for their recreational and medicinal needs.
Legal states like Washington and California have seen particularly sharp increases in retail sales over the past few months, and as other states continue to consider legalization, the industry will be ripe with a myriad of new opportunities. With so many U.S. markets possibly coming into play over the couple years year, there will be no shortage of investors and hungry founders eager to enter the budding marketplace and engage with companies that provide customers with new products that they’re eager to try for the first time.
What follows is a breakdown of how the industry has gotten to this point, and how it will look once it reaches the next level.
Before the pandemic
The cannabis industry was facing an uncertain future in 2020. Over the 12 months prior to the March shutdown, publicly-traded cannabis stocks were struggling in the capital markets as they continually missed investor expectations, sometimes significantly. This forced the industry to consolidate, and highlighted the importance of companies establishing brands that cover at least a good – better – best positioning, and to bolster supply chains and financial discipline. This period also challenged companies to manage their resources carefully as fundraising became incredibly difficult for the majority of companies that had not yet achieved profitability.
Fast forward to twelve months later, where cannabis investors are starting to see an uptrend since mid-March 2020, as they have witnessed the cannabis industry’s resilience in the wake of a pandemic. With increasing sales even during the worst of times, many are predicting the industry is on the verge of a major bounceback, and both operators and investors seem to be seizing the moment. Cannabis may be proving to be ‘recession proof, having outperformed other retail sectors that have largely struggled. If the industry continues to show resilience, as many expect it will, investors may finally be witnessing a crossover to mainstream consumer appeal, which will undoubtedly propel the capital markets.
Focusing on new buyer behaviors
Retail in cannabis is what really matters in terms of how the new consumer’s money flows, and as more states begin to legalize, the ongoing legalization movement will impact the types of products people are looking to purchase. Industry analysts are seeing new consumers increasingly move away from traditional flower, and look towards various new categories like vaporizers, pre-rolls and edibles to satisfy their needs in a ready-to-consume form factor. For many people, these categories of cannabis can be a more accessible point of entry as they explore an effective and all-natural remedy for health conscious consumers with insomnia, anxiety and chronic pain. Companies that recognize these trends will benefit substantially, and additionally, cannabis brands that follow these trends will be able to stand out and attract new investors.
With all of this in mind, now is the opportune time for brand owners to strategically invest in tools that can allow them to pinpoint consumer preferences and trends, helping them understand which products are increasing in consumer appeal, such as the explosive interest in full spectrum extracts, minor cannabinoids, and CBD-rich products.
Planning for the Road Ahead
Despite the economic downturn, new cannabis brands are still emerging to capitalize on growing consumer trends, and will be able to thrive if they can match the needs of consumers looking to explore new offerings. Additionally, with this increased demand comes shortages, so new brands that are fully stocked should be able to readily take advantage of the next wave.
Prior to the passing of California’s proposition 215 in 1996, the cannabis industry had a built in user base, supply chain, and economics system — yet it was all underground. Now, value brands like Pacific Stone in California and Back Forty in Ontario are having their day, and the cannabis investment landscape has become much more legitimized through the softening social stigmas, wider demand, and broader consumer education around the health and wellness benefits.
As cannabis stocks continue to rise and others fall, investors should learn their lessons from the first two booms, and understand that they are substantially different from one another. Keeping a pulse on evolving consumer demands and preferences will have a strong impact on future success, and cannabis leaders and owners who align their business operations and offerings to serve these demands will enable them to thrive.