The cannabis industry has had a difficult few years, with the bubble bursting in 2019 followed by the vaping crisis which rocked consumer confidence. As such, one could be forgiven for thinking that COVID-19 was the final nail in the coffin for the nascent industry.
In 2018, it looked like the sky was the limit for the cannabis industry, in a year defined by gatsby-esque spending, and high profile mergers and acquisitions. Most notably, Constellation Brands took a 38% stake in Canopy Growth Corporation (NYSE:CGC), and Altria Group investing USD $1.8 billion for a 45% stake in Cronos Group (TSE:CRON).
With major alcohol and tobacco companies vying for a slice of the cannabis industry, it's no wonder that investor sentiments were high in 2018, with cash pouring in from every angle. Then came 2019.
Unlike 2018, which was largely defined by exuberant optimism surrounding the cannabis industry, 2019 was a very difficult and testing year for even some of the best pot stocks. The market peaked in early Q1 before going on an 8-month decline to end the year more than 50% down. The industry was rocked by many events including fraudulent growing by CannTrust, Canopy Growth firing Bruce Linton, the vaping crisis that spread across the US, and most importantly, the ongoing capital crunch that all cannabis companies still face to this day.
For many in the cannabis industry, 2019 was a reality check and knocked the industry at large back down to reality, away from astronomical expectations and toward a more sober outlook. Then came 2020, and brought the COVID-19 pandemic alongside it.
Now, over 22 million cases of COVID-19 have been confirmed, with over 777K deaths worldwide and virtually no country escaping unscathed. By comparison, 2019 was a walk in the park.
The COVID-19 Pandemic & The Cannabis Industry
When the COVID-19 pandemic first hit, concerns emerged throughout the industry as many companies were still not yet profitable, often with as little as six months of cash runway at the beginning of the year. Couple that with record-high unemployment, rumors of supply-chain disruptions and poor investor sentiment that made cap-raises nearly impossible, and it looked like the industry was on the brink of a wide-scale extinction event.
And if all of that wasn't dispiriting enough, cannabis companies weren't included in any of the federal initiatives in the U.S. that were designed to help companies weather the COVID-19 storm – such as the Paycheck Protection Program or the CARES Act – forcing the cannabis industry to take care of itself.
In order to mitigate further cash hemorrhaging, many of the largest cannabis companies began to furlough staff, with Canopy Growth cutting over 1,000 staff, and ceasing operations across three continents, and OrganiGram cutting 45% of its workforce.
Additionally, with the entire world in the grips of a global pandemic, which has now claimed the lives of over 750K people at the time of writing, mergers and acquisitions within the cannabis industry had to take a backseat, dropping them to levels substantially lower than in 2019.
For all of these reasons, it was beginning to look like the grass was actually greener in 2019 – despite the litany of hurdles faced by the industry – given how 2020 was shaping up.
Though there have certainly been some positives amid the ongoing COVID-19 pandemic, particularly as they pertain to the cannabis industry.
It's Not All Doom and Gloom for The Cannabis Industry
2020 has been both unique and extremely difficult for virtually everyone on the planet, regardless of their career or the country they live in. However, the COVID-19 pandemic has also brought unique benefits to the cannabis industry which may help to accelerate its growth.
Firstly, while lockdowns were enacted globally in order to minimize the spread of the novel coronavirus, the cannabis industry was deemed "essential" in both Canada and the U.S., meaning that cannabis dispensaries were able to remain open during the ongoing lockdowns. However, given the ongoing health pandemic which requires social distancing in order to reduce its spread, changes needed to be implemented to dispensaries so that they could adapt to these new operating conditions. In this case, that led to the widespread adoption of "curbside pickups," allowing cannabis companies to provide products to people without them having to physically enter a store.
Secondly, due to a combination of increased welfare to citizens, perceived supply scarcity and increased anxiety, cannabis sales skyrocketed at the beginning of the coronavirus pandemic. Dispensaries throughout the U.S. and Canada all saw increases in cannabis sales, which are still continuing to this day. Recently, Illinois, Pennsylvania and Colorado each saw record-high cannabis sales, with Colorado selling over $158 million in recreational cannabis sales for the month of June alone.
This increase in demand for cannabis products in 2020 may be in part due to an increase in the demand of existing cannabis consumers, but is also likely the result of new individuals entering the legal cannabis market, either to use cannabis for recreation or as a medicine. Given the stigma that can surround cannabinoid medicines and the persistent black cannabis markets that exist around the world, increased demand for legal cannabis products and medicines reflects cannabis's growing acceptance into mainstream society.
Finally, the COVID-19 pandemic, combined with the ongoing capital crunch faced by cannabis companies, have all coalesced to force the cannabis industry to adopt a more conservative approach to spending.
While furloughs and firing employees isn't something to get excited about, particularly given the cannabis industry's reputation as a major source of job creation, few can say that the cannabis industry has been frugal with money over the past few years. If the COVID-19 pandemic teaches cannabis companies anything, it's to get their balance sheets in check.
This sentiment was personified in Canopy Growth's hiring of David Klein as the company's new CEO, who enacted many of Canopy's recent cutbacks, and stated:
"When I arrived at Canopy Growth in January, I committed to conducting a strategic review in order to lower our cost structure and reduce our cash burn."
With increased sales, a tightening on spending, and more realistic valuations, there are certainly positives for the cannabis industry amid the COVID-19 pandemic.
And with the U.S. Elections just a few months away, the recent strength of cannabis companies, as well as their ability to generate hundreds of millions in tax revenue for states who are currently struggling may give politicians a reason to campaign on cannabis.
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