As the COVID-19 pandemic continues to rage across the nation, the cannabis industry is entering uncharted waters: an economy engulfed by a far-reaching recession.
The coronavirus outbreak is inflicting severe damage, and the cannabis industry—along with traditional industries—is experiencing significant economic upheavals.
Cannabis companies of all sizes, from multi-state operators to smaller dispensaries, are shutting operations, laying off staff, and restructuring to cut costs and save cash in a bid to weather the crisis.
However, the crisis has revealed some positive—as well as negative—impacts on the cannabis industry, indicating that it may be uniquely well-positioned for success despite a general economic collapse.
Here, we explore five positive trends in the U.S. cannabis industry, with a general focus on risk management and insurance tips to help guide companies through the crisis and beyond.
1. Surging Cannabis Sales and Demand
Several sources reported that marijuana sales spiked during the onset of the COVID-19 crisis as consumers turn to marijuana to treat issues of anxiety as the nation endures fear and lockdown orders.
In March, marijuana spending soared by double digits of 10 to 20% across all categories (flower, edibles, topicals, etc.) as consumers stockpiled in response to the coronavirus outbreak, according to market research firms New Frontier Data and BDS Analytics.
For example, adult use and medical marijuana stores in Oregon sold over $84 million in products in March, a record for any month, as the market got a boost from coronavirus-driven purchases.
Similarly, Ohio consumers purchased more medical marijuana in March than any month in state history.
These spikes may not last, however, as states begin to experience the economic fallout from the crisis. Following initial surges, sales dropped in Colorado and Nevada, per Headset.
And, Massachusetts’ $400 million annual adult use cannabis market sales have dropped to zero—a loss of about $13 million per week—since the Governor’s March 23rd order closing all recreational dispensaries through May 4th, prompting a lawsuit to reverse the order.
Purple Risk Takeaways
- Coronavirus-driven sales spikes indicate that many people view cannabis as a consumer good, like beer or wine, and consider the product a necessity—especially during uncertain times.
- Although sales are volatile, demand will remain stable due to heightened levels of anxiety and sleeplessness during the crisis; many consumers will turn to the medicinal properties of marijuana to alleviate those symptoms at home, where half of all cannabis consumption happens anyway.
- For businesses experiencing a large drop in sales (e.g., in Massachusetts or Nevada) or reduction in staff, contact your broker to determine whether you can reduce insurance premiums since liability coverages and workers compensation, for example, are rated on sales and payroll.
2. Recession-Proof Industry
Some industry experts say marijuana may be recession-proof, to a point, and alcohol sales may be a good barometer indicating that marijuana is a fixed expenditure for most consumers.
Alcohol sales in liquor stores rose 22% for the week ending March 28 and spiked 55% the week before that, with coronavirus-driven alcohol sales online up 243%, according to market research firm Nielsen.
Similarly, consumers will budget for cannabis. And, they will likely spend consistently even when they pull back payments on other things, like lattes.
In challenging times, consumers don’t stop drinking. If anything, it is increased by stress and anxiety. A 2009 Nielsen survey taken at the end of the Great Recession found people compensated by drinking less expensive beer, wine, and liquor to stretch their budget.
No industry is completely recession-proof, but cannabis is better positioned to weather an economic downturn than many other industries as dispensaries in most states with lockdown orders are continuing to operate as “essential services” along with pharmacies, grocery stores, and liquor stores.
The cannabis industry has responded to the challenge with agility, innovation, and care that “manifested itself in dozens of pivots and measures that positioned them to survive and occasionally thrive during the pandemic,” says Marijuana Business Daily in a new Crisis Management in Cannabis report.
Purple Risk Takeaways
- It is more important than ever for cannabis businesses to be hyper-focused on sanitation, safety, compliance and risk management—including adequate insurance—going forward.
- As outlined by Marijuana Business Daily, key pivots cannabis companies have made to adjust to even stricter regulations, and practice compliance-plus measures include:
- Increasing sanitation: e.g., wipe down surfaces multiple times daily.
- Increasing social distancing: e.g., capping the number of patients in stores.
- Implementing online ordering and curbside pickup (where permitted): to avert crowds.
- As companies pivot to a digital first approach, it’s a good opportunity to contact your broker to assess your cyber security and consider cyber insurance.
- Implementing delivery (where permitted): many regulators have allowed dispensaries to offer delivery or have mandated delivery (e.g., Nevada); requiring businesses to quickly expand delivery teams or build operations from scratch.
- As operations pivot to delivery, confirm you have auto insurance coverage for delivery—and add it if not (personal auto insurance will not cover delivery).
3. Product Mix and Shifting Consumption Preferences
Sales of edibles—and to a lesser extent concentrates and topicals—have surged around coronavirus concerns, largely at the expense of pre-roll joints, according to Marijuana Business Daily.
The National Organization for the Reform of Marijuana Laws (NORML) recently advised users to switch from smoking flower to eating edibles or tinctures because people with a history of smoking may experience more severe symptoms of COVID-19.
Consumers have taken notice, with purchases of edibles, like gummies, surging to levels typically only seen around 4/20; with women and young people—Generation Z—driving much of the sales growth, according to Headset.
Purple Risk Takeaways
- Consumption habits are shifting in products preferred (edibles, tinctures, etc., over smokable products) as consumers grow increasingly conscious about social distancing and lung health in response to coronavirus—and the 2019 vaping crisis before that.
- While it’s unclear if sales patterns will revert to pre-coronavirus levels, companies throughout the supply chain must remain agile and capable of adapting to evolving market conditions.
- Edibles are particularly vulnerable to product liability claims for various reasons and, product liability insurance must be a nonnegotiable priority for any cannabis related business.
4. Essential Service/Business Recognition
The cannabis industry employs over 243,000 full-time employees in 33 states and had faster job growth in 2019 (15% year-over-year) than any other U.S. industry, according to Leafly’s Cannabis Jobs report.
For perspective, more people are being hired for jobs in the cannabis industry than teachers, the medical industry (doctors, nurses, pharmacists, etc.), technology or public sector.
Some 28 states have deemed medical marijuana companies “essential services”, meaning they can keep doing business during the coronavirus pandemic, after residents were told to stay at home and many businesses were ordered to close their operations, per Marijuana Business Daily.
Multiple states have also included recreational marijuana companies as essential businesses, with the notable exception of Massachusetts.
Purple Risk Takeaways
- Historic essential service designations reflect that cannabis use is increasingly mainstream; with growing recognition of cannabis as a therapeutic alternative to traditional medication for treating anxiety, sleeplessness and physical pain, among other conditions.
- Lockdown orders and mitigation actions to prevent spread of the virus highlight the importance of risk management and loss control measures to weather the crisis, as noted by National Cannabis Risk Management Association Chairman Rocco Petrilli.
- Essential service orders are spurring innovation and creativity in the industry, such as:
- Pivoting to a digital first strategy like the order online, pick up in store trend sweeping traditional retail sectors; and
- Permitting telehealth services to register new and renewal medical marijuana patients in many states including Connecticut, Ohio, and Massachusetts, that has seen a 158% increase in new patient applications.
- The recognition of marijuana as essential strengthens the argument for legalization in other states—and at the federal level; but, short term efforts to legalize adult use stalled in New York and in states seeking mass signature gatherings to qualify ballot measures.
5. Limited Supply Chain Disruptions
As the coronavirus crisis destabilizes the economy, the reliance of many industries on Chinese manufacturing and materials threatens their supply chain and ability to do business.
Not the cannabis industry.
The highly regulated cannabis industry—and its product development and testing—is largely domestic and state-specific, with less exposure to China than other industries (with certain exceptions such as vape hardware, cultivation equipment, and packaging).
As such, there are few, if any, reported shocks to the cannabis supply chain due to the pandemic.
Purple Risk Takeaways
- All cannabis companies in the supply chain—cultivators, product manufacturers, retailers, and others—depend on other vendors to provide them with supplies, products, etc.; it’s important to vet vendors and have backups in case of unexpected supply chain disruptions.
- As noted above, product liability insurance must be a priority; however, businesses should also demand certificates of insurance (and, ideally the full policy) from their vendors to confirm protection in the event of a claim arising out of, e.g., another company’s product.
- Finally, if your cannabis business is disrupted (e.g., in Massachusetts), keep meticulous records of lost business income and other expenses in case of the need to file an insurance claim—and contact your broker for guidance.
Conclusion
When a crisis hits, your business and its leaders must be able to respond quickly—usually with support from risk management guidelines and advanced planning—to assess the situation and react decisively.
Review the Crisis Management in Cannabis report from Marijuana Business Daily for tools and tips for preventing and responding to emergency situations. Contact your insurance broker, attorney, and other trusted advisors for guidance. And, review the Purple Risk Takeaways above.
Although the cannabis industry is entering uncertain times, and many businesses will suffer, the industry is uniquely positioned to survive, and possibly thrive, in the face of a prolonged economic downturn.
David M. Kennedy, Esq. is the founder and CEO of Purple Risk® Insurance Services, an NCRMA appointed broker. For inquiries about cannabis insurance or more information about cannabis risk management, contact David at david@purplerisk.com or visit https://purplerisk.com.
