Big cannabis companies scale back amid coronavirus, raising questions about industry’s overall health

The COVID-19 outbreak is causing serious jitters among large cannabis companies, with a growing list of multistate marijuana operators scaling back by laying off workers and shuttering operations in a bid to slash costs.

The widespread cutbacks this week by Acreage Holdings, MedMen Enterprises and 4Front Ventures also call into question the overall health of the marijuana industry as the U.S. economy appears headed into a sharp downturn.

Cannabis companies have experienced a rapid growth phase for years.

But as the coronavirus pandemic worsens in the U.S. and destabilizes both the marijuana and mainstream markets, many cannabis businesses have pivoted to restructuring, eliminating inefficiencies and pulling back on plans for expansion.

“Coronavirus conditions are prodding cannabis companies to take even more aggressive steps to reduce expenses, lower head count and sell noncore assets in a bid to accelerate their path to profit,” said Craig Behnke, equity analyst at Marijuana Business Daily’s Investor Intelligence.

New York-based Acreage Holdings announced Friday it furloughed 122 employees and temporarily closed several U.S. operations, saying this was related to the “significant impact of the COVID-19 pandemic and other uncontrollable factors that have greatly shifted the cannabis landscape.”

“Acreage’s employee reduction, cost cuts and various other strategic moves are the latest – but not the last, we suspect – in a string of cannabis company reorganizations,” Behnke said.

A needed development

Acreage is far from alone in taking similar cost-saving measures.

Harvest Health & Recreation, a multistate cannabis company based in Arizona, called off its planned acquisition of privately held Chicago-based Verano Holdings, with the companies citing “prolonged obstacles” that include the coronavirus crisis.

Phoenix-based 4Front Ventures slashed its corporate workforce by almost 40% and cut the number of employees at its recreational and medical cannabis stores by almost 45%.

The company also delayed the launch of a marijuana manufacturing facility, saying that California’s adult-use marijuana market faces “challenging conditions” and had been even before the COVID-19 pandemic.

According to Behnke, marijuana businesses have been under pressure from investors since 2019 to reach profitability quicker, and the uncertainty of the COVID-19 outbreak has made a difficult task even harder.

But, he said, the “transformation” of the industry is a “natural” step as the industry matures and the competition thins out.

“It’s actually very healthy and necessary for the industry to undergo a competitive shakeout that rewards the most viable players and penalizes the least viable,” Behnke added.

“Market conditions resulting from the coronavirus will probably make that competitive shakeout much faster.”

‘New normal’

Cannabis businesses have been running “pretty inefficiently” for a while, said Nic Easley, CEO of Denver-based 3C Consulting, and tended to throw money at problems when the prices for wholesale cannabis were high.

“This is a massive consolidation period where everyone has to get efficient,” he added.

But as mature markets have become more saturated and prices have declined, some companies haven’t shored up the cash reserves they needed to ride out a crisis such as this, according to Easley.

As for the layoffs, Easley expects a “copious” amount of additional workforce reductions because plant-touching cannabis companies don’t have the same Small Business Administration protections as other businesses.

“The new normal is what we need to consider,” he added. “Normal’s never going to come back.”

Reduced throughput

St. Louis-based investment bank Stifel recently released a report saying it believes COVID-19 will negatively impact the legal marijuana industry’s development and ability to profitably fulfill demand.

“Although cannabis has been deemed essential in many states and provinces, we believe the overall retail throughput will be greatly reduced,” Andrew Cartervice president of Stifel, noted in the report.

The Stifel analysis points out that the industry is strapped for cash and scaling up requires investment, which could prove difficult as the market contracts.

“We believe the social-distancing measures to contain COVID-19 will drive continued reductions in economic activity and put significant pressure on consumer spending,” according to Carter.

For those companies that can ride out the pandemic and not go under, this period could provide an opportunity to reevaluate, said Avis Bulbulyan, CEO of Los Angeles-based Siva Enterprises.

“This is a great opportunity for companies to take the next month to refocus and restructure themselves as a company,” he added.

Bart Schaneman can be reached at [email protected]

For more of Marijuana Business Daily’s ongoing coverage of the coronavirus pandemic and its effects on the cannabis industry, click here.

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4 comments on “Big cannabis companies scale back amid coronavirus, raising questions about industry’s overall health
  1. George Bianchini on

    ”Big cannabis companies scale back amid coronavirus, raising questions about industry’s overall health”

    The cannabis industry is being digested by itself, not a virus. From my insights into the “what’s happening” with cannabis, is that the black market is now having a hard time keeping up with demand. I believe that many are fed up with the corrupt officials back door dealings and greedy corporations so willing to cheat their own stockholders.
    It doesn’t take a genius CEO to do the math on this one. I said this same thing two years ago. Take an industry with a history of 50-70 years of an organized underground supply and demand. Promise them the wonderfulness of coming above board and tell society that this new system is the legalization of a flower that 40 million people desire.
    Now comes regulations, almost all of the existing supply side is excluded from entering this new regulatory scheme. I am mainly talking about California in this comment, but what happens in California effects the entire country.
    California managed to write over three hundred pages of rules and regulations for this one plant!. These rules do not project the will of the voters or even the language of our prop 64. Of course this is an expected result, as after dealing with the California’s Cannabis Board, I like many others shake our heads as there is not one person on the board that even knows the difference between a coreopsis plant and a Cannabis plant.
    But I digress,
    So what you end up with is an existing industry operating at full speed, and then license all the new cannabis experts to take over the industry . California expected the new chosen operators to assimilate the market and push aside the black market bad people the old fashion way, through competition.
    So now what we have are all the new cannabis experts in a race to the bottom with themselves, with 100% stockholder money, as the “bad” black market operators exited or never signed up, but did leave the system. The bad news for the corporations is, that the buying consumers left with them!
    Maybe we can fix this with a new war on drugs.
    But what the hell do I know!

    Reply

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