As increasing state legalization and declining social stigma push cannabis into the mainstream, companies will need to adopt some traditional business practices, including monitoring economic indicators that affect their access to capital, costs and bottom lines. Knowing these figures can inform decisions that will help executives maximize savings and revenue.
Following economic indicators is something executives should incorporate into their routines going forward. That said, one of the first things to know about economic indicators is that, thanks to the coronavirus pandemic, 2021 will likely be different than most years.
“Being knee-deep in the coronavirus pandemic is the overarching lens that we have to use as we go into 2021, because it’s not a real comparative,” said Jessica Velazquez, a CPA and managing partner at Indiva Advisors, a cannabis-focused accounting firm in Las Vegas. “Analysts do year-over-year (comparisons). We take into account any major items, but this one is different than most.”
That said, there are several indicators that are easy to follow. But it’s important to differentiate how those indicators are performing in your local area compared to the rest of your state and across the nation, Velazquez and other economic observers said. It’s also important to note that cannabis is not a typical consumer packaged goods (CPG) product and the usual rules and expectations of business and economics might not always apply.
Consumer spending and confidence
Business research groups such as The Conference Board and Trading Economics, both headquartered in New York, predict consumer spending will rebound in 2021 after an up-and-down 2020 in which consumer spending was partially propped up by government stimulus checks.
Spending fell more than 10% during the second quarter of 2020, according to a report from New York-based consulting firm Deloitte, but it picked up later in the year. In December, Congress agreed on a new round of stimulus checks as part of a $900 billion coronavirus relief package.
The National Retail Foundation in Washington DC, Fitch Ratings in New York and Deloitte all predict depressed retail spending in 2021. Such forecasts partly reflect worries that millions of Americans will be without work and unemployment benefits in 2021, meaning they won’t be able to spend as before.
But cannabis consumers have so far bucked that trend. “I think what 2020 proved to us is that the industry is somewhat recession-proof,” said Velazquez, noting that marijuana sales remained strong during the pandemic.
“Remember that a relatively small proportion of people are responsible for most of the marijuana bought (in legal markets), and those people will keep buying,” said Robert Sonara, associate director at the Bureau of Business and Economic Research at the University of Montana.
Indeed, a 2017 study by Washington DC-based cannabis data-analytics firm New Frontier and Denver-based consumer-relationship management firm Baker found that medical marijuana patients spend about three times as much as their recreational counterparts.
In other words, recreational cannabis spending might be vulnerable to decline, but the medical and die-hard consumers who account for the majority of sales will continue to buoy marijuana retail.
Still, Velazquez warned, cannabis retailers should worry about illicit businesses siphoning off cash-strapped customers in search of cheaper products. “I think where we might see things shift is whether consumers go to the unregulated market,” Velasquez said.
Retailers “have to understand their consumers and what’s driving them. And they need to look at their customers
from a very local level and not just a 30,000-foot level.” In other words, changes in the local economy—such as a major employer closing or laying off workers—can impact the consumer base.
A limited number of banks and lending institutions are willing to service marijuana businesses as customers. If the federal government passes cannabis banking reform in the form of the SAFE Banking Act, marijuana companies will increasingly be able to get loans from government-insured banks.
While cannabis companies shouldn’t expect the same interest rates as mainstream businesses—interest rates for MJ companies can be several points higher than those for mainstream businesses—they can be a useful guide for what rates lenders who work with marijuana entities will charge.
Also, having debt options in addition to equity are good for cannabis businesses.
“With more banks serving cannabis companies and the potential passage of the SAFE Banking Act, that will drive down the cost of capital,” Velasquez said. “What I expect to see is less equity plays and more operators getting debt, risking it on themselves, versus introducing equity partners into their operations.
“That will really be the last stranglehold of backed capital,” she said. “That’s access to real money that the industry needs, and operators need to be successful.”
Commercial real estate prices and rents
In the wake of the coronavirus pandemic, scores of commercial properties have been vacated either from businesses closing or significant numbers of office staff working from home. As a result, both sales and rental prices for commercial real estate are edging downward in some areas, but not all.
For example, an October 2020 report from the Chicago-headquartered National Association of Realtors found that in the third quarter of 2020, mall, strip mall and stand-alone retail space prices were down 7%, 5% and 3%, respectively. But land prices for industrial and agricultural purposes were up 4% and 1%, respectively. A December report from Deloitte revealed similar findings.
These trends will probably continue well into 2021, with retail real estate prices expected to stay depressed until COVID-19 is contained enough to enable a return to something close to normal shopping activity.
That means entrepreneurs seeking retail storefronts for dispensaries should be able to find good deals. Executives seeking cultivation and manufacturing properties, meanwhile, shouldn’t hold their breath for bargains. Nevertheless, now might be a better time to invest in a warehouse or land for cultivation, because prices could be driven up even higher as large players enter the industry.
“If bigger corporations move in and buy thousands and thousands of acres of land or loads of warehouse space,” warned Robert Sonora, associate director of the Bureau of Business and Economic Research at the University of Montana, “land prices are going to be an issue.”
Executives should, of course, assess situations at a local level.
Besides labor, the biggest cost for most cannabis businesses—especially cultivators and manufacturers—is electricity. Commercial and industrial electricity prices are a valuable cost indicator to watch. A December 2020 report from the U.S. Energy Information Administration (EIA) forecast commercial electricity prices rising to 10.74 cents per kilowatt hour (kWh), on average, in 2021 from the 2020 average of 10.61 cents. The energy agency forecast that industrial electricity prices would increase to 6.76 cents per kWh from 6.71 cents in 2020.
But like other economic indicators, electric rates vary by region and provider, observers said. For example, Central Maine Power and Duke Energy’s Florida unit will charge lower electric rates in 2021, while Southern California Edison and Pacific Gas and Electric are seeking to raise prices this year, according to news reports.
The pandemic has vaulted delivery to the forefront of retail, including in the cannabis industry. Many cannabis retailers reported huge increases in delivery sales in 2020, thanks to the combination of marijuana businesses being declared essential and limits on in-store shopping. Although delivery sales are expected to slow as the threat from COVID-19 recedes and people return to more normal in-store shopping, delivery is expected to remain an important component for many businesses. So it makes sense to watch gasoline prices.
According to the EIA, U.S. gasoline prices in early December 2020 were lower than the year-earlier period by 28 cents to 42 cents, depending on the region.
Gasoline prices are expected to rise in 2021 as the economy gains steam. The energy agency forecast that the prices for the benchmark Brent crude oil, which averaged $43 per barrel in the fourth quarter of 2020, will average $47 per barrel in the first quarter of this year and rise to an average of $50 per barrel by the fourth quarter.
Again, regional differences must be considered. California has the nation’s highest gasoline prices, followed by other West Coast states, according to the EIA. Florida and other Gulf Coast states plus Ohio and other Midwest states have the lowest gasoline prices.
The national unemployment rate fell to 6.7% in November from 6.9% in October, but the employment recovery has been slowing, and many millions of Americans haven’t been able to regain or replace the jobs they lost because of the pandemic.
For marijuana companies—especially those with plans to expand—that means a greater pool of executives and workers to choose from.
“In this kind of economy, where companies are trying to reduce their operating costs, there’s going to be some great talent that’s been laid off and seeking work,” Velasquez said. “That’s going to provide the industry with a great talent pool to reach into.”