The laws of supply and demand are a cornerstone of economics.
When supply exceeds demand for a product – be it tulip bulbs or crude oil – the price for that product falls. As in any other industry, marijuana growers and retailers should take precautions against a supply glut.
Consider Colorado. Growers there have been squeezed after watching wholesale prices tumble more than 30% last year. The average wholesale asking price per pound of recreational flower plunged 38%, from $2,106 in January 2016 to $1,306 by the end of the year. The price for medical flower slid 31%, according to the online MJ marketplace CannaBase.
Growers in California, Oregon and Washington state also have been hit with surplus supplies and falling prices. And more markets are likely to be zapped in the future, especially if cannabis is legalized at the federal level and companies are allowed to ship product from coast to coast.
“Eventually, you have to believe that you’ll be able to cross state lines (with MJ products). Why wouldn’t we? That’s going to happen one day,” said Jay Czarkowski, a principal at Colorado-based Canna Advisors.
Marijuana Business Magazine spoke with several experienced industry insiders to get suggestions for how growers and retailers can cope with a market glut. Their suggestions ranged from bolstering a company’s brand to focusing on customer service and waiting out price fluctuations.
Build Your Brand
For starters, don’t wait until an oversupply crisis hits. Try to anticipate that it’s coming and plan accordingly.
This means developing a full company brand – including a wide range of products – instead of simply growing as much cannabis as possible and relying on market demand.
“If you have a product that stands out, either because you have good brand awareness or if you have a really unique strain … your demand will not go down,” said Cody Stross, the CEO of Northern Emeralds, a grow operation in Humboldt County, California. “We’re all creatures of habit … and once (customers) identify with your product, they want it, whether or not your product is the best on the shelf or not. That’s probably the easiest thing for people to do. The other would just be to have the best product.”
To develop a solid brand, incorporate everything from unique strain names to easily identifiable packaging to branching out to different products instead of just classic flower. For example, growers could begin getting into vape pen cartridges and using some of their flower to produce branded vape oil. That could help a company backfill some lost profits until the flower market stabilizes.
“The name you develop is much more valuable than the name you don’t develop. We’re seeing that clear as day,” Stross said.
Nail Customer Service
Customer service is perhaps the most important strategy for retailers and other types of businesses vulnerable to oversupply. Focusing on this area of your business will create loyalty more quickly than just about anything.
“The best thing they could do is just like any other industry: superior product at a good price with top-notch customer service,” Czarkowski said. “Those basic tenets of business still seem to elude so many people in this industry.”
This doesn’t apply only to retailers. It works for growers, too. Growers need to take into account that they can – and arguably should – be working hand-in-hand with retailers.
“Anyone that’s going to market, or is currently in the market, they really need to be asking customers what they want,” said Sam Chapman, co-founder of Oregon-based New Economy Consulting. “It blows my mind how many retailers in general – and as a result, growers – are just selling things that have traditionally sold in other markets.”
Instead, he said, growers should communicate with retailers about what’s most in demand and concentrate on delivering plants and strains that sell best for various products. That could range from particular flower strains and pre-rolled sativas or indicas to easily produced edibles and vape pen cartridges.
Line Up Buyers Months in Advance
Another way for growers to avoid falling victim to the laws of supply and demand is to set up buyers well before an actual harvest takes place.
“One of the smartest ideas is to line everything up, and have some samples that are lab tested,” said Zeta Ceti, owner of Green Rush Consulting in California. “Even if you just start vending other peoples’ product … that’s just a critical juncture.”
This is a standard practice among growers operating in California’s volatile medical cannabis market. In the northern Emerald Triangle region, the outdoor October/November harvest triggers an annual price drop in wholesale cannabis prices.
“In the last few years, (prices) would bounce back really significantly. Like, (wholesale) prices would drop $500, and they’d bounce back. But now, prices are dropping $700 or $800, and they’re not bouncing all the way back,” said Stross of Northern Emeralds. “It’s definitely an indication of a lot more cannabis being produced.”
Having a locked-in buyer at least guarantees some return on an investment, as opposed to not finding any buyers and watching a perfectly good crop go to waste.
Focus on Quality
Quality is another basic business tenet, but it’s one that could mean life or death for plenty of cannabis growers. Quality products will always rise to the top of the free market.
“You have hundreds and hundreds of people who say they’re ‘breeding.’ All they’re doing is crossing a couple of strains, and they see what happens. Most of these people have zero plant experience and have no idea what they’re doing,” Czarkowski said.
Instead, he pointed to a Colorado company named New West Genetics (Czarkowski is on the company’s board) that’s using science to create superior cannabis plants.
“For three or four years running now, they’ve been doing real genetic development. Not just developing genetics for THC content or for a pretty purple flower, but for a stable crop, crops that are resistant to powdery mildew, resistant to bugs, that kind of thing,” Czarkowski said. “That’d be one step toward a quality product.”
Play the Waiting Game
Another option that many growers in California take advantage of is to carefully store product and simply wait until wholesale prices return to normal. Then sell.
“Smart farmers will store their product properly – which not everybody knows how to do – and they’ll hold it and sell it between February and October, when the markets are a little better,” Stross said. “The bottom line is strategy. If you can save enough to not be dependent on these few months to make sales, that would be best.”
One of the easiest ways to store product, Ceti said, is to vacuum seal cannabis flower.
“They’ll take some of their product, allocate a certain amount and vacuum seal it and store it – and wait until the beginning of (May) and break it out and sell it then,” Ceti said, referring to a number of strategic marijuana farmers who plan each year for the price drop after the fall harvest.
And while growers are waiting for those prices to stabilize, they can explore even more business options, Stross said.
“If you’re not making sales, and you still want to work, what else can you do to build your company during this time when it’s a little slower?” Stross said. “Maybe this is where you go strain-hunting for next year.”