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Colorado has led the way in the cannabis industry since we became the first state to legalize recreational marijuana in 2012, and launched the retail market in 2014.
After almost a decade, “the market has matured, with some businesses succeeding and many others either shutting down or being gobbled up by bigger fish,” writes Bart Schaneman, editor of Marijuana Business Daily, in a Dec. 5 post on mjbizdaily.com.
Colorado’s cannabis businesses saw some of their best months during the COVID-19 shutdowns in 2020, Schaneman says, as consumers spent their extra stimulus money and turned to pot to destress.
But now, “Colorado cannabis companies are experiencing the worst downturn the market has seen, with month-over-month sales numbers on a steady slide amid lower wholesale flower prices,” he says.
According to the Colorado Department of Revenue, tax revenue from marijuana sales declined almost $100 million in 2022, a drop of more than 23 percent from 2021. – the first year since legalization when that’s happened.
The state collected $325 million in tax revenue, compared with $423 million in 2021.
The downturn affects not just marijuana businesses but numerous state programs as well.
Funds from the 15 percent excise tax on wholesale and retail marijuana, the special 15 percent sales tax on retail marijuana and the regular .9 percent sales tax on medical and retail cannabis flows support public school construction, youth programs, mental health, substance abuse and law enforcement initiatives, as well as the state general fund and local programs in cities and counties that allow marijuana sales.
Contributing to the decline in Colorado is legalization in Arizona and New Mexico and other areas of the country, along with inflation that has consumers clutching their wallets tighter.
In addition, the market has been flooded with product as growers responded to the increased pandemic demand, which now has fallen off. With wholesale prices continuing to fall, some companies have asked the state to enact a moratorium on new permits, Schaneman says.
“The need for new workers shows no signs of slowing.”
— HUB International
Outlook for 2023
So if the boom appears to be over, what lies ahead for the cannabis industry?
Business advisory firm HUB International, which works with the cannabis and other industries, attempts to answer that question in a new report, released in late December.
HUB projects that cannabis businesses will continue to face challenges this year, including an adverse regulatory environment, lack of access to capital, labor shortages, supply chain disruptions, product recalls and the ever-present threat of property damage — plus, of course, fluctuations in the overall economy.
Cannabis growers and vendors will face increasing costs for fertilizer, building materials and packaging, the report predicts, but will face tough decisions about raising prices in an ultracompetitive market.
But there are also reasons for optimism, the report says, including the industry’s rapid growth, lots of room for product development and increased access to insurance.
One of the keys to success will be investing in employees, the report states. The number of cannabis jobs nationwide grew 33 percent between 2021 and 2022, and “the need for new workers shows no signs of slowing.”
The most successful companies have been offering higher wages and providing benefits like health insurance and 401k plans. They’re also investing in training.
Successful companies in 2023 will continue those strategies to create company cultures that attract and retain workers.
They’ll also pay attention to risk management and prioritize strategies to minimize losses.
Cyber attacks are significant loss drivers in the industry, “which is hit disproportionally hard by hackers who perceive cannabis businesses as being flush with cash and lacking sufficient IT controls,” the report says.
Savvy marijuana businesses will train employees in cybersecurity practices; those that invest in advanced cybersecurity controls and training may be able to get lower cyber insurance rates.
Cyber insurance rates also have started to ease for cannabis businesses that haven’t had claims or significant exposure changes, the report states, but overall, cannabis businesses can expect cyber liability coverage rates to be 20 to 40 percent higher this year.
Another high-liability risk is new products. Cannabis companies are developing reams of new products. The infused beverage market alone is expected to grow more than 15 percent year-over-year between now and 2025, the report says.
But along with the blossoming market, more product recalls and litigation are occurring. In the first six months of 2022, cannabis companies filed more claims against their product liability policies than in the previous five years.
As a result, product liability rates are expected to rise 10 to 15 percent in 2023, the report says.
Companies that are prepared to meet these risks will be the ones that survive and thrive in these challenging times.