From ‘vice spike’ to ‘hitting a brick wall’: How cannabis purveyors are coping during the pandemic
As the coronavirus pandemic escalated in March and businesses across the U.S. began shutting down, retailers in the nascent recreational cannabis industry experienced an unprecedented surge in sales activity.
“We saw sales that were four or five times what our normal averages are for a few weeks,” says Terra Tech chairman Derek Peterson, whose company cultivates and sells cannabis products in California and Nevada. Terra Tech was not alone; in California, Colorado, and other states where recreational marijuana is legal, retailers witnessed a sharp increase in sales—close to 100% in some markets—as the coronavirus outbreak worsened and authorities began rolling out stay-at-home orders.
Peterson attributes the March sales spike to “panic buying” by customers uncertain whether marijuana dispensaries would remain open much longer. “Then,” he adds, “we hit a brick wall.”
While dispensaries in most states have been allowed to remain open as “essential businesses,” April has brought more muted sales figures for cannabis retailers. In tourism-heavy markets like Colorado and Nevada—where spring usually sees visitors flocking to the former’s ski resorts and the latter’s Las Vegas hotels and casinos—slumping demand has resulted in lower sales and higher inventories, according to cannabis industry data analytics platform Headset.
In Nevada, Terra Tech and other retailers have had to comply with a delivery-only mandate that has forced them to close their doors; those without existing delivery services have had to either develop them on the fly or effectively cease operations (though the state will allow curbside pickup beginning May 1).
Even in California, where sales have proven more resilient, some dispensaries are dealing with the same issues that other “essential retailers” are—namely, a drop in revenues due to fewer customers coming in.
“While the demand is still there, the logistics are challenging because of social distancing,” Peterson notes. “You just can’t get as many people through your doors.” And many customers, he adds, simply “don’t want to go out as much as they would normally.”
Alternatives like delivery and curbside pickup are complicated by the fact that they’re not permitted in some jurisdictions or simply not yet implemented at certain dispensaries. As a result, publicly traded Terra Tech recently had to shed 25% of its workforce thanks to revenues that have been down more than 50% year-on-year, according to Peterson.
“We’ve been scrambling to deliver curbside [standard operating procedures],” he says. “A lot of people just weren’t set up for that.”
Matters are even worse for cannabis retailers elsewhere. Across the country in Massachusetts—where the industry has faced an array of issues since recreational sales launched in November 2018—the “essential business” designation has evaded recreational dispensaries, which have been forced to shutter (even as medical dispensaries and liquor stores are allowed to remain open).
In what’s already a low-margin business, the loss of nearly $2 million in weekly revenues for the Massachussetts’s recreational retailers could prove “an unmitigated disaster,” according to Emily Paxhia, co-founder and managing partner at cannabis industry investment firm Poseidon Asset Management.
Paxhia says that among Poseidon’s portfolio companies, its “forward-looking” cannabis retailers who have already invested in online services enabling delivery and curbside pickup have outperformed—something she attributed to the lockdown’s influence on consumers’ day-to-day routines.
“People’s lives have shifted in a way that was unimaginable, and they’re trying to find a new normal,” she says. “We’ve been forced to stay at home, and the things we’re now doing pair very well with cannabis—whether that’s watching movies, or having to suffer through your own cooking.”
Likewise, Vice Ventures founder Catharine Dockery—whose venture capital firm invests in traditionally taboo industries like cannabis, alcohol, and sex-tech—notes that cannabis startups backed by the VC firm, like CBD sparkling water brand Recess and vaporizer manufacturer Indose, have seen an increase in sales since the beginning of the lockdown.
“It portrays the state of mind that a lot of Americans are in right now,” Dockery says. “More people are using cannabis and CBD to stay calm.”
In line with what those in the recreational marijuana sector are seeing, Dockery says direct-to-consumer brands that deliver straight to customers’ homes have done exceptionally well as of late. It is a dynamic that large swaths of the economy are currently experiencing as the lockdown has forced businesses and consumers to conduct more business online—and one that could show the way forward for the cannabis industry, as well.
“Brick-and-mortar is important, but at some point, people are going to think, ‘These are my [product] preferences, I’m going to order it online like I do everything else,’” according to Paxhia.
Terra Tech’s Peterson agrees. “We’re altering our strategic thought process on how we conduct business in the future, and are in the process of re-engineering our approach to retailing,” he says. That will likely include more online-enabled, delivery and curbside-pickup capabilities at the company’s brick-and-mortar locations. “I think a lot of businesses are doing that, and we certainly are.”
In the meantime, despite the current challenges, Peterson thinks the cannabis sector will persevere through these unprecedented times—even though the federal aid available to many small businesses via the government’s coronavirus bailout package remains out of reach for the industry.
“I think the demand is still there; theoretically, it should be increasing from an anxiety and stress level, or even a sheer boredom level,” he notes. “Those [retailers] that are adapting, I think, are going to see a ramp-up in sales in Q2, going into Q3.”
Our mission to help you navigate the new normal is fueled by subscribers. To enjoy unlimited access to our journalism, subscribe today.
More must-read stories from Fortune:
—Inside the chaotic rollout of the SBA’s PPP loan plan for America’s small businesses
—Filing for unemployment benefits? What to know before you start your claim
—The latest round of unemployment claims puts real jobless rate near Great Depression peak
—Everything you need to know about furloughs and what they mean for workers
—A Harvard Business School professor reimagines capitalism
—PODCAST: How 2 CEOs outside of health care decided to pivot to fight COVID-19
—WATCH: Why the banks were ready for the financial impact of coronavirus
Subscribe to Outbreak, a daily newsletter roundup of stories on the coronavirus pandemic and its impact on global business. It’s free to get it in your inbox.