by Colt Peterson
“It was the best of times, it was the worst of times.” While those two outcomes might not have been simultaneous, I’m sure a lot of folks were feeling high on the hog coming into the end of February. The Dow, S&P 500, and NASDAQ we’re hitting all time highs seemingly daily. “Stonks only go up” became the battle cry of everyone with a Robin Hood and a long position in something, anything. Capital markets were looking ready to bounce back after a rough year for the sector in 2019. Unemployment was at all time lows, and you could still buy a US Treasury with a YTM over 1%. (At the time of this writing you can still get 20 and 30 year US Bonds at ~1.3%) Life was good and it seemed like nothing, not even a looming trade war was going to stop the longest bull market in US history.
But then March came around. Fears of a massive Coronavirus outbreak in the US shattered investor confidence and the market plummeted and in two weeks the Dow gave back all the gains of the last four years and in response, Papa Powell fired up the money printer on a level never seen before (at least outside of Japan).
So what does all of this have to do with Cannabis? Just like any other consumer good, market forces will have a large impact on every aspect of the sector from buying habits, stock prices, access to capital, and investor tolerance for risk. So let’s look at the numbers. Now I will preface this with the old “lies, damn lies, and statistics” quip from our favorite Mustachioed Missourian. However, I money offering actionable insights to cannabis operators, not hucking sensationalist soundbytes, so here goes nothing.
February sales might have been the first indication of trouble. Now in a normal February, you generally see about a 1-5% dip in cannabis sales from January. I’m not entirely sure why. Maybe the weather, maybe everyone stocked up in January with all their Christmas cash from Aunt Mille, maybe everyone finally checked their bank account after the holidays and are scrounging around old stash boxes they forgot about to get by until pay day. That’s all purely conjecture, but that being said, we did see a statistically significant dip in sales this February, and it would appear to me, that perhaps people were cutting back on discretionary purchases such as cannabis with many people uncertain about their economic future with the pending virus.
And then came March… March 2020 will undoubtedly go down as one of the wildest rides in American history, marked by mass shutdowns of businesses, especially bars and restaurants, a toilet paper shortage (I may never understand why), the CBOE Market Volatility index hitting an all time high of over 80 (normally bounces around between 10 and 20 #shortthevix) and a sitting Republican President pushing to cut every American a check. For all intents and purposes, the simulation broke.
As luck would have it, the cannabis sector fell into a bucket of shit and came out smelling like some dank OG, relatively speaking of course. On the whole, March sales were up 20% from the year prior. Generally, you would expect about a 10% bump just due to market expansion, so 20% is significant. Furthermore, we observed some unique sales phenomena. For example, any given Sunday will on average, account for about 9% of a shops weekly sales, but on Sunday March 15th, that jumped to 14%. This coincided with a number of states issuing lockdown order and potentially closing dispensaries. My fellow Denverites will probably remember lines around the block at liquor stores before the Mayor pulled back an order to close all stores the following day. A justifiable panic as liquor is essentially just hand sanitizer for your insides, or at least that’s what I’ve been telling myself.
Trump Bucks: what it means for the sector. In case March wasn’t crazy enough for you, it finished off with record jobless claims. Not by a little, but by A LOT. I’m talking an order of magnitude more than have ever been seen in history, over 3 million in a week, up from a previous record of around 400k. This of course, caused the stock market to finish the week on the biggest rally in history. Who would have thought?
That little tidbit, right there, ties the whole picture together for cannabis. Unemployment numbers of that magnitude would normally mean that millions and millions of people will no longer have disposable income for discretionary spending and may not even be able to pay rent or buy groceries. Back to the money printer, the historic $2.2 trillion stimulus package included heavy provisions for unemployment benefits, rent and mortgage assistance, and a crisp $1200 for everyone making under $75k/year. These backstops, while ultimately bad for the lower and middle classes (Printing money devalues currency while inflating asset prices) will create liquidity for average consumer, and based on recent alcohol sales data a little something to take the edge off might be just what the doctor ordered.
But wait, there’s less… So while it might be reasonable to expect sales to increase while people are stuck at home, unemployed (hopefully temporarily) with enough money to pay the bills thanks to Federal intervention. The wrench in that gears, if you will, comes in the form of canna-tourism. Data from across the country shows sales numbers stabilizing after the surge in “panic buying” prior to isolation measures, with two exceptions, Nevada and Colorado. The sharp drop in travel due to the virus has cut sales sharply in both States, as visitors that would otherwise indulge in some legal weed are now stuck at home. Only time will tell, but expect cannabis businesses in largely residential areas to be just fine during the downturn, but shops in areas relying heavily on tourism should be tightening their belt and bracing for a sharper downturn. While a lot of large banks and economic forecasters predict a speedy recovery, only time will tell.
The curious case of Illinois: America’s newest recreational cannabis program has seen some interesting phenomena around purchasing habits. Since all rec shops in the state were grandfathered in from medical, there aren’t any “rec only” outfits in the Land of Lincoln. There is also a law requiring that dispensaries keep an inventory reserve for medical patients. This has caused the average consumer to visit the dispensary 5 times per month. This 2.5 times the national average of twice per month. That’s showing us that people are buying less product at a time most likely due to supply chain strain combined with mandatory medical reserves.
While not as recession proof as alcohol, which can be purchased most everywhere in America, cannabis looks as if it will weather the storm. As the first major economic downturn in the era of mainstream marijuana, only time will tell how the sector handles this unprecedented economic anomaly. Operators should stay smart, run lean, and use all tools available to bolster their bottom line. Just like any other recession however, it becomes a great opportunity for the well prepared and well capitalized.