The cannabis industry is no stranger to turbulence, but as 2025 approaches, signs of improvement are emerging. While the sector has weathered its fair share of economic storms, including soaring costs and tightening regulations, shifting macroeconomic trends could provide a lifeline to struggling operators.
Stabilizing Consumer Demand
Cannabis sales surged during the pandemic as homebound consumers turned to recreational marijuana. However, post-pandemic, the market has begun to stabilize. Demand patterns are becoming more predictable, reflecting a return to pre-pandemic behaviours. This stability allows operators to plan more effectively, although challenges remain.
In addition to stabilizing demand, innovations spurred by pandemic-era pressures, such as delivery services and curbside pickups, continue to enhance operational efficiency. These services, born out of necessity, now serve as enduring pillars of customer convenience.
Rising Costs and Efficiency Pressures
Cannabis operators have faced relentless cost pressures. Labour, packaging, and other input costs surged in recent years, prompting businesses to trim inefficiencies wherever possible. Many companies were forced to operate on leaner cash flows, relying on ten-month revenue projections instead of the typical twelve-month model.
Despite these challenges, some innovations emerged:
- Increased revenue per employee through automation and digital services.
- Streamlined supply chains, now less impacted by disruptions but still exposed to geopolitical risks.
The need for efficiency is also driven by price compression as more states legalize cannabis. With prices normalizing, businesses must stay lean and adaptable to remain competitive.
Capital Costs and Their Declining Grip
One of the cannabis sector’s biggest hurdles has been the astronomical cost of capital. Smaller operators have often faced interest rates exceeding 30%, severely limiting growth potential. Emerging markets, in particular, have struggled under these financial constraints, delaying store openings and stifling consumer participation in regulated markets.
The good news? Interest rates are expected to decline in 2024 and 2025. Even modest reductions can make a significant difference. For instance, a 1% drop in interest rates on a £2 million loan translates to £20,000 in annual savings. This easing could help cannabis companies boost profitability and reinvest in their operations.
Outsourcing as a Strategic Shift
Vertically integrated cannabis businesses, once the norm, are giving way to a more modular model. Larger brands are outsourcing production to smaller, regional operators to reduce overheads. This “low-touch” approach allows multistate operators (MSOs) to expand their market presence without incurring massive capital costs.
By collaborating with local producers and leveraging revenue-sharing agreements, big brands can introduce products in new markets faster and more efficiently. This model not only reduces financial strain but also fosters a more dynamic and collaborative ecosystem.
Tax Reforms: A Double-Edged Sword
Tax policies remain a contentious issue for the cannabis industry. The burdensome Section 280E of the Internal Revenue Code has cost cannabis companies billions in extra taxes. If federal rescheduling of marijuana eliminates 280E, businesses could see a collective cash flow improvement of over £3 billion by 2026.
However, potential changes to the Tax Cuts and Jobs Act of 2017 loom large. If temporary tax cuts expire in 2025, cannabis operators could face higher taxes, with corporate rates potentially climbing from 21% to 28%. Industry stakeholders are increasingly advocating for reduced taxes and fees to mitigate these risks.
Industry Resilience and Future Optimism
Despite numerous challenges, the cannabis industry remains resilient. Recent surveys show an increase in the number of profitable cannabis businesses, from 14.4% in 2023 to 27.3% in 2024. While profitability is still limited, the upward trend signals a cautiously optimistic future.
Operators that have survived this far exhibit remarkable adaptability. From leveraging outsourcing to mastering efficiency, these businesses are setting themselves apart in an increasingly competitive landscape.