COVID-19 Impacts Cannabis Supply Chain: But for How Long?

by | Apr 21, 2020

Written by Sarah Ratliff

As of yet, the cannabis industry has not been profoundly affected. Cannabis has been blessed to receive “essential services” designations in most locations, allowing cultivators, manufacturers, and retailers to stay open and in operation. But even with favored status, cannabis will eventually feel the pain of supply chain interruptions, which could push many small companies in particular over the edge into extinction.

One company anticipating a significant impact is Hydroponics, Inc. This Southern California-based enterprise is a premier provider of agricultural supplies and logistical solutions to cannabis cultivators nationwide. A true cannabis industry success story, Hydroponics, Inc. furnishes customers in 16 states plus Canada and Puerto Rico with cost-saving goods and services.

Hydroponics, Inc. CEO Ken Alston has his finger on the pulse of this industry, and what he’s been feeling is a rapidly rising heart rate driven by anxiety and uncertainty.

“It’s going to be pretty brutal over the next handful of months,” Alston predicts. No cannabis company will be immune to the effects of the COVID-19 outbreak, not even one as profitable and well-entrenched as Hydroponics, Inc.

Early Signs of Trouble

While most Americans—and American institutions—were still sleeping on COVID-19 in February, the impact of the coronavirus on the Chinese economy put Hydroponics, Inc. on early alert.

“Before this became a crisis,” Alston explains, “we had started to see that ports were closing and factories were laying off workers in China. What we anticipated is that there were going to be material shortages or backorders of some non-critical grow components.”

Alston mentions LED lighting as one notable area where shortages have been experienced, thanks to Chinese manufacturing and shipping slowdowns that could persist for two or three months at a minimum. Cannabis producers in Western Europe are now beginning to be affected by coronavirus-inspired lockdowns as well, and backorders for cannabis supplies made in that part of the world are also starting to accumulate.

Alston believes the U.S. cannabis industry will experience more severe shortages as April unfolds—which, unfortunately, will only be the beginning. He points out that cannabis companies won't garner any kind of federal funding, such as Paycheck Protection programs or any SBA-backed loans or grants, to “help them weather the storm.” 

Ironically, new data is showing that cannabis companies may profit from the stimulus after all. Jane Technologies, an online cannabis marketplace, reported interesting data from Harborside and Airfield Supply Co., who saw a 48% increase in sales after the first round of stimulus checks were deposited last Wednesday. Likewise, Springbig, a loyalty platform with more than 12 million users, reported a 63% increase in sales on Wednesday.

Assessing the Threat

Analysts are forecasting an avalanche of small business closings over the next several months. Estimates are that as much as 50 percent of all small businesses in the U.S. may succumb to the economic infection caused by the coronavirus. It is much too soon to speculate how this trend will impact cannabis entrepreneurs. But Alston is not sanguine about their prospects.

“We predict that shipping and logistics costs are going to skyrocket over the next two to three months,” Alston states. He believes this will spell doom for small supply chain operators who function with razor-thin profit margins. He foresees a changing landscape, as the implosion of small cannabis cultivators, manufacturers, and retailers lead to a greater concentration of wealth and more large-scale, corporate control of the industry.

“Unfortunately, if there’s less competition, prices would perhaps increase,” he observes. Even more significantly, the business failures associated with such developments could mean permanent job loss for tens of thousands of people. Since small businesses nationally employ 53 percent of all workers, their failures in cannabis and elsewhere could send unemployment figures skyrocketing.

Of course, it helps that the demand for cannabis products is relatively inelastic, especially on the medicinal side. Since news of the COVID-19 outbreak penetrated the public consciousness, Hydroponics, Inc. has been busy filling orders from customers at a higher-than-normal rate. Cannabis producers and retailers are preparing for short-term increases in public demand, as customers stock up on products they fear will be unavailable or unaffordable in the near future.

But temporary spikes in demand won’t sustain cannabis companies for long. The long-term prospects for cannabis will be determined by the overall shape of the economy, which will impact the nature and degree of supply chain shortages, along with the availability of adequate investment dollars and the potential for acceptable profit margins.

Cannabis may survive, but whether it thrives again anytime soon remains to be seen.

Survival Strategies for the Coming Calamity

When asked to give advice to cannabis companies or entrepreneurs on how to survive the coming storm, Alston recommends a narrowing of vision appropriate for tough times.

“The single biggest thing to do is focus on liquidity,” he asserts. “Cash management. The second thing is cost management.” He advises a line-by-line approach to the latter and a willingness to make difficult decisions if the bottom line demands it.

Alston also advises cannabis companies to stay in constant communication with vendors, employees, and customers, to make sure everyone knows they’re open for business. He recommends that expansion plans be put on hold in most cases unless there is good reason to expect a faster-than-usual return on investment.

Finally, he says companies should concentrate specifically on what they do best.

“You need to be focusing on things you can control and what your core competencies are, versus having an in-house procurement department or screwing around with logistics, transportation, and shipping. Just focus on what you’re good at, which is [building] your brand and cultivating cannabis.”

Concerning the latter consideration, Alston is speaking from an insider’s perspective. Hydroponics, Inc. specializes in procurement, logistics, and shipping, and it makes its expert services available to cannabis cultivators of all sizes. While the company manufactures nothing themselves, they know where to locate the equipment cultivators need and can help them find the best bargains available in the marketplace. They also handle specialized and time-consuming administrative duties that might otherwise overburden companies with limited human and financial resources to devote to such endeavors.

As Hydroponics, Inc. Principal Justin Pierce explained to Global News Wire in a September 2019 interview:

”We are a profit center. By outsourcing to us for procurement, cultivators can open up vital square footage at their facilities while eliminating in-house personnel dedicated to procurement and logistics.”

Now more than ever, the professionalization of the supply chain is vital for the health of the cannabis industry. Cultivators who leverage Hydroponics, Inc.’s expertise and knowledge to help them reduce costs will increase their chances of avoiding bankruptcy in the near term, which may be enough to ensure their survival once the U.S. economy passes through its darkest days. 

Forecasting the Resurgence

Even if worse-case scenarios prove true, cannabis cultivators, manufacturers, and retailers as a class should still have a relatively bright future. Cannabis is desired and needed by tens of millions of Americans, and the circumstances that have fueled its rise should make the industry at least somewhat immune to destructive macroeconomic forces.

On the recreational side, states hungry for revenue and looking to spur economic growth may be more open to legalization in the coming years. Only 11 states have currently legalized cannabis for personal use, leaving much room for change even if the federal government remains steadfast in its refusal to consider national legalization.

Meanwhile, medicinal cannabis remains a formidable competitor to the pharmaceutical industry, thanks to its versatility and non-addictive potency. A 2018 University of Michigan study found that 44 percent of medical marijuana users had stopped taking one or more pharmaceutical drugs after adding cannabis-based medications to their recovery regimens. Overall, the participants in this study gave medical cannabis high marks in comparison to pharmaceuticals for their effectiveness, sparseness of side effects, easy availability, and lower cost.

Ken Alston is bullish on cannabis over the long-term, in part because of such factors. He also believes the industry will benefit from the streamlining and belt-tightening that the COVID-19 outbreak will inevitably spark.

“Perhaps something as cataclysmic as the COVID-19 crisis can actually fundamentally change behavior,” he suggests hopefully. “ And then, if folks migrate to cannabis-related products, for whatever it may be—depression, anxiety, pain— if it alleviates any type of issues they’re having and their dependence on traditional pharmaceuticals, I think all the better.”

Like so many other observers, Alston acknowledges that nothing will ever be the same, in cannabis or the U.S. economy as a whole. But he remains convinced that cannabis will rise again.

“Cannabis will do just fine,” Alston declares, succinctly but definitively.

There will be rough waters to navigate in the months ahead. But ever-burgeoning demand for cannabis products, buoyed by the indefatigable movement for legalization, will offer opportunities for a rebirth that other industries can only envy.