The Coronavirus outbreak and subsequent economic shutdown is taking a toll on all businesses, cannabis included.

While on the one hand consumers are rushing to stock up on cannabis and alcohol in anticipation of a prolonged lockdown, there is a flipside to increased demand.

Can companies keep digital and physical shelves stocked with product if there are serious disruptions to global supply chains?

March Sales Compared to February

Headset.io

As reported by Slang Worldwide, a cannabis branding company, cannabis owners should be prepared for potential supply shortages as global supply chains from China to America are tested.

Slang says that they are not in any immediate danger of running out of supplies and will operate as normal for the “short to medium term”, however, their desire to release this information means there are non-trivial supply chain issues going on industrywide.

A jump in sales is great for cashflow and revenue, but for money-losing cannabis companies, sustained problems with the supply chain could lead to missed sales and more importantly huge cash needs (called working capital) to restock products once operations stabilize.

Cash they don’t have.

We believe companies who focus on vape pens are most at risk due to the slow restart of manufacturing in China while edibles, topicals, and dry flower, in that order, are at risk as well due to the need for packaging.

Though supply chain problems will end up being transitory, they are a near term risk all cannabis investors should be aware of and invest accordingly.

 

Dwindling Inventories

Using data from California provided by Headset.io we can see that supplies are already running 40%-50% below where they would be under normal operating circumstances.

Source: headset.io

The average amount of supplies on hand has fallen to about 3.3 weeks compared to the 4.7 weeks of inventory before the crisis began.

Source: headset.io

It is interesting to note that inventory on hand in Nevada has actually gone up. This is because Nevada typically relies on tourism heavily for its sales and recently, tourism has been essentially nonexistent.

 

Interesting Statistics

Another reason for dwindling inventories is because of people rushing to dispensaries to stock up. This becomes a double-whammy of a huge increase in demand and a huge decrease in supply at the same time.

Cannabis sales have grown across the board since the crisis began

Source: headset.io

Interestingly, when broken down by gender, sales growth for females is significantly higher compared to males. Experts say that this is because females are less likely to keep a large stock of cannabis on hand and therefore more likely to stock up on cannabis back when the crisis first began.

Cannabis Sales Growth By Generation (Since COVID-19 Crisis Began)

Source: headset.io

Also interestingly, we see massive sales growth across the board for all except the Baby Boomer generation.

Market Share By Generation

Source: headset.io

But this may not matter that much as Millennials and Gen X make up the bulk of cannabis sales even before the crisis began.

Source: headset.io

We can see the average basket size has increased dramatically since the start of the outbreak, a further sign that people are stocking up.

 

What’s Next?

Cannabis stores will begin to see lost sales soon if the current drawdown in inventories continues.

We saw that the inventory for capsules in California has already taken one of the biggest hits, on average declining from 9 to 5 weeks of inventory.

Unprofitable companies with low inventory levels now have one more hurdle to add to their list of industry woes.

Clearly, capsules are just one of a variety of highly in-demand products that will soon disappear if the crisis worsens.

Unprofitable companies with low inventory levels now have one more hurdle to add to their list of industry woes.

On the positive side, these supply chain problems will pass, but for companies with already strained balance sheets, there could be short-term pain which will show up through disappointing revenues, capital raises and ultimately lower share prices.

The hits just keep on coming in cannabis.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Grizzle hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.