The COVID-19 Pandemic and its Impact on the Global Cannabis Industry

Economies around the world, dependent to some degree on Chinese manufacturing, are stalling out and could be waiting at least six months for China's economy to resuscitate the pulse of the global supply chain. Experts are predicting that the global GDP growth rate will be the lowest that it has been in 30 years and that the S&P 500 will see a negative growth rate of -15% to -20% for 2020 overall (Goldman Sachs). Experts are also predicting that 50% of Americans (150 million people) and about 70% of Germany (58 million people) will contract the virus, both of which are key drivers in the world’s industrial economy (Goldman Sachs). For cannabis businesses, especially vape companies utilizing Chinese manufacturing, slow-downs have led to deeper investigations into the vulnerabilities of their supply chains. Currently, 90-95% of all components that are part of a cannabis vaporizer are manufactured in China, producing a substantial bottleneck in supply.

Apart from supply issues, which have yet to directly impact most cultivation, distribution, or processing operations in the U.S. due to their largely localized supply chains, the industry is also struggling to adjust its retail strategy to suit health concerns. The Center for Disease Control (CDC) has outlined several precautions that the public needs to take to slow the spread of the virus, including social distancing measures and the closure of all “non-essential businesses.” This has forced several municipalities and states across the U.S. to issue “shelter in place” edicts, encouraging people to stay in their homes, and limit business services or close them entirely. Local governments are currently struggling to decide which businesses to deem “essential” amidst the crisis, allowing grocery stores and other vital businesses to remain open while implementing social distancing and other sanitation caveats. Cannabis, however, started out as an “essential business,” with some local governments initially omitting dispensaries from their lists and then adding them later as we saw in San Francisco. The success that the industry has experienced so far in keeping at least medicinal cannabis dispensaries open is largely due to industry advocates arguing that medical dispensaries are akin to pharmacies and provide much-needed medicine to patients. They have also argued that adult-use retailers should not be treated any different than liquor stores, which are allowed to remain open. For states with legal cannabis programs that have yet to issue “shelter in place” orders, emergency regulations are being published almost daily to contend with CDC recommendations. Some of the most popular solutions are curb-side delivery, online sales, and home delivery, most or all of which were not previously permitted. All licensed operators should be aware of their local legislation regarding dispensary policies amid this pandemic to ensure compliance, as not all municipalities and States have finalized their approach to leaving dispensaries operational.

For retailers that have voluntarily shuttered their doors, or that were forced to close, as has been the case for one adult-use business in Colorado and all adult-use businesses in Massachusetts, their businesses may be in a dire situation. Since cannabis is illegal on the federal level, cannabis companies are not eligible for federal COVID-19 assistance programs, including Small Business Administration (SBA) low-interest loans. State-chartered banks, private investors, and real estate leaseback programs are the predominant sources of capital. These deals take time, and with no guarantees, businesses are frantic. This combined with not having access to institutional capital, leaves operators vulnerable if their cash reserves are running low. Currently, the industry employs more than 240,000 Americans; this number will likely decrease as a result of COVID-19's impact on the market. Employees of state-licensed cannabis businesses are likely to receive unemployment benefits if laid off, as long as the employer has appropriately paid their unemployment insurance. Additionally, recent updates to the Family and Medical Leave Act (FMLA) and the passage of the Families First Coronavirus Response Act (FFCRA) offer greater protections to employees during COVID-19, and cannabis industry employers will likely receive the tax credits associated with these laws.

After the pandemic subsides, families, industries, and entire economies will not be the same. Drastic changes will, however, produce silver linings, as our daily lives evolve and adapt to new economic conditions and new opportunities. For example, although COVID-19 has added to an over year-long bear market in the public cannabis sector, furthering (already substantial) losses, investors with access to capital will have less competition than ever before, providing particularly excellent opportunities for private equity and venture capital. A decrease in the number of emerging markets could also mean a decrease in licensing competition among new businesses that manage to secure adequate funding. While some cannabis companies adapted quickly or were better prepared for the current situation, numerous weaknesses are now apparent, which means that businesses can now see and fix problems to emerge stronger. Amidst this health crisis, states with cannabis programs are also coming to a consensus about the plant's importance to medical patients. One by one, state governments are adding dispensaries to their list of “essential businesses” during municipal and state-wide lockdowns, establishing an even stronger case for federal legalization, especially during a time of economic downturn when budgets are becoming tighter.

Our hearts go out to families who have lost loved ones as a result of and who are struggling financially to weather the repercussions of the aggressively spreading COVID-19 virus. First and foremost, we must prioritize the health, safety, and economic stability of individual families while uniting as a global community to stop this pandemic. During these times, businesses and investments both inside and outside the cannabis industry will fail. That said, we are confident that companies who act swiftly to assess the truth of their current situations and act accordingly to nurture the core of their business will emerge from this crisis more robust than before. With this in mind, we encourage businesses to get creative, support each other, and take stock of your operational weaknesses. The actions that you take today will inform your future successes and possible opportunities when the virus decreases. Furthermore, do not let COVID-19 be the only reason to implement safer cannabis operations. Regardless of the prevalence of a virus, all operators should implement preemptive policies and strategies to protect their employees and end consumers—be it from a health-related or financial perspective. Employees should not have to lose their livelihoods and risk their health or needed income to support their families due to poor planning. Always ensure that, in the event of such crises, you have contingency measures in place to defend the safety of your staff and products.