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The concept of loss leadership, a pricing strategy in which a product is sold below market cost to stimulate the sale of more profitable goods and services, is currently receiving considerable attention in the cannabis space.
Here in California, in the midst of the aggressive fall in wholesale cannabis prices, smaller farms are cursing corporate traders for intentionally lowering prices to force them to leave the business.
Is there a sinister and widely adopted business game to eliminate family farms in the Golden State, or does a highly competitive market in a capitalist nation simply work as one might expect?
Terminology issues
To begin with, it seems that labeling the current state of affairs as “loss leadership” is wrong. Although it has been documented that retail cannabis establishments use loss leadership as a pricing strategy, they sell a line of pre-rolls at a cheap price to attract buyers and target them with products with higher margins like cartridges, packaged flowers or dabs, I didn’t. I have not found literature that supports it on a wholesale level.
More correctly, I would say that larger corporations have more scale efficiencies and can “afford” the luxury of moving products cheaper than others. In this context, I would say that they are implementing market penetration prices, so they accept smaller short-term sales margins in exchange for a larger market share and, ultimately, higher profits once they have earned a larger customer base.
Capitalism, costs and price pressure
What appears to be the case with California cannabis, specifically, is that price compression is more of a structural reality than a more tortuous result of a corporate design.
First of all, California produces a lot of weeds, in fact, more all the time. As I have written in the past, with large quantities of production and relatively few outlets, supply far exceeds demand and prices fall. This is true of all commodities and agricultural products, and cannabis is no different.
In addition, cannabis is a discretionary purchase for most consumers. While some segments of the population make use of it based on the need for medication, most consumers, especially when it comes to adult use markets, use it casually. Given that inflation is rampant right now, people are spending a lot more on everything else. The price of gas, food, clothing, pet supplies, home care products, durable goods, and many services are rising rapidly.
With more money spent on living expenses, most average consumers simply have less to spend on weeds. Government stimulus has slowed and cannabis retailers are watching the fall in average purchases. A dispensary owner I spoke to recently said that people used to spend a couple of hundred dollars in the store, now they spend $ 40.
As demand decreases, prices fall: this is a basic economic issue.
Supply chain companies, such as consumers, are facing rising input prices. Packaging materials and other supplies used in value-added segments such as manufacturing have increased considerably and are harming profits. With that in mind, companies need to control costs in other areas, such as what they pay for cannabis flower, biomass, or bulk extracts.
So while it’s easy (and popular) to curse loss leadership over California cannabis issues, like so many things in life, the truth seems more complicated.
Forced loss leadership
More than anything, it seems that cannabis operators have been forced into a declining pricing strategy, not so much by design but by circumstances. Growing competition, growing supply, softening demand and the need for lower input prices have crushed the price of pounds and more is likely to come.
Despair
Aside from the market forces mentioned above, despair, not malice forces some producers to follow a downward price spiral. The low quality product, the need to finance operating expenses or the debt of services can create a real need for cash in the cannabis space, especially considering that loans and access to the banking system still they are limited to the sector.
As capital needs increase, despair ensues, and operators of all sizes may be forced to move the product quickly. Buyers, happy to take advantage of the cheaper stuff, will devour it and turn distressed prices into the new normal. Just as Nor Cal black market buyers cite The Pines as a cheap source, legal distributors cite Salinas, Santa Barbara, and Desert Grow in an effort to reduce sellers a few dollars per unit.
As long as there are a large number of producers in the game, someone is always forced and willing to sell to a lower number. The contagion of prices is real and there is a downward cascade.
In my opinion, California has reached a point where the market is no longer clear. Weeds used to be harder to find in early spring and summer and prices would melt, filling the pockets of those who held the flower or had the first bottoms. That doesn’t really happen anymore.
Year-round production is now important in Cali, and more is coming out online all the time. This only aggravates despair and forces farmers with cash difficulties to sell at a good price.
After a very short window in which prices have consolidated, it seems that things are falling sharply again. We’re hearing between $ 600 and $ 800 for bulk shipments, free packaging a little better. Last year, which ended very badly for prices, the pounds were much higher at that time.
As the season matures and supply rises further in the context of approaching inflation and recession, I expect many producers to experience a cash crisis. With the approaching financial obligations, people will be forced to sell, cheaper and cheaper, it would mean.
The legal cannabis industry has proven to be a real challenge. Some of the largest multistate operators and global giants like Aurora are making huge losses – from hundreds of millions to billions a year. Investment flooded the sector, but entry is slowing, or at least increasingly scrupulous.
Interest rates and the cost of capital are rising and investors are becoming grumpy, demanding a return on capital. I anticipate failures, acquisitions and forced liquidations over the next few months. In the midst of this, it will all be millions of pounds in search of a home. My guess is that prices will continue to fall, not based on a corporate loss leadership strategy, but because of industry and economic dynamics.
Things may change, but for the time being it seems that difficult times are being prepared. This week I received two calls that worried me even more and illustrated the case I’m making here, a broad product with limited distribution equals falling prices.
The first was from an acquaintance who had “tons of deps and ins” between $ 400 and $ 800 a unit. The second was from someone who wanted to move many, many pounds of jars of a gram of prepackaged sauce. Both were related to the traditional market.
If the illicit market, which accounts for 75 to 80 percent of the total cannabis market, is struggling in the same way to move the product and is lowering prices in May, how can we expect it to grow this year? the west coast?
Perhaps the removal of the crop tax, as proposed for July 1, will let things go a little and move a little more capital, but other than that, I hope prices far exceed last year’s lows, to the point where so many operators fail. the supply / demand balance returns to a closer equilibrium point.
As in every recession or difficult period in an industry, the opportunity still exists. Several well-established brands are looking to get truly exceptional flowers and the full market of terpene extracts continues to attract attention. It’s time to pile up, control costs, increase yields, make the most of it, and prepare for what appears to be a wild journey.
All the best to Humboldt and beyond,
Jesse
