Cannabis Musings - December 6, 2023
Would 280E relief result in cannabis retailers cutting prices? Also, MJBizCon.
Friends – before we muse, some personal news. I’m now Chief of Staff at Jardín, helping them grow the unique brand and business the team has developed and nurtured over the past seven years. I’ll also continue to not practice law, which is nice.
Cannabis Musings will remain absolutely unchanged – you’ll still receive the same industry perspective filled with random cultural references and Yiddish proverbs on a weekly-ish basis in your mailbox. A nar ken a mol zogen a gleich vort (“Sometimes a fool can say something clever.”).
Were you in Las Vegas last week for the annual MJBizCon industry trade show/bacchanal? I was, although, as usual, I didn’t step foot inside the convention center, and instead spent my time in meetings, gathering intelligence (I use that word cautiously) on the state of play. My quick takeaways:
Nothing has really changed since last year
Everyone is excited about the financial boon that could come from rescheduling (which would remove the impact of Section 280E in federal taxes)
No one cares about SAFE(R) Banking
Equity capital is still a unicorn, meaning afterparties once again remained subdued (but, see, clip)
Everyone is wondering why they’re not also getting on the hemp-derived THC bandwagon while there’s still time
New York is a mess, California is a mess, New Jersey is a mess, yadda yadda yadda
Really, it’s all pretty much the same since MJBizCon 2022.
One conversation in particular stood out to me. In the midst of speculating the future of the industry, which is usually a mostly futile exercise, posed to me the theory that, if cannabis were rescheduled, making 280E no longer applicable, allowing cannabis operators to enjoy more cash flow, companies would lower prices in order to better compete with the unlicensed/illicit/legacy market. I Googled this theory, and it’s been posited previously, but it was new to me, so it made me go “Hmmm...”
Now, I’m no macroeconomist, and although there’s a logic to the theory, I’m not sure I buy it. First, most cannabis companies don’t make money. Sure, they may have positive “adjusted” EBITDA, and even free cash flow, but bottom line profits remain incredibly elusive, due in no small part to the effects of 280E. If 280E no longer applied, I think that companies would be more likely to do other things with their newfound cash like pay down debt, get more current on payables, set up reserves, and, oh, I don’t know, report a profit to their investors. It all just seems to me like a better use of cash in an industry where capital is elusive. Fun dem der in vald zol men dos fel nit farkoifen (“Don’t sell the skin off the bear that’s still in the forest.”)
Second, cannabis is one of the only industries that didn’t really raise prices in response to inflation over the past few years. While prices and costs rose across the board in pretty much every other industry, whether due to supply chain shocks, economic policy, or, more controversially and theoretically, “greedflation,” that simply didn’t happen in cannabis. The industry has (very generally) experienced price deflation. So why intentionally squeeze margins further (and extend your losses) by cutting retail prices to customers on the hope that it'll attract more shoppers away from the unlicensed/illicit/legacy market at a time when shoppers already expect higher prices? There’s even a study that suggests that higher (but not excessively higher) prices for legal cannabis may not necessarily cause people to disfavor it.
Third, I haven’t run the numbers, but I suspect the “no more 280E dividend” wouldn’t result in that much extra cash to allow a retailer to cut prices substantially enough to bridge the gap between licensed and unlicensed cannabis prices.
I’m generally on the side of the conservative (as an adjective, not as a political designation) use of cash by cannabis companies. As my old boss, Sam Zell, used to say, “Liquidity equals value.” The companies that will succeed (which may simply mean “not failing”) are the ones that appreciate the beauty of a solid balance sheet and plan for a potential downturn. That’s why I would bet we won’t generally see companies cutting retail prices if 280E is no longer plaguing the industry. Then again, I could be wrong.
Be seeing you!
© 2023 Marc Hauser and Hauser Advisory. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form.