The impact of the COVID-19 on the Cannabis industry in the U.S. | Baker Tilly
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The impact of the COVID-19 on the Cannabis industry in the U.S.
Feb. 9, 2021
“Our supervisor came into the break room and said he just sold $1,500 worth of edibles to one customer.” – worker at a Southern California-based dispensary, on the surge in cannabis sales at the beginning of March.
In the early weeks of the coronavirus pandemic in the United States, much was made about panic buying of essential items like toilet paper, food staples and hand sanitizer. But one other good flew off the shelves as well – cannabis. Hundreds of dispensaries across the country have experienced an uptick in sales since the beginning of the COVID-19 outbreak.
As many other industries have faced extreme hardships due to the measures being taken to prevent the spread of the novel coronavirus, the cannabis industry has experienced a breakout moment.
How has the coronavirus outbreak impacted the cannabis industry?
As the concern and threat of coronavirus persists in communities around the country, the cannabis industry appears to be thriving. With state and local government authorities deeming cannabis companies as “essential businesses,” sales in 2020 surged to new heights. In addition to record breaking sale numbers, congressional support and praise for the industry’s efforts to help fight the spread of the novel coronavirus has made one thing clear: the cannabis industry is having its moment.
Recognition as “essential” and mainstream
As government authorities first began to issue city-, county-, and even state-wide shutdown orders of any business not classified as “essential,” there was concern about whether marijuana dispensaries and delivery services would fit the bill. Initially, some cities, like San Francisco and Denver, left marijuana businesses off of the list. But then the public revolted in the name of public health. In San Francisco, it took only one day for the mayor to adjust the city’s public health order and add dispensaries and cannabis deliveries to the list of “essential” businesses.
In state after state, governors and public health officials deemed cannabis businesses as “essential” operations. Now, nearly all of the states with legal medical or recreational markets
allowing them to remain open even as much of the retail economy has had to close down or operate with severe restrictions.
Marijuana shops are essentially being treated the same as pharmacies, reflecting a dramatic shift in cultural perceptions about the substance over the last decade. In fact, a survey conducted by YouGov posed the question: “Do you believe medical marijuana dispensaries should or should not be considered essential services?” 53% of respondents said yes. The overall trend reflects the increased mainstreaming of marijuana in U.S. society, with state and local governments increasingly recognizing the value and benefits of medicinal marijuana.
Sales took off
Even before government-ordered shutdowns were common, cannabis dispensaries experienced a significant rise in sales and new customers. The week of March 17 (essentially the first week of severe shutdowns), dispensaries saw overall sales increase by 30% in one week. Beyond sale increases, cannabis retail shops also experienced increases in new customers, the amount each customer spent in one visit, and deliveries.
Once cannabis dispensaries and services received coveted recognition as “essential” businesses, sales only continued to grow.
Marijuana sales boomed in 2020. Americans purchased nearly $18 billion worth of cannabis products in 2020, marking a 67% increase over sales in 2019. Nine states, including Arkansas, Connecticut, Florida, Illinois, Maine, New Jersey, North Dakota, Ohio and Pennsylvania, more than doubled their 2019 sales in 2020. Illinois alone sold more than $1 billion in legal cannabis sales last year.
Between panic buying, increased stress amid a global pandemic and inclusion on the essential businesses list, cannabis sales grew exponentially in 2020.
Support from those in power
Since the onset of the global health crisis, state representatives and lawmakers stepped up to advocate for keeping recreational marijuana shops open during the COVID-19 outbreak. For example, Rep. Katherine Clark (D-MA) raised concern that military veterans could be especially impacted by her home state’s decision to shut down the recreational cannabis shops amid the coronavirus crisis. She called on Massachusetts Governor Charlie Baker to reopen adult-use shops so that veterans can continue to obtain marijuana products more readily and without fear of being penalized.
Similarly, it was Illinois State Representative Sonya Harper who introduced a bill in her home state to allow cannabis dispensaries to deliver.
In California, there has been support from the local level through the U.S. Senate. For instance, some GOP lawmakers, like Assembly Republican Leader Marie Waldron of Escondido sided with Governor Gavin Newsom’s decision to keep cannabis stores operating during the pandemic. She explained, “I think it’s also important to keep as many businesses open as possible, as long as that doesn’t interfere with virus mitigation and employees and customers are protected.” While not a strong stance advocating for cannabis shops specifically, the comment does show support for the governor’s action. At the U.S. Senatorial level, then-Senator Kamala Harris (D-CA) was one of 11 senators to co-sign a letter to leadership of the Appropriations Committee, calling for the allowance of marijuana businesses to access federal loan programs – specifically the Loan Guarantee Program, Disaster Assistance Program and Microloan Program – during this time of crisis.
Beyond the call for keeping the shops open, other congressional leaders have recognized the positive contributions of the marijuana and hemp industries to help fight the coronavirus pandemic. Sen. Cory Gardner (R-CO), in referencing his home state, explained, “In a uniquely Colorado way, you have hemp businesses that are now producing cotton swabs for medical needs…We have protective equipment that’s being donated…by the marijuana industry.” Praise like that from Sen. Gardner only serves to paint the cannabis industry in a more positive light and driving a more mainstream view of cannabis itself.
How has the cannabis industry reacted to the COVID-19 pandemic?
Like many businesses, those in cannabis were called upon to make adjustments to their retail operations in order to help combat the spread of COVID-19. The response by the industry has helped foster continued success during a time of great panic.
One significant strategy that has taken off is the launch of curbside pickup and delivery. Some states temporarily relaxed guidelines regarding where marijuana sales can take place. By doing so, governments opened the door for curbside and delivery services. The ability to incorporate curbside pickup and delivery provides a significant connection in what otherwise may have been a broken supply chain.
As many have had to do, dispensaries made changes to their store operations and implemented new strategies to encourage customers to continue buying in-store. Dispensaries are following health and safety protocols by installing hand sanitizer stations and limiting the number of customers in the store at a single time. Some have also instituted a “senior hour” – like many grocery stores have done – to allow senior citizens to shop at a designated time.
Cannabis companies have also had to adjust to the loss of a number of live events. But the loss has sparked creativity throughout the industry. Where companies originally planned to host elaborate month-long celebrations around April 20, 2020 (a.k.a., “4-20” among cannabis aficionados), some cannabis businesses shifted to celebrate the “holiday” with virtual parties and concerts, accessory and swag giveaways, and discounts on products.
While we are many months into the COVID-19 crisis, we are still assessing the overall impact on the industry as a whole. However, we can start to make educated predictions. For instance, the dubbing of cannabis businesses as “essential” is significant. Not only does “essential” designation convey the importance of these businesses, but it propels them into the mainstream and perhaps lessens the negative connotation that some may associate with the word “cannabis.” Another component to consider is the rise in delivery services and curbside pickup. While state officials have allowed these services “temporarily” it will be interesting to see if the success of the services leads to any legislative changes in the future.
Finally, many companies have noted a change in buying habits as a result of the outbreak. Mainly, the shift to edible products and away from those that require smoking. Edible sales appeared to increase significantly in the early months of the pandemic, whereas vape sales decreased. Will this be a lasting trend as the fear of coronavirus and other respiratory illnesses is sure to linger?
What federal challenges exist for the cannabis industry during this crisis?
While the industry experienced record sales and have been able to implement new sales and delivery options, it would be remiss to fail to acknowledge the challenges that continue to exist as marijuana continues continue to endure at the federal level.
The burgeoning industry does face some stiff financial headwinds: The CARES Act and its $2.2 trillion stimulus package, as well as the $900 billion stimulus relief funds authorized under the recently passed Consolidated Appropriations Act (CAA) largely shut out cannabis companies from taking advantage of its benefits, reflecting the continued federal illegality of marijuana. Prior to the recent boom in sales, the industry had been in financial turmoil, with many companies laying off workers and dismissing acquisitions as cash ran dry. Add to this the array of obstacles not seen in more traditional businesses including sky high tax burdens due to Internal Revenue Code (IRC) section 280E prohibiting cannabis businesses from claiming standard business deductions, and the state-by-state nature of the industry where businesses have to replicate their operations in every new state rather than take advantage of economies of scale and shipping products across state lines. This is then exacerbated by the lack of access to commercial loans, institutional capital, standard insurance plans and federal bankruptcy protections.
US Covid-19 Financial Stimulus and Marijuana Businesses
When the CARES Act was passed, many questions emerged regarding those operating in the cannabis space, which questions remain with the passage of the CAA on December 27, 2020. Most commonly, whether a company could take advantage of the federally relief programs.
The conflict between state and federal law as it pertains to the legality of marijuana-related businesses continues to prevent the cannabis sector from receiving assistance from the U.S. Small Business Administration (SBA) under the CARES Act and the CAA. Thus, those involved in marijuana business were shut out from participating in the Paycheck Protection Program (PPP), as it is administered by the SBA. In light of COVID-19, the SBA revised its “Disaster Loan” process to provide low-interest “disaster loans” to eligible small businesses. The problem, however, is that the SBA still refuses to assist state-legal marijuana businesses in need of small business loans. Specifically, in a 2018 Policy Notice, the SBA reaffirmed that marijuana businesses – and even some non-“plant-touching” firms who service the cannabis industry – cannot receive aid in the form of federally backed loans.
How can Baker Tilly help?
Baker Tilly takes pride in being a business leader working with those in the cannabis industry to handle all of their accounting, tax and business consulting needs. Our Cannabis industry Value Architects™ have unrivaled experience and dedication to working with cannabis clients and understand the uniqueness of the industry and the depths of the concerns without federal protections. Please reach out to ask questions and develop insightful strategies for the short-term and long-term needs of your business.
