Challenges and opportunities of COVID-19 for the cannabis industry.

As a response to the current pandemic, regulators from all over the world have imposed restrictions almost on every industry predisposed to physical customer interaction. At the beginning of the quarantine period, some countries were initially hesitant to include cannabis stores in the list of essential services. This has left cannabis consumers with no other choice but to source their products from illicit channels. In the Netherlands, the Dutch cabinet originally ordered the cannabis stores to suspend operations but the government quickly reversed course after mayors warned that such a move would cause the illicit market to flourish. A similar story was unfolded in Canada when Ontario’s provincial government canceled its earlier decision to take recreational cannabis stores off its list of essential services allowing to offer delivery and curbside pickup services instead. In both examples, regulators have recognized the importance of ensuring stable cannabis supplies to medicinal and adult-use consumers and preventing the illicit market from taking over the regulated supplies.

The current pandemic is also forcing operators of dispensaries to rethink their business models to meet current regulations. In certain US states, customers are relying on home delivery only, and in the states where medical dispensaries are opened regulators are still encouraging delivery for customers. This presents an opportunity for operators of dispensaries to build their delivery infrastructure and capabilities or partner with the established delivery companies. Some operators also report that the growth is coming from consumers who have made their first purchase of cannabis due to the convenience of home delivery.

Although none of the major cannabis producers have experienced any notable supply chain disruptions expansion plans are expected to be scaled back to cut costs. Moreover, the European cannabis supply will be constrained due to EU-GMP certification audits being put on hold as people can not travel to inspect facilities. As a result, cannabis wholesalers in Germany, one of the largest European markets, will continue to be limited in terms of supply sources for the foreseeable future. However, it is expected that the situation with inspections will get back to normal soon. For example, the Danish regulator has recently said in a statement that it will gradually resume on-site inspections and laboratory controls, including for medical cannabis producers.

COVID-19 pandemic represents an unprecedented disruption to global trade. As a result, going forward the governments will increasingly focus on ensuring the stability of cannabis supplies through domestic sources, especially for medicinal use. Due to supply constraints and travel restrictions UK regulator was forced to publish emergency legislation allowing patients to continue accessing cannabis for the duration of the pandemic, from pharmacies, without a prescription.

As COVID-19 dominates the agenda for governments of all countries the continued reforms around cannabis legalization will not be considered a priority in the short-term. This has already been witnessed when the New York governor pushed back adult-use cannabis legalization to the next year. The Mexican Senate has also decided to postpone the legalization of adult-use cannabis.

However, the financial losses of the COVID-19 outbreak will force governments to look at new potential industries that can bring more jobs and tax revenues. This draws an analogy with alcohol prohibition in the US during the Great Depression of 1929. In a similar vein, cannabis presents an opportunity that could be leveraged by governments. It is estimated that 300,000 direct and indirect jobs were created in the US cannabis industry. Colorado state alone made US$1billion in tax revenue in 2019. This provides a huge financial incentive for other countries to legalize and tax cannabis. The weakened state of economies post-COVID-19 could catalyze the governments around the world to push the agenda for cannabis legalization as one of the top priorities.

Sources:

[1] A deeper dive into the potential impact of COVID-19 on US cannabis, Canaccord report dated 9 April 2020

[2] MKM Partners US consumer survey