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Less than 25% of U.S. cannabis businesses were profitable in Q4, 2022: Whitney Economics

Less than 25% of U.S. cannabis businesses were profitable in Q4, 2022: Whitney Economics

The United States cannabis industry is in crisis and most businesses there are struggling to stay afloat, according to a new survey report released on Thursday by the analytics firm Whitney Economics.

The report found that only 24.4 per cent of American cannabis businesses were profitable during Q4 last year, a 41 per cent drop from the fourth quarter of 2021 when Whitney reported that 42 per cent of pot distributors in the country had financially viable operations. Over 70 per cent of respondents reported that their profits had decreased during the quarter.

The results come from the firm’s second annual Cannabis Operator Sentiment and Business Conditions report, which is derived from a yearly survey of U.S. cannabis business licensees. It is intended to assess how cannabis industry operators view their success and the factors that hinder their growth.

A total of 224 respondents from 13 states participated in the survey, representing approximately 1.1 per cent of cannabis business license holders in those states. There was a 67 per cent rate of male respondents and a 27 per cent ratio of female respondents, with the remainder preferring not to say.

The firm says it presents this data with a 90 per cent rate of confidence and a 5.5 per cent margin of error. The report does not publish individual or company information and respondents were anonymous.

Less than 25% of U.S. cannabis businesses were profitable in Q4, 2022: Whitney Economics

States that participated in the survey. Map via Whitney Economics

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Whitney says cannabis operators are reporting increasing costs across the board and that the retail price for pot continues to drop. The firm says there is also a shift in consumer behaviour and reduced levels of spending, intense price competition and lower margins that are creating stress throughout the industry.

Following the release of the new report, Whitney is forecasting seven quarters of reduced growth for cannabis operators in the U.S. and says there is little relief in sight. The business environment isn’t expected to start improving until 2025.

Whitney also says that regulatory and legislative policies in the country are more concerned with tax generation than creating a viable and business-friendly environment. Respondents felt that if policies became more industry-focused and supportive of businesses then conditions may improve.

“By conducting this survey, Whitney Economics strives to bridge the gap between the theories of business economics and the daily lives of operators within the cannabis industry,” said Beau Whitney, Founder of Whitney Economics.

The firm was founded in Portland, Oregon in 2014 and its founder is currently serving in significant roles with different industry organizations. Whitney is currently the Chief Economist for the National Cannabis Industry Association and National Industrial Hemp Council and the Oregon chapter president of the National Association of Business Economics.

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Recent industry troubles will likely pass with time

Other states not surveyed in the report have also been experiencing difficulties in the cannabis economy.

“The market’s just bad, there’s businesses closing left and right,” said a cannabis sales worker in an interview with The Denver Post this May. The publication says that in March this year retail sales in Colorado dropped by US$17 million from 2022.

The major U.S. cannabis operator Curaleaf Holdings, Inc. (CSE: CURA) (OTCQX: CURLF) closed down the majority of its operations in Colorado, Oregon and California this year over lack of financial viability in those states, two of which did participate in Whitney’s survey.

Curaleaf’s CEO Matt Darin said in January that those states may represent opportunities in the future but the price compression brought on by lack of effective enforcement of the illicit market prevented the company from generating acceptable returns on its investments there.

Trulieve Cannabis Corp. (CSE: TRUL) (OTCQX: TCNNF) is another U.S. cannabis distributor that saw a US$30 million drop in gross profit at the end of Q1 this year in comparison to the first quarter of 2022.

The company recently closed two of its California dispensaries over a lack of continued financial feasibility. Trulieve has had its share price drop by almost 68 per cent over the past year from $16.72 last June to a value of $5.36 on Thursday.

Another report released in March by the cannabis business intelligence firm New Frontier Data indicated that although the U.S. cannabis industry has been experiencing difficulties, the situation would improve over time.

“Inflation, high taxes and competing illicit markets are compounding price pressures in mature legal markets, and the potential for a recession will negatively impact cannabis consumer spending in the medium term,” said the firm’s CEO Gary Allen, adding that those challenges will do little to deter the growing demand for legal cannabis in the long term.

According to New Frontier Data, the U.S. is expected to generate US$5 billion more from cannabis sales this year than in 2022.

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