How to Overcome Wholesale Cannabis Price Compression
Where to Invest to Withstand the Inevitability of Wholesale Cannabis Price Compression
Let’s begin with a very basic question.
If you’re a wholesale cannabis brand (cultivator, extractor, product manufacturer), has your pricing gone down since you entered the market?
For those of you in limited license markets or brand-new adult-use markets, you probably haven’t felt much compression yet, but you should be planning for it. However, everyone else has more than likely experienced a decline in prices due to supply surpassing demand. Look no further than states like Colorado, Oregon, Washington, and more recently Massachusetts. All of those markets have seen wholesale prices for flower fall by over 50% since the inception of adult use. The price compression is exacerbated by the fact that the day-to-day business operational costs have only continued to increase (equipment, materials, labor, tax, etc.).
What can wholesale cannabis producers do to withstand and survive these lower prices and profit margins? Producing more or new products probably isn’t the right decision as the market is already in a state of oversupply.
This leaves a few options. Keep in mind, we aren’t discussing marketing or branding in this article and will leave that topic for another day. You can:
- Invest in the existing facility and equipment to produce the same products at a lower cost
- Work with a consultant to identify what can be done better and follow their guidance
- Invest in your technology stack to streamline operations, improve efficiency and reduce overhead
Option 1 – Investing in the facility and equipment
For example, a cultivator could move away from hand watering and use auto-drip irrigation. Another example, would be replacing MH or HPS lights with LED to lower both labor and utility bills. However, these approaches often require a fair amount of capital and could disrupt current operations and product quality as the team gets everything dialed in. For those with deep pockets or supportive investors this could be an option, but for many it probably isn’t in the cards when cash is tight.
Option 2 – Working with a consultant or “expert” to help you identify areas to improve
The saying ‘you don’t know what you don’t know’ could be true here. There might be particular things within production or operations that a consultant could identify and help to remedy. We work with many consultants who bring a lot of value to producers and they are quite amazing. However, we’ve heard horror stories, as well. Aside from the consultant costs, you are trusting someone to guide your business when their intentions could be clouded or misled by their personal emotions, feelings, or external partners.
Option 3 – Investing in your technology stack for more streamlined efficiency
This is often one of the quickest and lowest-cost methods for improving the bottom line. In your current business state, start looking at where the team is spending most of their time and where improvements could and should be made. How many different software systems are currently being used? Are there strong integrations between them? Is the team having to use additional tools (ex: excel) in conjunction with the software to get what they need? Is there somewhere you have no technology to support your business that you could/should?
Many companies might consider each of these options, but ultimately can only afford (time & cost) one. Due to the cost barriers, Option 1 is most likely the first to be scratched. That leaves either working with a consultant and/or improving the technology stack. Often, the consultant is going to recommend software along with operation/production improvements, so it’s possible you could receive both with Option 2. However, many cannabis business owners and managers tend to feel confident in their skill set and are hesitant to pay for another opinion. This might lead them to shy away from working with a consultant, which is where Option 3 should be a strong consideration.
If you are looking for ways to improve wholesale operational efficiency while providing sales and marketing teams with tools that allow them to lower the days that inventory is available on the market and reach new stores, check out Apex Trading. Request a demo by clicking here.