Author – John Manlove, Chief Executive Officer & Founder – Apex Trading
It doesn’t take long running a wholesale business in the cannabis industry to feel the crunch of oversupply. Outside of limited-license markets, which are very few, every state eventually hits that tipping point where supply outweighs demand and the race to the bottom begins. Several forces drive this, no matter the state.
The State and Oversupply in Wholesale Cannabis
Let’s begin with the state itself. Typically motivated by tax revenue, regulators aren’t inclined to issue licenses at a rate grounded in the economic principles that would ensure a “healthy” market for businesses. They look instead at the dollars generated from taxes on product moving through the supply chain and from license applications and renewals. Capping licenses caps the taxes you can collect, and that’s no benefit to the state’s coffers. Outside of a few large, powerful operators, there’s been very little the market can do to correct this conflict.
Demand and False Assumptions
The next issue is the false assumption, especially in markets less than two years old, that today’s demand will hold steady, and better yet, that it will only climb as more retailers come online. Two things break that assumption.
First, canopy and production can come online fast enough to meet and quickly exceed the pace of retail. In markets with large MSOs, those operators often hold 100k+ sq ft of canopy that takes longer to build out before it enters the market, so it’s critical to look at canopy issued under license versus canopy in actual production when forecasting how supply in a state could shift. You’d think cultivators would simply reduce canopy to adjust, but that isn’t an easy decision. The capital it took to expand in the first place, such as lights, HVAC, equipment, automation, sits heavy on the balance sheet, especially when it was financed with debt. So more often than not, the cultivator keeps the canopy they’ve brought online and looks at cutting prices to drive demand, or investing further into additional product lines to move the overproduced supply.
Second, retailers almost always overpurchase. Instead of carrying fewer than 30 days of inventory on hand, the average cannabis retailer is sitting on 50+. That’s a false demand signal sent straight to brands. Brands produce against that signal, and when everyone follows the same track, oversupply becomes a reality fast. Cultivators have it worse, since they can’t adjust production overnight on a three-to-four-month cycle. They’re constantly playing catch-up to demand while adjusting unit pricing to keep a product with a limited shelf life from aging at their facility.
Beyond overpurchasing, retailers also have to weigh their competition and whether there are simply too many stores serving the population in a given area. That leaves them looking for ways to attract consumers, and the lever is almost always price. To offer the lowest prices, they buy enough volume to earn price breaks, which loops right back to the false demand signal. They may also demand certain prices from brands to stay on the shelf. That doesn’t necessarily cause overproduction, but it does erode the brand’s margin and its ability to survive.
Potential Solutions to Oversupply in Wholesale Cannabis
So what could help solve this issue? From the regulatory perspective, leaning on economics and bringing stakeholders into the process is key. If new states learned from the mistakes of their peers, we’d see a better balance of production licenses, retail licenses, and canopy where it is ramping up issuance over time rather than opening the floodgates on Day 1.
Retailers can lean harder on data and on the purchasing platforms already in the industry to move from 50+ days on hand down to fewer than 30.
That shift gives brands a truer signal of what they should be producing, which means less oversupply and a healthier market overall.
Want to learn more about how Apex Trading can elevate your business and put the whole in wholesale? Request a demo below.