Business

Holding Steady, Industry Braces for Worst

avatar Dan Mitchell / Mar 27, 2020

While much of the American economy has shut down, the cannabis supply chain appears stable. Companies are scrambling to do business, while also protecting workers and the public from the novel coronavirus. But if the outbreak lasts for months or a major economic downturn ensues, the industry will not be immune, operators say.

Since an initial spike in retail sales, cannabis receipts have begun to drift lower as consumers hunker down with their hoarded stashes. Many retailers, particularly those that offer delivery, still report sales higher than the pre-virus average. However, they worry that with soaring unemployment, cannabis could begin to seem more like a luxury, or consumers could turn to the untaxed illegal market.

The industry as a whole has been protected by statewide and local exemptions to government-mandated business closures. In California, for example, cannabis has been deemed an “essential” business, right along with restaurants and grocers (and, in several cases, liquor stores).

Retailers, as discussed in this space last week, have had to fundamentally alter how they do business. But the risks posed by the virus — both to worker health and to business — appear to increase as you move to the center of the supply chain. Manufacturers and distributors, which generally employ more people in closer quarters, have been forced to make significant changes.

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“A bit of a silver lining”

As vice president of business development for Flow Kana, Adam Steinberg, sits at the center of the supply chain. Flow Kana is a big California distributor and manufacturer that buys product from about 200 independent, outdoor farmers in the Emerald Triangle region. The virus “is definitely affecting everything you’d consider normal operations” across the industry, Steinberg said.

Flow Kana (a WeedWeek advertiser) has reconfigured its workspaces to distance its lab workers, packagers, inventory managers, office staff, and others. It has installed hand-sanitizing stations throughout its facilities and issues gloves and handwipes to drivers and outside salespeople. While he said that cannabis being declared an “essential” business in California has been “a bit of a silver lining,” Steinberg’s under no illusion that the industry will be unscathed.

He noted in particular that capital markets, already closing to the industry before the virus, might become even more stagnant if the economy struggles. There are “active discussions” going on about future financing and investment, but “we’re day-to-day at the moment.” Flow Kana is among the cannabis industry’s most successful private fundraisers.  It has raised a total of $175M, with $125M of that coming last year.

Flow Kana distributes mostly raw flower, but it also has retail brands of its own. Unlike some other manufacturers, particularly makers of vape pens and cartridges, Flow Kana was well positioned to weather the supply crisis of a couple of months ago, when the virus first disrupted China’s economy. A lot of packaging for cannabis and nearly all the hardware for vapes is sourced in China. “We had pretty solid inventory [of packaging material from China and elsewhere], so no significant challenges,” Steinberg said.

NewTropic, a contract manufacturer of concentrate, distillate, flower, and other products in Santa Rosa, Calif., was hit a bit harder by the supply disruption, and is now recovering just as the virus wreaks havoc in the U.S. “We’re about 60 percent of the way back,” in terms of packaging supplies, said NewTropic CEO Alex Rowland.

Securing packaging from China remains slow, he said, because there are still cost issues and delays in getting estimates and processing orders. At the moment, “We’re specifically focused on maintaining the safety of our personnel,” he said. That involves social distancing and the provision of safety equipment, as well as giving employees the option to stay home.

NewTropic has plans to open new facilities in Santa Rosa in the coming months to branch into making edibles and beverages. So far they’re on schedule. “We’ll see what happens,” Rowland said. “If demand stays elevated,” those projects will go ahead.

The company has raised $12M so far, but Rowland said another $1M or $2M might soon be raised from “internal sources.” The company previously decided not to do another big round of financing until it reached profitability. 

“The privilege of being remote”

In California, some farms haven’t seen much of a problem so far. It’s much easier to maintain social distance on a farm. Plus, rural areas, as is often the case with outbreaks, have not been as hard-hit as densely packed cities. 

With harvest time still months away, small operations like Moon Made Farms in Humboldt County are mostly unaffected. Owner Tina Gordon said she and five workers have had little trouble keeping their distance from each other. They’re also following recommended protocols, like sheltering in place and frequent handwashing. “We have the privilege of being remote,” she said. 

Moon Made practices regenerative farming, which in many ways is more environmentally friendly than organic farming. The practice relies heavily on closed-loop systems, which use water, fertilizer, and other inputs that have been produced on-site. That helps keep out anything that might despoil the farm or its products. “The less dependent on outside inputs, the better,” Gordon said. “If whatever we use isn’t produced on the land, we source it locally.”

So far, she said, business hasn’t been much affected.

Elsewhere in farm country, however, “we’re seeing fewer workers and less productivity,” especially among larger operations, said Hezekiah Allen, chairperson of the Emerald Grown growers’ co-op, which represents indoor and outdoor farms in California. Many employees, he said, are being given the option to stay home, and some are taking that offer.

“Our capacity to package is down about 20 percent,” Allen said. “Things are strained, but it’s not a severe problem yet. Our first hope is that things will be under control by harvest time,” which starts in late summer.

Perhaps counterintuitively, Allen said he thinks indoor growing might be safer than outdoor, thanks to the former’s tight protocols. “It’s a closed space,” he said, but it’s also “very sterile” thanks to the need to prevent infestations. Some operators, Allen said, “are moving their disinfecting stations to the front door from the door to the grow room,” so everyone who enters the premises will have been sterilized.

While Covid-19 is affecting different parts of the cannabis industry in different ways, it’s also highlighting just how connected it all is. The holistically-minded Allen was moved to quote Bob Marley: “The rain don’t fall on just one man’s housetop,” he said.    

Clarification: This story has been clarified to more accurately reflect NewTropic’s progress towards profitability.

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Dan Mitchell
Business columnist