Research: Lack of Profitability Continues Plaguing Cannabis Operators
The latest report by Whitney Economics shows cannabis businesses continue derailing off the profitability track with limited help on the way.
While I’d love to write more optimistic pieces on the latest industry trends, the latest findings show anything but that — in fact, according to Whitney Economic’s Latest Operator Sentiment and Business Conditions Survey Report (Q4’22), less than a quarter (24%) of US cannabis operators are making a profit. And there doesn’t seem to be any serious relief building momentum either.
TL;DR:
The US cannabis industry is struggling to say the least. Less than a quarter (24.4%) of operators are making a profit. The others are either losing money or breaking even.
The majority of operators (68%) are small businesses with 16 employees or less, likely the biggest at risk of going under.
Future sentiment isn’t great, with the vast majority of operators seeing less gross sales & declining profit margins in the months ahead.
SAFE banking, a federal reform aimed at granting cannabis owners access to essential banking services such as a checking account, appears to be the only pro-industry legislation currently in the pipeline. For industry analysts and investors, SAFE represents a significant relief for an industry facing considerable challenges. While I agree that basic banking services are long overdue, they fall short of addressing the industry's long-term sustainability needs—especially given the current bleak conditions, where surviving is thriving.
Last month, the Department of Health and Human Services (HHS) publicly stated their intention to conduct a thorough review for potential de-scheduling (federal legalization) or rescheduling of cannabis by the end of this year. However, when it comes to de-scheduling, the final decision has been punted to the Department of Justice (DOJ).
Considering the Senate's history of flirting with but never passing the SAFE bill, my best guess is that we see re-scheduling sometime in the second or third quarter of next year. De-scheduling, though it remains unsaid, seems less likely.
In theory, this re-scheduling would enable state-licensed cannabis businesses to avail federal tax deductions currently prohibited under 280E, a provision affecting those involved in selling substances listed in Schedules I and II.
In the end, I think 280E and interstate commerce are the only real key pieces (besides federal legalization) in the way of a healthier cannabis market. 280E improves the foundation of the business while interstate commerce incentivizes opportunities to expand by having to use less upfront capital to enter new states.
Here are some other great operator insights that have been adapted from Whitney Economics new report. Enjoy.
