Did Market Saturation and Overspending Cause 2019 Cannabis Market Slump?
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Did Market Saturation and Overspending Cause 2019 Cannabis Market Slump?

Expect the industry to rebound as companies refocus on customer value and experience over production capacity, says industry expert.

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March 5, 2020

This column was updated on 3/13/20 at 1:01 p.m. EST

The cannabis industry has experienced explosive growth, so much so that it might have been assumed that the company valuations, along with their stocks, had nowhere to go but up. 

 All industries that see a massive expansion over a short period of time must, at some point, experience a hiccup. Understanding what causes those hiccups will go a long way to helping industry players find a path to controlled growth and new opportunities.
 

Why the Cannabis Industry Struggled in 2019

In any industry, the original excitement and investment that surrounds sudden growth needs to be backed by a continuous expansion of company earnings if that value is to be held over the long-term. 

In the case of the cannabis industry, far too much money was spent building an infrastructure, including enormous investments in the technology, packaging, regulatory lobbying, and adjustments to the new and ever-changing regulatory environments. All of this happened without showing investors much in the way of profit.

Overestimation of large industry players’ market share as well as a focus on their production capacity (instead of concentrating on the retail market capacity and consumer behaviors) also are underlying causes of this low performance. The inability of Canadian companies to find enough retail outlets and a lack of pricing transparency (retailers can only indicate product pricing at the point of sale) are other factors impacting the Canadian market. 

Also, like any industry, the leadership at many companies lacks specific industry knowledge that is leading to inconsistent wholesale pricing and price discrimination against small retailers.

The Impact of Market Saturation 

In Canada, the market is saturated. These companies now need to focus on building their brands and focus on creating a better consumer experience instead of more growing capacity.

The effects on market saturation of different markets coming online—Colombia being a prime example—that will be able to export the product all over the world and eventually to the U.S. are difficult to gauge at this time. That said, many investors already believe that the cannabis market is saturated, and they are not really interested in the stocks that just have great stories about their future potential. They are far more interested in the reality of sales and brand recognition; these are markers that investors will seek in stocks in any sector, not just cannabis.
 

FDA Stance on Safety of CBD 

There is no question that the FDA stating it cannot conclude that cannabidiol (CBD) in food is safe is another piece of the low-performance puzzle. The FDA cannot seem to find a way to effectively regulate CBD as an ingredient in food or beverage products, resulting in this kind of non-statement. 
 

CBD is an isolated molecule in the cannabis plant and is also an active ingredient of an FDA-approved drug (Epidiolex). There is currently a lot of misconception in the marketplace as to what this means—along with a lot of unregulated products claiming to be CBD. In state-legal cannabis markets, CBD products sold at dispensaries are regulated by individual state oversight authorities. But elsewhere in the consumer market, these CBD products are not created with any regulatory oversight whatsoever.

This general market confusion is another effect of the runaway growth this industry has experienced. 

What’s the Outlook for 2020?

Looking at the stock market right now, it’s difficult to assess the future performance of cannabis stocks. 

By the end of December, cannabis investments became a tax sale, where people who made money from other investments in 2019 needed to offset their gains by showing some losses. Many investors chose the cannabis sector for the tax-loss opportunity. The majority of the stocks impacted by this sell-off were of the larger players. 
 

But it’s not just the cannabis companies that are struggling. Many in non-cannabis sectors are 50% or 60% underwater. The stock market, including the cannabis sector, is experiencing a normal correction, which won’t really hurt most stocks too much. With a longer-term view, investors in the cannabis industry could come out as winners: Many cannabis companies have an enormous infrastructure and the ability to burn through cash to start to make some money.

They are concentrating on the products that will prove to be beneficial and will be recognized by the consumer. As long as they are using this strategy, eventually the recognition will come to the winners, with perhaps some consolidation from outside of or within the industry. Some fluctuation will still occur this year, but that’s the nature of investing.

 
The cannabis industry will have an opportunity to recover. As the industry gains legitimacy, more uses are on the horizon. There is a bright future in it becoming a household item.
 

Serge Chistov is a cannabis industry expert and Chief Financial Partner with Honest Marijuana Co., inventor of Nanobidiol Technology and THC-O-Acetate technology and products.