From Illegal to Essential: Which cannabis companies will survive COVID-19

With coronavirus spreading throughout the United States and around the globe, businesses across industries are feeling the impact—and businesses in the cannabis space are no exception.

Here in Colorado, the state’s leadership deemed cannabis dispensaries “critical” retail businesses, and the demand for essential products, such as flower, edibles, topicals and tinctures, remains high in our state. Unfortunately, the industry’s massive growth might backfire for many companies as the spread of COVID-19 draws a stark contrast on the long-term stability between different business models in the industry.

With authorities across the country ordering the shutdown of restaurants, bars and other public places and gatherings, some companies in the cannabis space were forced to close, while others turned to curbside pickup or delivery. Many of the shops that could remain open initially experienced a dramatic surge in sales as customers stocked up in fear that their local dispensary would also have to shut its doors during the pandemic.

In fact, reports have shown an increase in cannabis sales. And while campaigns surrounding the legalization of cannabis have slowed during the pandemic, the industry has achieved newfound legitimacy as most states deemed both medical and recreational cannabis dispensaries essential during the quarantine.

Rapid growth—but issues loom for many

The cannabis industry has grown at an astonishing rate—seeing an incredible 15% growth in 2019 alone. In fact, a recent report revealed cannabis is America’s fastest-growing industry. However, many public cannabis companies, with artificial revenue growth and pot stocks, have put their energy into becoming the biggest company in the space, scaling at a dangerous rate and failing to follow basic business principles that promote long-term growth.

While growth and expansion can be quite exciting, these companies often expand into new markets as different states move farther along the path to legalization but fail to recognize whether a store is necessary or even makes sense in that locale. Plus, uncontrolled expansion can cost companies time, money and other resources.

When a company in any industry grows too quickly, it can lose track of its finances and make cash flow mistakes that result in big trouble—despite strong growth, cannabis companies are certainly not immune to business realities. Companies might feel pressured to hire more people sooner than anticipated—putting culture and customer service at risk—and might not be able to cultivate or purchase products quickly enough to fill orders, which can impact quality and customer supply expectations. Increased demand for cannabis products often results in increasing the supply, and you can’t just “make” more cannabis; growing quality product takes time. This simple, often overlooked, reality can prove to not only be detrimental to the product’s quality but can also lead to compliance concerns.

Regulations don’t care about your business issues

Because the legal status of medical and recreational cannabis is continuing to evolve and can vary greatly by state, maintaining compliance with local and state regulations is essential to preserving a company’s reputation and their license to legally operate. From cultivation to sales, every aspect of operation must follow strict regulations, and any missteps can result in significant fines, reputation damage or even a complete shutdown.

By baking compliance into everything the organization does, cannabis companies aren’t forced into difficult positions when new regulations arise—they simply incorporate the new rules into what they’re already doing. Implementing the correct procedures will not only help companies thrive, but it will also create resiliency for years to come. Too-rapid growth, however, can place new employees with insufficient experience in positions to make decisions that should be put in the hands of more seasoned employees.

Culture, culture, culture

Many of these massive companies in the cannabis space have been built to flip versus being built to last, which has a significant impact on company culture from the top down. By focusing on building a successful business, not simply a canna-business, cannabis companies can focus on cultivating a successful culture that drives the company forward.

For growing companies, that means defining a mission and vision upfront, communicating values and teaching all new hires the company way. When a culture isn’t set, new employees are poorly trained, and as a result, customer service and product quality won’t be up to par. With a coherent company culture that’s focused on doing the right thing, quality control and client services aren’t sacrificed for profit, and companies in the space set themselves up for success.

According to industry veterans, as well as a recent article from MarketWatch, cannabis businesses need an abundance of three things to survive the pandemic: cash, cannabis and sales channels. In a time where even solid industries and businesses are struggling (e.g., Wendy’s running out of beef), cannabis companies that grew too quickly or are overleveraged are quickly learning that no industry is safe from disruption and the basic rules of business apply to everyone — even the new kids on the block.

So, which companies will survive post-pandemic? Thus far, we’re seeing the smaller, privately owned cannabis companies that are built to last, not built to flip, are coming out on top. Because it’s impossible to predict the future, a focus on responsible growth, compliance and culture will help ensure the success of any cannabis business—coronavirus crisis or not.