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Inflation is making it tougher to open a cannabis business

By Beau Whitney


Inflation hasn’t had much impact on demand among American marijuana consumers, but it’s having a major impact on cannabis startup companies—especially those in newly legal states.

Startup costs are up 25% to 40%. It’s harder to borrow and harder to build.

A new analysis of market conditions by Whitney Economics finds that startup cannabis operators in 2022 are facing a difficult double whammy: increased borrowing costs and increased building costs. In other words, it’s more expensive to build out a store or processing facility, and it’s more expensive to raise the capital needed to get those projects off the ground.

Those higher startup costs could slow the expansion of the legal cannabis industry in newly legal states like New Jersey, New York, Connecticut, and Rhode Island. Consumers may have to wait a little longer before a legal cannabis store opens near them—simply because it costs too much to actually build out a cannabis facility.


Rising costs are also expected to affect the number of cannabis jobs created this year. Higher materials and labor costs, along with higher finance costs, will mean 8,300 cannabis-related jobs that might have been created—simply won’t exist. If our current inflationary period extends into next year, as many as 18,500 jobs could be affected in 2023.


A reduction in the number of cannabis operations will also impact the number of jobs created. Whitney Economics is also forecasting that the impact of higher start-up costs combined with higher finance costs will reduce cannabis employment opportunities by 8,300 jobs in 2022 and by 18,500 jobs in 2023.


Startup costs are 25% to 40% higher than two years ago

A large number of key startup sectors have been hit hard by inflation. What’s causing it? Blame supply chain disruptions and higher labor costs, mostly.


Those higher costs aren’t unique to cannabis startups. But with limited access to financing, cannabis operators are facing a tougher time getting up and running. Increased building costs and increased borrowing costs each represent a major hurdle for all new businesses, and that’s especially so for cannabis startups.


Higher costs mean slower expansion, fewer new jobs


The supply of cannabis plays a fundamental role in the success or failure of newly legal markets. Without adequate legal cannabis access and supply, prices will remain artificially high and discourage consumers from participating in the legal market.

As more startups struggle to open their doors, there will be fewer ways to access legal cannabis, and consumers will continue to rely upon the illicit market. That is expected to result in reduced sales, limited tax revenue, and fewer new jobs.

As costs rise, illicit market competition increases


Supply, access to legal cannabis, and products priced relatively close to the illicit channels are the three most important factors in convincing consumers to transition away from the illicit market. The greater the access, the easier it is to participate legally, as long as the price is competitive with illicit operators.


Data show that consumers are very price sensitive, but are still willing to pay a premium in order to participate in the legal cannabis market. If that premium rises above 10% – 15%, however, the pace of consumer conversion slows considerably. And inflation is driving higher internal operational costs, as prices are rising for everything from glass cleaner to toilet paper. So the profit margins in already-existing cannabis stores are getting squeezed too.

Data also show that if there is less access to cannabis, and demand outweighs supply, legal cannabis stores will keep their prices higher, which has the impact of inadvertently perpetuating the illicit market.


The price of wood: Up 152%

The below chart examines construction material prices in Portland, Oregon. This is indicative of a trend that is being seen across the country. Notice that there was an initial dip in prices entering into Covid, but as the pandemic prolonged and headed into 2021, prices began to skyrocket. This is most acutely illustrated by the price of lumber, which has risen 152% since 1Q 2019. The pace of construction material inflation has not yet abated in 2022.

Construction costs in Portland, Oregon

Source: Mortenson Cost Index, Portland, OR


HVAC costs have gone through the roof

Cannabis processing and retail facilities are required to install air management systems, and this too may be pricing cannabis startups out of the market. One HVAC distributor in Arizona is quoted as saying that if rate increases persist, “new air conditioner prices in 2022 could be as much as 56% higher by next November.” Rates have jumped since 2021 and are forecasted to continue into 2023.


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https://www.leafly.com/news/industry/inflation-is-making-it-tougher-to-open-a-cannabis-business

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